C.17 Principles of risk and insurance

Question 1

Which of the following best describes the concept of risk?

A. The possibility of a financial loss or negative outcome
B. The probability of a positive outcome
C. The likelihood of breaking the law
D. The potential for long-term financial gain

Answer 1

A. The possibility of a financial loss or negative outcome

Risk refers to the uncertainty or potential for undesirable consequences, typically associated with financial loss or negative outcomes. It encompasses the idea that there is a chance something unfavorable may happen when making decisions or taking actions. While other factors, such as the probability of positive outcomes (B), legality (C), and long-term financial gain (D), can be related to decision-making, they are not as central to the core concept of risk as the possibility of financial loss or negative consequences.

C.17 Principles of risk and insurance

Question 2

Which of the following is NOT an element of risk?

A. Uncertainty
B. Probability
C. Loss
D. Gain

Answer 2

D. Gain

In the context of risk assessment and management, the elements typically considered are uncertainty, probability, and loss. These elements are often used to evaluate and quantify risks associated with various scenarios or decisions.

C.17 Principles of risk and insurance

Question 3

What is the primary purpose of insurance?

A, To eliminate all risks
B. To transfer risks from the insured to the insurer
C. To increase the probability of a positive outcome
D. To guarantee profits for the insurer

Answer 3

B. To transfer risks from the insured to the insurer

The primary purpose of insurance is to transfer risks from the insured (the policyholder) to the insurer (the insurance company). When individuals or businesses purchase insurance policies, they are essentially transferring the financial burden of certain risks to the insurer. In exchange for regular premium payments, the insurer agrees to cover specified losses or damages that may occur due to events like accidents, illnesses, or disasters. This helps individuals and businesses manage unexpected financial hardships by spreading the risk among a larger group of policyholders and providing a safety net in case of unfortunate events.

C.17 Principles of risk and insurance

Question 4

Which of the following is an example of an insurable risk?

A. A person smoking cigarettes
B. A person jumping out of an airplane without a parachute
C. A house located in a flood zone
D. A person intentionally causing harm to others

Answer 4

C. A house located in a flood zone

Explanation: An insurable risk is typically defined as a risk that is uncertain, accidental, and measurable, and for which insurance coverage is available. In this context:

C.17 Principles of risk and insurance

Question 5

Which of the following is an example of a non-insurable risk?

A. Death
B. Illness
C. Unemployment
D. Intentional acts of the insured

Answer 5

D. Intentional acts of the insured

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Insurance is designed to provide financial protection against unforeseen and accidental events. Non-insurable risks are those that insurance companies typically do not cover because they are considered to be within the control of the insured or are the result of intentional actions.

C.17 Principles of risk and insurance

Question 6

John owns a house worth $500,000 and wants to insure it. The insurance company offers a policy with a premium of $5,000 per year and a deductible of $10,000. What is the maximum amount that John will have to pay out of pocket in case of a loss?

A. $5,000
B. $10,000
C. $15,000
D. $20,000

Answer 6

C. $15,000

The maximum amount that John will have to pay out of pocket in case of a loss is equal to the deductible plus the premium, which in this case is $10,000 + $5,000 = $15,000.

C.17 Principles of risk and insurance

Question 7

Lisa is a 30-year-old non-smoker who wants to purchase life insurance. Which of the following factors will most likely affect the premium she will have to pay?

A. Her occupation
B. Her gender
C. Her age
D. Her marital status

Answer 7

C. Her age

Age is one of the most important factors that determine the premium for life insurance. The younger the insured person, the lower the premium.

C.17 Principles of risk and insurance

Question 8

Tom has a car that is worth $10,000 and wants to insure it. The insurance company offers a policy with a premium of $500 per year and a deductible of $1,000. If Tom gets into an accident and the repair cost is $2,000, how much will the insurance company pay?

A. $500
B. $1,000
C. $1,500
D. $2,000

Answer 8

B. $1,000

The insurance company will pay the repair cost minus the deductible, which in this case is $2,000 - $1,000 = $1,000.

C.17 Principles of risk and insurance

Question 9

Sarah is a 25-year-old smoker who wants to purchase health insurance. Which of the following factors will most likely affect the premium she will have to pay?

A. Her occupation
B. Her gender
C. Her age
D. Her smoking habit

Answer 9

D. Her smoking habit

Smoking is a major risk factor for many health problems, so insurance companies charge higher premiums for smokers.

C.17 Principles of risk and insurance

Question 10

Which of the following types of insurance is designed to cover a specific period of time?

A. Term life insurance
B. Whole life insurance
C. Universal life insurance
D. Variable life insurance

Answer 10

A. Term life insurance

Term life insurance provides coverage for a specific period of time, typically 10-30 years, and pays out a death benefit if the insured dies during that period.

C.17 Principles of risk and insurance

Question 11

Which of the following best describes the concept of risk management?

