2-15 Final Exam Review

Question 0

Which of the following risks is insurable?

(A) Pure risks
(B) Gambling
(C) Speculative risks
(D) Investing

Answer 0

(A) Pure risks

Only pure risks are insurable because they involve only the chance of loss. They are pure int he sense that they do not mix both profits and losses. Insurance is concerned with the economic problems created by pure risks.

Question 1

In the insurance business, risk can best be defined as:

(A) Sharing the possibility of a loss
(B) Uncertainty regarding the future
(C) Uncertainty regarding financial loss
(D) Uncertainty regarding when death will occur

Answer 1

(C) Uncertainty regarding financial loss

The concept of insurance developed from the need to minimize the adverse effects of risk associated with the probability of financial loss.

Question 2

Buying insurance is one of the most effective ways of:

(A) Avoiding risk
(B) Transferring risk
(C) Reducing risk
(D) Retaining risk

Answer 2

(B) Transferring risk

Buying insurance is one of the most effective ways of transferring risk. Through the insurance contract, the burden of carrying the risk and indemnifying the financial loss is transferred from the individual to the insurance company.

Question 3

Which of the following best describes the function of insurance?

(A) It is a form of legalized gambling
(B) It spreads financial risk over a large group to minimize the loss to any one individual
(C) It protects against living too long
(D) It creates and protects risks

Answer 3

(B) It spreads financial risk over a large group to minimize the loss to any one individual

The function of insurance is to safeguard against financial loss by having the losses of few paid by the contributions of many who are exposed to the same risk.

Question 4

All of the following are elements of an insurable risk EXCEPT:

(A) The loss must be due to chance
(B) The loss must be predictable
(C) The loss must be catastrophic
(D) The loss must have a determinable value

Answer 4

(C) The loss must be catastrophic

One of the criteria for an insurable risk is that it NOT be catastrophic. A principle of insurance holds that only a small portion of a given group will experience loss at any one time. Risks that would adversely affect large numbers of people or large amounts of property - wars or floods, for example - are typically not insurable.

Question 5

The amount of money an insurer sets aside to pay future claims is called:

(A) A premium
(B) A reserve
(C) A dividend
(D) An accumulated interest

Answer 5

(B) A reserve

Reserves can be defined as the amounts that are set aside to fulfill the insurance company’s obligation to pay future claims. The reserve is compiled from past premium payments and interest.

Question 6

Which of the following constitutes an insurable interest?

(A) The policyowner must expect to benefit from the insured’s death
(B) The policyowner must expect to suffer a loss when the insured dies or becomes disabled
(C) The beneficiary, by definition, has an insurable interest in the insured
(D) The insured must have a personal or business relationship with the beneficiary

Answer 6

(B) The policyowner must expect to suffer a loss when the insured dies or becomes disabled

Insurable interest requires the policy-owner to benefit from the insured’s continuing to live or enjoy good health or to suffer a loss when the insured dies or is disabled.

Question 7

Which of the following statements describes the parol evidence rule?

(A) A written contract cannot be changed once it is signed
(B) An oral contract cannot be modified by written evidence
(C) A written contract cannot be changed by oral evidence
(D) An oral contract takes precedence over any earlier written contracts

Answer 7

(C) A written contract cannot be changed by oral evidence

The parol evidence rule states that when parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.

Question 8

Which of the following factors determines whether policy dividends will be paid on a participating policy?

(A) Reserves & experience
(B) Expenses & claim costs
(C) Interest & benefits
(D) Premiums & renewability

Answer 8

(B) Expenses & claim costs

If expenses and claim costs are less than expected, dividends are likely to be paid.

Question 9

A licensed agent legally represents:

(A) The insurer
(B) The applicant/insured
(C) The state insurance department
(D) Himself or herself

Answer 9

(A) The insurer

An agent is an individual who has been authorized by an insurer to be its representative tot he public and to offer for sale its goods and services.

Question 10

All of the following statements regarding policy replacement are correct EXCEPT:

(A) replacement involves convincing a policyholder to lapse or terminate an existing policy and to purchase another
(B) interrupting one cash value insurance plan to begin another could cause serious financial problems for the policyowner
(C) even if the customer wants to replace his or her existing policy, an agent can effect a policy replacement only by following the replacement regulations in the agent’s state
(D) premiums for replacement policies are generally lower than premiums for the existing policies they replace

Answer 10

(D) premiums for replacement policies are generally lower than premiums for the existing policies they replace

The new policy will probably be at a higher premium rate because it will be based on the insured’s then-attained age.

Question 11

With regard to insurable risks, which of the following statements is NOT correct?

(A) Only pure risks are insurable
(B) An insurable risk must involve loss that is within the insured’s control
(C) Insurers will not insure risks that are catastrophic in nature
(D) An insurable risk must be measurable

Answer 11

(B) An insurable risk must involve loss that is within the insured’s control

To be insurable, a risk must involve the chance of loss that is fortuitous and outside the insured’s control.

Question 12

On August 9, Albert made an application for life insurance that his agent submitted a day later without a premium payment. On August 21, the insurer issued the policy as applied for and on August 24, the agent delivered the policy and collected the initial premium. ON what day was the contract offer made?

(A) August 9
(B) August 10
(C) August 21
(D) August 24

Answer 12

(C) August 21

If an applicant does not submit an initial premium with the application, the applicant is inviting the insurance company to make a contract offer. The insurer can respond by issuing a policy (the offer) that the applicant can accept by paying the premium when the policy is delivered.

Question 13

All statements made by an applicant in an application for life insurance are considered to be:

(A) warranties
(B) affirmations
(C) representations
(D) declarations

Answer 13

(C) representations

Most states require that life insurance policies contain a provision that all statements made in the application be deemed representations, not warranties. A representation is a statement made by the applicant that the applicant believes to be true. A warranty is a statement made by the applicant that is guaranteed to be true. If an insurance company rejects a claim on the basis of a representation, the company bears the burden of providing materiality.