A. Eliminating all risks
B. Transferring risks to another party
C. Reducing risks to an acceptable level
D. Accepting all risks and their potential consequences

Answer 11

C. Reducing risks to an acceptable level

Risk management involves identifying potential risks, assessing the likelihood and severity of each risk, and implementing strategies to reduce or mitigate those risks to an acceptable level.

C.17 Principles of risk and insurance

Question 12

Which of the following types of insurance is designed to cover damage or loss to a business’s property?

A. Liability insurance
B. Business interruption insurance
C. Property Insurance
D. Workers’ compensation insurance

Answer 12

C. Property insurance

Property insurance covers damage or loss to a business’s property, including buildings, equipment, inventory, and other assets.

C.17 Principles of risk and insurance

Question 13

Which of the following is an example of a hazard?

A. A high-speed intersection
B. A slippery floor
C. A smoker’s health status
D. A driver’s age

Answer 13

B. A slippery floor

A hazard is a condition that increases the likelihood of a loss, while a peril is an event that causes a loss. A slippery floor is an example of a hazard because it increases the likelihood of someone slipping and falling.

C.17 Principles of risk and insurance

Question 14

Which of the following types of insurance is designed to protect against claims of negligence or wrongdoing?

A. Property insurance
B. Liability insurance
C. Disability insurance
D. Health insurance

Answer 14

B. Liability insurance

Liability insurance protects individuals and businesses against claims of negligence or wrongdoing, such as a lawsuit resulting from a car accident or a slip and fall on someone’s property.

C.17 Principles of risk and insurance

Question 15

Which of the following is an example of morale hazard?

A. A driver texting while driving
B. A homeowner leaving a stove on while leaving the house
C. An employee stealing from their employer
D. A business owner operating in a high-risk industry

Answer 15

A. A driver texting while driving

A Morale hazard refers to the tendency of individuals to take more risks when they are insured or otherwise protected from the consequences of their actions. A driver who texts while driving is an example of morale hazard because they are taking a greater risk than they would if they were not insured.

C.17 Principles of risk and insurance

Question 16

When determining the suitability of a life insurance policy for a client, which of the following factors should be considered?

A. The client’s income
B. The client’s age
C. The client’s marital status
D. All of the above

Answer 16

D. All of the above

When determining the suitability of a life insurance policy for a client, factors such as the client’s income, age, and marital status should be considered, as these can impact the client’s insurance needs and ability to pay premiums.

C.17 Principles of risk and insurance

Question 17

Which of the following is an example of a situation where a high deductible health insurance plan may not be suitable for a client?

A. A client with a chronic health condition requiring regular medical care
B. A client who is young and healthy with no preexisting conditions
C. A client who has a high income and can afford to pay out-of-pocket expenses
D. A client who is self-employed and has no access to employer-sponsored health insurance

Answer 17

A. A client with a chronic health condition requiring regular medical care

A high deductible health insurance plan may not be suitable for a client with a chronic health condition requiring regular medical care, as the high out-of-pocket costs may make it difficult for the client to afford necessary treatments and medications.

C.17 Principles of risk and insurance

Question 18

Which of the following is an example of a situation where a high-risk insurance policy may be suitable for a client?

A. A client with a stable job and steady income
B. A client with a history of heart disease
C. A client who enjoys participating in extreme sports
D. A client with a large emergency savings fund

Answer 18

C. A client who enjoys participating in extreme sports

High-risk insurance policies are typically designed for individuals who engage in activities or have conditions that increase the likelihood of making a claim on the insurance policy. Engaging in extreme sports can be a high-risk activity, so it may be suitable for someone in this category to consider a high-risk insurance policy. Options A, B, and D do not necessarily require a high-risk insurance policy based on the information provided.

C.17 Principles of risk and insurance

Question 19

When determining the suitability of a long-term care insurance policy for a client, which of the following factors should be considered?

A. The client’s age and health status
B. The client’s income and assets
C. The client’s family history of medical conditions
D. All of the above

Answer 19

D. All of the above

When determining the suitability of a long-term care insurance policy for a client, factors such as the client’s age, health status, income, assets, and family history of medical conditions should be considered, as these can impact the client’s need for long-term care coverage and ability to pay premiums.

C.17 Principles of risk and insurance

Question 20

John and Emily own a condominium and are insured with a typical HO-6 policy. After an unexpected windstorm, they noticed $3,500 worth of damage to their balcony. How much might they expect to be covered by the policy?

A. $0
B. $1,750
C. $2,800
D. $3,500”

Answer 20

A. $0

The HO-6 policy, also known as the condo owner’s insurance policy, typically covers the interior of the unit and personal property inside, but it does not generally cover the exterior or the common areas, The balcony is an exterior part, and thus damages to it wouldn’t be covered by the HO-6 policy.

C.17 Principles of risk and insurance