Question 14

Which of the following legal terms indicates that a life insurance contract contains the enforceable promises of only one party?

(A) Adhesion
(B) Unilateral
(C) Conditional
(D) Aleatory

Answer 14

(B) Unilateral

Insurance contracts are unilateral in that only one party - the insurer - makes any kind of enforceable promise.

Question 15

Which of the following types of agent authority is specifically set forth in writing in the agent’s contract?

(A) Express
(B) Implied
(C) Apparent
(D) Personal

Answer 15

(A) Express

Express authority is the authority a principal gives to its agent. Express authority is granted by means of the agent’s contract, which is the principal’s appointment of the agent to act on its behalf.

Question 16

Assume a home catches fire after it is struck by lightning and the fire destroys its structure and contents. By insurance definition, the fire is:

(A) the risk
(B) the hazard
(C) the peril
(D) the proximate cause

Answer 16

(C) the peril

A peril is the immediate specific event causing loss and giving rise to risk. When a building burns, fire is the peril.

Question 17

What constitutes “consideration” for a life insurance policy?

(A) Application and initial premium
(B) Agent’s commission
(C) Adhesion feature of the contract
(D) Policy’s benefits

Answer 17

(A) Application and initial premium

Consideration is the value given in exchange for the premises sought. In an insurance contract, consideration is given by the applicant in exchange for the insurer’s promise to pay benefits, and it consists of the application and the initial premium.

Question 18

Statements made by an applicant for life insurance that are guaranteed to be true are:

(A) warranties
(B) material statements
(C) representations
(D) declarations

Answer 18

(A) warranties

A warranty in insurance is a statement made by the applicant that is guaranteed to be true. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract. Warranties are presumed to be material because they affect the insurer’s decision to accept or reject an applicant.

Question 19

Which of the following insurance companies is owned by its policyholders?

(A) Service insurer
(B) Stock insurer
(C) Reinsurer
(D) Mutual insurer

Answer 19

(D) Mutual insurer

Mutual insurers are owned by the policyholders. Anyone purchasing insurance form a mutual insurer is both a customer and an owner.

Question 20

With regard to life insurance, all of the following statements are correct EXCEPT:

(A) all individuals are considered to have insurable interests in themselves
(B) spouses are automatically considered to have insurable interests in each other
(C) a creditor has an insurable interest in a debtor
(D) insurable interest must be maintained throughout the life of the contract

Answer 20

(D) insurable interest must be maintained throughout the life of the contract

Insurable interest is required only when a contract is issued; it does not have to be maintained throughout the life of the contract, nor is it necessary at the time of claim.

Question 21

A life insurance company is organized in Orlando where it maintains its home office. In FL, the company is classified as:

(A) a domestic company
(B) a local company
(C) a foreign company
(D) a preferred company

Answer 21

(A) a domestic company

An insurer is termed “domestic” in a state when it is incorporated in that state.

Question 22

A life insurance company is organized in Illinois, with its home office in Philadelphia, is licensed to conduct business in Wisconsin. In Wisconsin, this company is classified as:

(A) a domestic company
(B) an alien company
(C) a foreign company
(D) a regional company

Answer 22

(C) a foreign company

A foreign company operates within a state in which it is not chartered and in which its home office is not located.

Question 23

To whom does the cash value of a life insurance policy belong?

(A) Policyowner
(B) Insured
(C) Insurer
(D) Beneficiary

Answer 23

(A) Policyowner

The accumulation that builds over the life of a policy is called the “cash value,” and it belongs to the policyowner, who may o may not be the insured.

Question 24

Frank is the insured in a $40,000, 5-year level term policy issued in 2003. He died in 2009 . His beneficiary received:

(A) nothing
(B) $20,000
(C) $40,000
(D) the cash value of the policy

Answer 24

(A) nothing

In this case, the insured died after his term policy has expired. As a result, his beneficiary received nothing.

Question 25

All of the following statements regarding assignment of a life insurance policy are correct EXCEPT:

(A) to secure a loan, the policy can be transferred temporarily to the lender as security for the loan
(B) the policyowner must obtain approval from the insurance company before a policy can be assigned
(C) the life insurance company assumes no responsibility for the validity of an assignment
(D) the life insurance company must be notified in writing by the policyowner of any assignment

Answer 25

(B) the policyowner must obtain approval from the insurance company before a policy can be assigned

Question 26

After a family’s breadwinner dies, the “blackout period” generally can be defined as the period:

(A) during which children are living at home
(B) that begins when the youngest child turns 16 and ends when the surviving parent retires
(C) during which children are in school
(D) from the surviving parent’s retirement to death

Answer 26

(B) that begins when the youngest child turns 16 and ends when the surviving parent retires

The “blackout period” is the time during which no Social Security benefits are payable to a surviving spouse. This period begins when the youngest child reaches age 16 and continues until the spouse retires.

Question 27

A company with 3 partners is considering a buy-sell plan. All of the following statements pertaining to buy-sell plans and this partnership are correct EXCEPT:

(A) an insured entity buy-sell agreement designates the partnership as the beneficiary
(B) if they choose a cross-purchase plan, each partner would have to purchase 2 policies for a total of 6 plans
(C) no benefits will accrue to the partnership from the buy-sell agreement until one of the partners dies
(D) if they choose an entity buy-sell agreement, the business would be party to the agreement.

Answer 27

(C) no benefits will accrue to the partnership from the buy-sell agreement until one of the partners dies

A buy-sell plan offers several advantages to the partners while they are all living. The partners know they will have a legal right to buy a deceased partner’s share of the business, and the family and heirs of the partners know that the partnership interest will be disposed of at a fair price. Further, the money needed to purchase the decreased partner’s interest will be available when needed. All this adds up to security and peace of mind for all involved, including employees of the business.

Question 28

Bill names his church as the beneficiary of his $300,000 life insurance policy. When Bill dies, who is responsible for the income taxes payable on the lump-sum proceeds received by the church?

(A) Bill’s estate is responsible
(B) Bill’s church is responsible
(C) No income tax is payable on the death proceeds
(D) Bill’s estate and Bill’s church split the tax

Answer 28

(C) No income tax is payable on the death proceeds

Lump-sum proceeds payable upon the death of the insured are not subject to income tax, no matter who the beneficiary is.

Question 29

Which provision of a life insurance policy states that the application is part of the contract?

(A) Consideration clause
(B) Insuring clause
(C) Entire contract clause
(D) Incontestable clause

Answer 29

(C) Entire contract clause

The entire contract clause states that the policy document; the application, which is attached to the policy; and any attached riders constitute the entire contract. The policy cannot refer to any outside documents as being part of the contract.

Question 30

Ron, the insured, dies during the grace period for his $100,000 life insurance policy. Considering that the premium on the policy has not been paid, what happens?

(A) The premium is canceled because the insured died during the grace period.
(B) The amount of the premium is deducted from the policy proceeds paid to the beneficiary.
(C) The premium due, plus a 10% penalty, is charged against the policy.
(D) The beneficiary must pay the premium after the death claim is paid.

Answer 30

(B) The amount of the premium is deducted from the policy proceeds paid to the beneficiary.

If the premium of a policy has not been paid and the insured dies during the grace period, the policy benefit is payable. However, the premium amount due is deducted from the benefits paid to the beneficiary.

Question 31

Which of the following is stated in the consideration clause of a life insurance policy?

(A) Insured’s risk classification
(B) Insured’s general health condition
(C) Amount and frequency of premium payments
(D) Benefits payable upon the insured’s death

Answer 31

(C) Amount and frequency of premium payments

The consideration clause specifies the amount and frequency of premium payments that the policyowner must make to keep the insurance in force.

Question 32

John stopped paying premiums on his permanent life insurance policy 8 years ago though he never surrendered it. He is still insurable and has no outstanding loan against the policy. The company probably will decline to reinstate the policy because the time limit for reinstatement has expired. The limit usually is:

(A) 6 months
(B) 1 year
(C) 2 years
(D) 3 years or as long as 7 years

Answer 32

(D) 3 years or as long as 7 years

There is a limited period of time in which policies may be reinstated after lapse. This period is usually 3 years, but may be as long as 7 years, in some cases.

Question 33

All of the following statements pertaining to reinstatement of a life insurance policy are correct EXCEPT:

(A) a suicide exclusion period is renewed with a reinstated policy
(B) when reinstating a policy, the insurer may charge the policyowner for past-due premiums
(C) when reinstating a policy, the insurer may charge the policyowner for interest on past-due premiums
(D) a new contestable period usually becomes effective in a reinstated policy

Answer 33

(A) a suicide exclusion period is renewed with a reinstated policy

When reinstating a life policy, no new suicide exclusion period goes into effect.

Question 34

Leland elects to surrender his whole life policy for a reduced paid-up policy. The cash value of his new policy will:

(A) continue to increase
(B) decrease gradually
(C) remain the same as in the old policy
(D) decrease by 50% immediately

Answer 34

(A) continue to increase

When Leland surrenders his whole life policy for a reduced paid-up policy, the face value is reduced but the cash value continues to increase.

Question 35

Kevin, the insured in a $200,000 life insurance policy, and his sole beneficiary, Lynda, are killed instantly in a car accident. Under the Uniform Simultaneous Death Act, to whose estate will the policy proceeds be paid?

(A) The policy proceeds will be paid to Lynda’s estate
(B) The policy proceeds will be paid to Kevin’s estate
(C) The policy proceeds will be paid equally to both Kevin’s and Lynda’s estate
(D) The proceeds will escheat to the estate

Answer 35

(B) The policy proceeds will be paid to Kevin’s estate

Under the Uniform Simultaneous Death Act, if the insured and primary beneficiary are killed in the same accident and there is not sufficient evidence to show who died first, the policy proceeds are to be distributed as if the insured died last. Kevin’s estate would receive the proceeds because Lynda, the beneficiary, was deemed to have predeceased Kevin, and no other beneficiary was named.

Question 36

When a policyowner cannot exercise rights of ownership without the policy beneficiary’s consent, the beneficiary is designated:

(A) vested
(B) contractual
(C) irrevocable
(D) primary

Answer 36

(C) irrevocable

If a beneficiary is named irrevocable, the policyowner gives up the right to change that beneficiary, and unless otherwise specified in the policy, the owner cannot take any action that would affect the right of that beneficiary to receive the full amount of the insurance at the insured’s death. This includes taking out a policy loan or surrendering the policy.

Question 37

All of the following statements about term insurance are correct EXCEPT:

(A) it pays a benefit only if the insured dies during a specified period
(B) level, decreasing, and increasing are basic forms of term insurance
(C) cash values build during the specified period
(D) it provides protection for a temporary period of time

Answer 37

(C) cash values build during the specified period

There are no cash values in term policies.

Question 38

Bob purchases a $50,000, 5-year level term policy. All of the following statements about Bob’s coverage are correct EXCEPT:

(A) the policy provides a straight, level $50,000 of coverage for 5 years
(B) if the insured dies at any time during the 5 years, his beneficiary will receive the policy’s face value
(C) if the insured dies after the specified 5 years, only the policy’s cash value will be paid
(D) if the insured lives beyond the 5 years, the policy expires and no benefits are payable

Answer 38

(C) if the insured dies after the specified 5 years, only the policy’s cash value will be paid

If the insured lives beyond the 5-year period, the policy expires and no benefits are payable. There are no cash values in term policies.

Question 39

Mrs. Williamson purchases a 5-year, $50,000 term policy with an option to renew. Which of the following statements about the policy’s renewability is CORRECT:

(A) The premium for the renewal period will be the same as the initial period.
(B) The premium for the renewal period will be higher than the initial period.
(C) The premium for the renewal period will be the same as the initial period, but a one-time
(D) The premium for the renewal period will be lower than the initial period

Answer 39

(B) The premium for the renewal period will be higher than the initial period.

Premiums for the renewal period will be higher because of the insured’s advanced age and, thus, increased risk.

Question 40

Joanna and her husband, Tom, have a $40,000 annuity that pays them $200 a month. Tom dies and Joanna continues receiving the $200 monthly check as long as she lives. When Joanna dies, the company ceases payment. This is an example of:

(A) an installment refund annuity
(B) a joint and full survivor annuity
(C) a life annuity
(D) a cash refund annuity

Answer 40

(B) a joint and full survivor annuity

The joint and full survivor annuity to 2 people. If either person dies, the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone.

Question 41

Each of the following statements about the incontestable clause in a life insurance policy is correct EXCEPT:

(A) the clause gives people assurance that when their policies become claims, they will be paid without delays or protests
(B) the incontestable clause means that after a certain period, an insurer cannot refuse to pay the proceeds of a policy or void the contract
(C) Incontestable clauses usually become effective 2 years fro the issue date of the policy
(D) insurers can void a contract even after the specified period provided they can prove the policy was purchased fraudulently

Answer 41

(D) insurers can void a contract even after the specified period provided they can prove the policy was purchased fraudulently

After the policy has been in force for the specified period, the company cannot contest a death claim or refuse payment of the proceeds even on the basis of a material misstatement, concealment, or fraud.

Question 42

All of the following statements correctly describe the purpose of Social Security EXCEPT:

(A) to provide basic protection against financial problems accompanying death, disability, and retirement
(B) to augment a sound personal insurance plan
(C) to provide a source of income for a meaningful standard of living
(D) to protect workers, their spouses, and dependent children

Answer 42

(C) to provide a source of income for a meaningful standard of living

The purpose of Social Security system is to provide a basic floor of protection to augment - not replace - a sound personal insurance plan. Many expect Social Security to fulfill all their financial needs and to provide a meaningful standard of living. The consequences of this misunderstanding have been disillusionment by many Americans who found they were inadequately covered when they needed life insurance, disability income, or retirement income.

Question 43

Ralph owns a $50,000 nonpar whole life policy. Its cash value has accumulated to $15,000, and he has paid a total of $9,500 in premiums. If he surrenders the policy for its cash value, how will it be taxed?

(A) Ralph will receive the $15,000 tax free
(B) Ralph will receive $5,000 tax free; the $9,500 balance is taxable as income
(C) Ralph will receive $9,500 tax free; the $5,500 balance is taxable as income
(D) Ralph will receive the $15,000 as taxable income

Answer 43

(C) Ralph will receive $9,500 tax free; the $5,500 balance is taxable as income

A policyowner is allowed to receive tax free an amount equal to what the policyowner paid into the policy over the years in the form of premiums.

Question 44

Which of the following would NOT apply when a life insurance policy is reinstated after a lapse?

(A) All back premiums must be paid.
(B) All outstanding loans must be paid.
(C) A new contestable period goes into effect.
(D) A new suicide exclusion period goes into effect.

Answer 44

(D) A new suicide exclusion period goes into effect.

There is no new suicide exclusion period when a policy is reinstated.

Question 45

Jane, age 35, has just purchased a 20-pay whole life policy. When she turns 55, she will:

(A) receive the policy’s face amount benefit
(B) have a fully matured policy
(C) cease paying premiums
(D) no longer be covered by the policy

Answer 45

(C) cease paying premiums

Limited pay whole life policies have level premiums that are limited to a certain period (less than life), after which no more premiums are owed.

Question 46

If a life insurance applicant is given a binding receipt, when does the applicant’s coverage become effective?

(A) The date the policy is issued
(B) The date the applicant proves to be insurable
(C) The date the receipt is given
(D) The date the policy is delivered

Answer 46

(C) The date the receipt is given

Under a binding receipt (or temporary insurance agreement), coverage is guaranteed at the time of application for the amount of insurance applied for. The temporary coverage continues until the policy is issued as requested, until the company offers a different policy or until the company rejects the application, but in no event for more than 60 days from the date the agreement was signed.

Question 47

Who performs the function of risk selection in determining an individual’s insurability for policy issue?

(A) Actuary
(B) Agent
(C) Fiduciary
(D) Underwriter

Answer 47

(D) Underwriter

Who is qualified to purchase life insurance and who is not? The process of answering this question is called risk selection, a function that is performed by insurance company underwriters.

Question 48

Regular notices sent to policyowners for payment of their life insurance policy premiums reflect:

(A) gross premium
(B) net level premium
(C) net single premium
(D) none of the above

Answer 48

(A) gross premium

Gross premium equals net single premium plus expense. The gross premium is what the policyowners are required to pay.

Question 49

In which of the following situations would the premium payor of a life insurance policy be able to deduct the premium payments for tax purposes?

(A) Joe, the sole proprietor of a grocery store, purchases and pays premiums on a $75,000 term life policy on his life and names his wife as beneficiary.
(B) Leland, a local board member of the United Way assigns his $25,000 whole life policy to that organization, but continues to make the premium payments.
(C) Michelle, the legal guardian of 5-year-old Angela, makes the premium payments on Angela’s $5,000 juvenile life insurance policy.
(D) Bob takes over the premium payments on his son’s $30,000 whole life policy after his son declares bankruptcy.

Answer 49

(B) Leland, a local board member of the United Way assigns his $25,000 whole life policy to that organization, but continues to make the premium payments.

Premiums paid for life insurance owned by a qualified charitable organization are deductible.

Question 50

At what point does a whole life policy mature or endow?

(A) When the policy’s cash value equals the face amount
(B) When premium paid equal the policy’s face amount
(C) When premiums paid equal the policy’s cash value
(D) When the policy’s cash value equals the loan amount

Answer 50

(A) When the policy’s cash value equals the face amount

Whole life insurance is designed to mature at age 100. At age 100, the cash value of the policy has accumulated to the point that it equals the face amount of the policy, as it was actuarially designed to do. At that point, the policy has completely matured or endowed. No more premiums are owed; the policy is completely paid up.

Question 51

Assume 4 individuals, all age 30, purchase the following life insurance policies.  If all policies are still in force 10 years later, who will have the largest cash value in his policy?
Bob:  $100,000 straight whole life
Dennis:  $100,000 life paid-up at 65
Ralph:  $100,000 20-pay life
Jack:  $100,000 life paid-up at 55

(A) Bob
(B) Dennis
(C) Ralph
(D) Jack

Answer 51

(C) Ralph

The larger the face amount of the policy, the larger the cash values; the shorter the premium-payment period, the quicker the cash values grow; and the longer the policy has been in force, the greater the build-up in cash values.

Question 52

Who designates the beneficiary of a life insurance policy?

(A) Insured
(B) Policyowner
(C) Underwriter
(D) Fiduciary

Answer 52

(B) Policyowner

One of the rights of owning a life insurance policy is the right to designate the change the beneficiary of the policy proceeds.

Question 53

A retirement plan that is not employer-sponsored allows single workers who earn up to $25,000 a year to contribute up to $5,000 every year and deduct the contribution from their taxes. The plan described is:

(A) a 401(k) plan
(B) an SEP plan
(C) an HR-10 plan
(D) an IRA plan

Answer 53

(D) an IRA plan

Anyone under the age of 70.5 who has earned income may open an IRA and contribute each year ana mount up to $5,000 or 100% of compensation, whichever is less. Contributions grow tax free until they are withdrawn.

Question 54

When an insured dies, who stands first to receive the policy’s proceeds?

(A) Policyowner
(B) Primary beneficiary
(C) Insured’s creditors
(D) Insured’s estate

Answer 54

(B) Primary beneficiary

A primary beneficiary is the party designated to receive the proceeds of a life insurance policy when they become payable.

Question 55

What is the basic source of information for life insurance underwriting and policy issue?

(A) Consumer reports
(B) Medical Information Bureau
(C) Application
(D) Physician reports

Answer 55

(C) Application

The application for insurance is the basic source of insurability information. It is the first source of information to be reviewed, and it is reviewed thoroughly.

Question 56

Jerry has just purchased a life insurance policy and is taking time to review the policy’s provisions. He will find that his policy excludes death by all of the following means EXCEPT:

(A) suicide
(B) accident
(C) aviation
(D) war

Answer 56

(B) accident

Most life insurance policies exclude the following risks: war, aviation, hazardous occupation or hobbies, commission of a felony, and suicide.

Question 57

A universal life policy expires when:

(A) an outstanding loan equals the death benefit
(B) a regularly scheduled premium payment is missed
(C) the cash value becomes too small to pay the cost of insurance
(D) the cash value equals the death benefit

Answer 57

(C) the cash value becomes too small to pay the cost of insurance

Universal life premiums are flexible and deposited into the policy cash value account along with interest credited by the insurer. Increasing monthly mortality charges are deducted from the cash value account. if the cash value account is insufficient to pay the monthly mortality charges at any point, the policy lapses.

Question 58

Randy’s premium payment was due on June 1, but the company did not receive it until June 28. Which policy provision kept Randy’s policy from lapsing?

(A) Reinstatement
(B) Facility-of-payment
(C) Grace period
(D) Automatic premium loan

Answer 58

(C) Grace period

If policyowners forget or neglect to pay their premiums by the date they are due, the grace period allows an extra 30 days or 1 month during which premiums may be paid to keep policies in force.

Question 59

Which of the following statements regarding policy assignments is CORRECT?

(A) The policyowner must notify the insurer of the assignment and receive the insurer’s permission.
(B) The procedure required for policy assignment is explained int he policy’s insuring clause.
(C) A policy that has named an irrevocable beneficiary cannot be assigned without that beneficiary’s agreement.
(D) Insurable interest must exist between the insured and the assignee at the time of assignment.

Answer 59

(C) A policy that has named an irrevocable beneficiary cannot be assigned without that beneficiary’s agreement.

When beneficiaries are designated irrevocable, the policyowner gives up the right to change them. Irrevocable beneficiaries have a vested right in the policy, and the policyowner cannot exercise rights of ownership without the beneficiary’s consent.

Question 60

On August 1, Roger completed an application for a major medical policy, gave his agent a check for the initial premium, and received an insurability receipt from the agent. No medical examination was required. On August 3, the agent submitted Roger’s application and premium to the insurance company. On August 6, Roger was involved in an accident and admitted to a hospital. On August 12, the agent received Roger’s policy from the insurance company. Which of the following statements concerning this situation is CORRECT?

(A) Roger’s coverage will begin when he receives the policy from the agent.
(B) Roger’s coverage began when he received the insurability receipt.
(C) Roger’s coverage began the day the insurance company received the application and premium from the agent.
(D) Roger’s coverage began the day the agent sent the application and premium to the insurance company.

Answer 60

(B) Roger’s coverage began when he received the insurability receipt.

The insurability type of conditional receipt provides that when an applicant pays the initial premium, coverage is effective - on the condition that the applicant proves to be insurable - either on the date the application was signed or the date of the medical examination, if one is required.

Question 61

Beth’s health insurance policy contains a provision that allows her to renew coverage up to age 65. However, the policy also states that should Beth lose her job, the insurance company will cancel the policy, regardless of Beth’s age. In terms of renewability, what type of policy does Beth have?

(A) Cancelable
(B) Optionally renewable
(C) Guaranteed renewable
(D) Conditionally renewable

Answer 61

(D) Conditionally renewable

A conditionally renewable policy allows an insurer to terminate the coverage, but only in the event of one or more conditions stated in the contract. These conditions cannot apply to the insured’s health. Most frequently, they are related to the insured reaching a certain age or losing gainful employment.

Question 62

Health maintenance organizations are known for stressing the provision of:

(A) preventative care
(B) health care and services on a fee-for-services-rendered basis
(C) health care and services in hospital settings
(D) health care and services to government employees

Answer 62

(A) preventative care

HMOs stress preventative care to reduce the # of unnecessary hospital admissions and duplication of services.

Question 63

All of the following statements are true of preferred provider organizations EXCEPT:

(A) a PPO is a group of health care providers, such as doctors, hospitals, and ambulatory health care organizations, that contract with a group to provide their services
(B) PPOs operate on a prepaid basis
(C) PPO members select from among the preferred providers for needed services
(D) groups that contract with PPOs are employers insurance companies, or other health insurance benefits providers

Answer 63

(B) PPOs operate on a prepaid basis

Unlike HMOs, preferred provider organizations usually operate on a fee-for-service-rendered basis, not on a prepaid basis.

Question 64

All of the following benefits are available under Social Security EXCEPT:

(A) welfare benefits
(B) death benefits
(C) old-age or retirement benefits
(D) disability benefits

Answer 64

(A) welfare benefits

Social Security provides death benefits, old-age or retirement benefits, and disability benefits to eligible workers. Social Security is an entitlement program, not a welfare program.

Question 65

Medicaid provides:

(A) funds to states for the provision of medical care to the aged
(B) funds to states to assist their medical public assistance programs
(C) funds to charitable organizations for providing medical benefits to poor people
(D) medical benefits to those who contributed to Medicare funding through payroll taxes

Answer 65

(B) funds to states to assist their medical public assistance programs

Medicaid provides matching federal funds to states for their medical public assistance programs to help needy persons, regardless of age.

Question 66

Mr. Ritchie, a taxidermist, is insured under business overhead expense policy that pays maximum monthly benefits of $2,000. Mr. Ritchie becomes disabled. His actual monthly expenses are $2,700. The monthly benefit payable under his policy will be:

(A) $1,300
(B) $2,00
(C) $2,350
(D) $2,700

Answer 66

(B) $2,000

Business overhead expenses insurance reimburses business for the covered expenses incurred or the maximum that is stated in the policy. If Mr. Ritchie’s monthly expenses were $1,700, his plan would have paid a monthly benefit of $1,700. However, because Mr. Richie’s expenses exceeded his maximum coverage, the policy pays the maximum benefit stated in the policy, $2,000.

Question 67

All of the following statements about Medicare supplement (Medigap) policies are correct EXCEPT:

(A) Medigap policies supplement Medicare benefits
(B) Medigap policies cover the cost of extended nursing home care
(C) Medigap policies pay most, if not all, Medicare deductibles and copayments
(D) Medigap policies pay for some health care services not covered by Medicare

Answer 67

(B) Medigap policies cover the cost of extended nursing home care

Medigap policies do not cover the cost of extended nursing home care.

Question 68

Which of the following is NOT a typical type of long-term care coverage?

(A) Skilled nursing care
(B) Home health care
(C) Hospice care
(D) Residential care

Answer 68

(C) Hospice care

Long-term care services are designated for senior citizens, while hospice services are for terminally ill persons and their families.

Question 69

All of the following are mandatory provisions in health insurance policies EXCEPT:

(A) proof of loss
(B) entire contract
(C) change of beneficiary
(D) misstatement of age

Answer 69

(D) misstatement of age

Misstatement of age is an optional provision of health insurance policies.

Question 70

Under the notice of claims provision of a health insurance policy, a policyowner must provide notification of loss within a reasonable period of time, usually:

(A) 10 days after an occurrence or a commencement of a loss
(B) 20 days after an occurrence or a commencement of a loss
(C) 1 month after an occurrence or a commencement of a loss
(D) no later than 3 months after an occurrence of a commencement of a loss

Answer 70

(B) 20 days after an occurrence or a commencement of a loss

Under the notice of claims provision an insured must provide notification of loss 20 days after an occurrence or a commencement of a loss.

Question 71

Paul is hospitalized with a back injury and, upon checking his disability income policy, learns that he will not be eligible for benefits for at least 60 days. This would indicate that his policy probably has a 60-day:

(A) elimination period
(B) probationary period
(C) disability period
(D) blackout period

Answer 71

(A) elimination period

Similar in concept to a deductible, the elimination period is the time immediately following the start of a disability when benefits are not payable.

Question 72

Major risk factors in health insurance underwriting include all of the following EXCEPT:

(A) physical condition
(B) habits or lifestyle
(C) marital status
(D) occupation

Answer 72

(C) marital status

Physical condition, habits or lifestyle (moral hazards), and occupation are major risk factors in health insurance. Marital status is not a risk factor.

Question 73

Which of the following is known for stressing preventive health care?

(A) Administrative-services-only providers
(B) Lloyd’s of London
(C) Health maintenance organizations
(D) Commercial insurers

Answer 73

(C) Health maintenance organizations

Health maintenance organizations stress preventive care to promote patient health and to control the use of health care resources, particularly expensive resources like hospitals.

Question 74

Leonard owns a major medical health policy which requires him to pay the first $200 of covered expenses each year before the policy pays its benefits. The $200 is the policy’s:

(A) coinsurance amount
(B) deductible
(C) stop-loss amount
(D) annual premium

Answer 74

(B) deductible

A deductible is a stated initial dollar amount that the individual insured is required to pay before insurance benefits are paid.

Question 75

Basic hospital expense insurance provides coverage for all of the following EXCEPT:

(A) hospital room and board
(B) anesthesia and use of the operating room and supplies
(C) physician services
(D) drugs and x-rays

Answer 75

(C) physician services

Physician’s services are not covered under a basic hospital expense policy, even in the case of surgery. The cost for a physician is covered under a basic surgical expense or basic physician’s (nonsurgical) expense policy.

Question 76

All of the following approaches are used by insurers to determine benefits payable under basic surgical expense insurance EXCEPT:

(A) relative value scale approach
(B) traditional net cost method
(C) reasonable and customary approach
(D) surgical schedule method

Answer 76

(B) traditional net cost method

The traditional net cost method is a way of comparing costs of similar policies.

Question 77

Basic surgical expense policies generally provide coverage for all of the following EXCEPT:

(A) anesthesiologist services
(B) surgeon services
(C) postoperative care
(D) miscellaneous expenses, such as lab fees and x-rays

Answer 77

(D) miscellaneous expenses, such as lab fees and x-rays

Miscellaneous expenses are covered under basic hospital expense policies. These “extras” include drugs, x-rays, anesthesia, lab fees, dressings, use of the operating room, and supplies.

Question 78

A waiver of premium provision may be included with which kind of health insurance policy?

(A) Hospital indemnity
(B) Major medical
(C) Disability income
(D) Basic medical

Answer 78

(C) Disability income

A waiver of premium rider generally is included with guaranteed renewable and noncancelable individual disability income policies. It is a valuable provision because it exempts the policyowner from paying the policy’s premiums during period of total disability.

Question 79

The minimum number of persons to be insured under a group health insurance plan is established by:

(A) the NAIC
(B) state law
(C) federal law
(D) the employer

Answer 79

(B) state law

State laws specify the minimum number of persons to be covered under a group policy. One state may stipulate 15 persons as a minimum number, while another state may require a minimum of 10. (The most typical minimum requirement is 10 lives.)

Question 80

Alice has a major medical policy with a $500 deductible and an 80/20 coinsurance provision. If she receives a hospital bill for $7,500 of covered expenses, how much of that bill will she have to pay?

(A) $1,400
(B) $1,900
(C) $2,000
(D) $2,400

Answer 80

(B) $1,900

Total Expenses $7,500
Deductible Alice pays - 500
Basis for insurer’s payment $7,000
x .80
Amount insurer pays $5,600
Coinsurance amount Alice pays $1,400
Deductible + 500
Total Alice pays $1,900

Question 81

Which of the following reimburses its insureds for covered medical expenses?

(A) Health maintenance organizations
(B) Preferred provider organizations
(C) Commercial insurers
(D) Service providers

Answer 81

(C) Commercial insurers

Commercial insurance companies function on the reimbursement approach. Policyowners obtain medical treatment from whatever source they feel is most appropriate and, per the terms of their policy, submit their charges to their insurer for reimbursement.

Question 82

Individual health insurance policies are typically written on which basis?

(A) Participating
(B) Nonparticipating
(C) Experience-rated
(D) Claims-rated

Answer 82

(B) Nonparticipating

Most individuals health insurance is issued on a nonparticipating basis.

Question 83

Workers’ compensation covers income loss resulting from:

(A) work-related disabilities
(B) plant and office closings
(C) job layoffs
(D) job terminations

Answer 83

(A) work-related disabilities

All states have workers’ compensation laws, which were enacted to provide mandatory benefits to employees for work-related injuries, illness, or death.

Question 84

As it pertains to group health insurance, COBRA stipulates that:

(A) retiring employees must be allowed to convert their group coverage to individual policies
(B) terminated employees must be allowed to convert their group coverage to individual policies
(C) group coverage must be extended for terminated employees up to a certain period of time at the employee’s expense
(D) group coverage must be extended for terminated employees up to a certain period of time at the employer’s expense

Answer 84

(C) group coverage must be extended for terminated employees up to a certain period of time at the employee’s expense

COBRA requires employers with 20 or more employees to continue group medical expense coverage for terminated workers (as well as their spouses, divorced spouses, and dependent children) for up to 18 months (or 36 months, in some situations) following termination. However, the terminated employee can be required to pay the premium, which may be up to 102% of the premium that would otherwise be charged.

Question 85

Which of the following statements regarding morbidity tables is CORRECT?

(A) They indicate the average number of individuals from a given group who will die in a given year.
(B) They indicate the average number of individuals from a given group who will become disabled.
(C) They indicate the number of males and females from a given group who will die in a given year.
(D) They indicate the number of males and females from a given group who will become disabled in a given year.

Answer 85

(B) They indicate the average number of individuals from a given group who will become disabled.

Whereas mortality rates show the average number of persons within a larger group of people who can be expected to die within a given year at a given age, morbidity tables indicate the average number of individuals at various ages who can be expected to become disabled each year due to accident or sickness. They also reveal the average duration of disability.

Question 86

All of the following are primary health insurance premium factors EXCEPT:

(A) interest
(B) expense
(C) policy benefits
(D) morbidity

Answer 86

(C) policy benefits

There are three primary factors that affect health insurance premiums: morbidity, interest, and expenses.

Question 87

When a group disability insurance plan is paid entirely by the employer, benefits paid to disabled employees are:

(A) taxable income to the employee
(B) deductible income to the employee
(C) deductible business expenses to the employer
(D) taxable income to the employer

Answer 87

(A) taxable income to the employee

Disability benefit payments that are attributed to employee contributions are not taxable, but benefit payments that are attributed to employer contributions are taxable.

Question 88

Harry, the owner of a convenience store, is the insured under a business overhead policy. Were Harry to become disabled, the oplicy would cover all of the following EXCEPT:

(A) Harry’s salary
(B) the store manager’s salary
(C) the rent
(D) utility bills

Answer 88

(A) Harry’s salary

Business overhead expense policies do not include any compensation for the disabled owner.

Question 89

All of the following are mandatory health insurance policy provisions EXCEPT:

(A) change of occupation
(B) entire contract
(C) grace period
(D) reinstatement

Answer 89

(A) change of occupation

Change of occupation is an optional provision.

Question 90

Which renewability provision allows an insurer to terminate a health insurance policy on any date specified in the policy and to increase the premium for any class of insureds?

(A) Conditionally renewable
(B) Optionally renewable
(C) Guaranteed renewable
(D) Cancelable

Answer 90

(B) Optionally renewable

The renewability provision in an optionally renewable policy gives the insurer the option to terminate the policy on the date specified in the contract. Furthermore, this provision allows the insurer to increase the premium for any class of optionally renewable insureds.

Question 91

The time payment of claims provision requires that:

(A) claims must be paid after the insurer is notified of a loss
(B) claims must be paid after the insurer is notified and receives proof of loss
(C) the insured must submit proof of loss within a specified time, or the claim may be denied
(D) the insured must periodically submit proof of loss in order to receive the claim

Answer 91

(B) claims must be paid after the insurer is notified and receives proof of loss

The time of payment of claims provision provides for immediate payment of the claim after the insurer receives notification and proof of loss.

Question 92

By most insurers’ definitions, “partial disability” is:

(A) the loss of one or more limbs
(B) the ability of a disabled insured to work at any job for which the insured is reasonably suited
(C) the inability of the insured to work at the insured’s own job
(D) the inability of the insured to perform certain important duties of the insured’s own job

Answer 92

(D) the inability of the insured to perform certain important duties of the insured’s own job

By most definitions, partial disability is the inability of the insured to perform one or more important duties of the insured’s job.

Question 93

The period of time immediately following a disability during which benefits are not payable is:

(A) the elimination period
(B) the probationary period
(C) the residual period
(D) the short-term disability period

Answer 93

(A) the elimination period

The elimination period is the time immediately following the start of a disability when benefits are not payable. Elimination periods eliminate claims for short-term disabilities for which the insured can usually manage without financial hardship and save the insurance company from the expense of processing and settling small claims.

Question 94

All of the following are characteristics of group health insurance plans EXCEPT:

(A) their benefits are more extensive than those under individual plans
(B) the parties to a group health contract are the employer and the employees
(C) employers may require employees to contribute to the premium payments
(D) the cost of insuring an individual is less than what would be charged for comparable benefits under an individual plan

Answer 94

(B) the parties to a group health contract are the employer and the employees

The contract for coverage is between the insurance company and the employer, and a master policy is issued to the employer.

Question 95

Bill’s medical expense policy states that it will pay him a flat $50 a day for each day he is hospitalized. The policy pays benefit on which basis?

(A) Reimbursement
(B) Indemnity
(C) Service
(D) Partial

Answer 95

(B) Indemnity

Indemnity medical expense policies do not pay expenses or bills; they merely provide the insured with a stated benefit amount for each day the insured is confined to a hospital as an in-patient. The money may be used by the insured for any purpose.

Question 96

After a week in the hospital, Lola receives a bill for $9,000 of covered expenses. Her major medical policy has a $250 deductible and a 75/25 coinsurance feature. How much of the total expense will Lola’s policy cover?

(A) $2,063
(B) $6,063
(C) $6,563
(D) $8,753

Answer 96

(C) $6,563

Responsibility for payment would be as follows:
Total expenses $9,000
Deductible Lola pays - 250
Basis for insurer’s payment $8,750
x .75
Amount insurer pays $6,563
Coinsurance Lola pays $2,187

Question 97

A basic surgical expense policy that covers surgeons’ fees per a schedule approach:

(A) bases its benefits on what is customary for a particular area
(B) assigns a set of points to each surgical procedure
(C) assigns a dollar amount to each surgical procedure
(D) bases its benefits on a percentage of hospital room and board expenses

Answer 97

(C) assigns a dollar amount to each surgical procedure

Under the surgical schedule method, every surgical procedure is assigned a dollar amount by the insurer. When a claim is submitted to the insurer, the claims examiner reviews the policy to determine what amount is payable; if the surgeon’s bill is more than the allowed charge set by the insurer, it is up to the insured to pay the surgeon the difference. If the surgeon’s bill is less than the allowed charge, the insurer will pay only the full amount billed; the claim payment will never exceed the amount charged.

Question 98

A stop-loss feature in a major medical policy specifies the maximum:

(A) benefit amount the policy provides each year
(B) benefit amount the policy provides in a lifetime
(C) amount the insured must pay in premiums
(D) amount the insured must pay toward covered expenses

Answer 98

(D) amount the insured must pay toward covered expenses

To provide a safeguard for insureds, many major medical policies contain a stop-loss feature that limits the insured’s out-of-pocket expenses. This means that once the insured has paid a specified amount toward the insured’s covered expenses - usually $1,000 to $2,000 - the company pays 100% of covered expenses after that point.

Question 99

Which of the following is a standard optional provision for health policies?

(A) Grace period
(B) Physical exam and autopsy
(C) Change of beneficiary
(D) Misstatement of age

Answer 99

(D) Misstatement of age

Misstatement of age is 1 of 11 optional policy provisions. Companies may ignore them or use them in their policy forms.