Chapter 2

Question 1

Risk Pooling

Answer 1

-Group sharing of losses – combining of risks by persons exposed to loss from a particular source.
-Individuals “in the pool” mutually insure each other

Question 2

Assessment Insurance

Answer 2

Adverse Selection– healthy insureds drop coverage as they age while unhealthy insureds stay in plan.

Question 3

Basic elements of all types of life insurance (term, whole life, universal, variable)

Answer 3

-Mortality (risks of death for insureds)
-Interest (earnings of investment dollars)
-Expenses(included in gross premium)

Question 4

RENEWABLE TERM CHARACTERISTICS

Answer 4

-Coverage for a stated period
* No evidence of insurability on renewal
* Renewal is limited to a specified period or to a maximum age (due to adverse selection) * Premiums increase with attained age at renewal
* Premiums increase and accelerate after age 40 due to adverse selection (more older insureds with higher mortality risks)

Question 5

Legal Reserve

Answer 5

• Amount set aside to pay future claims and obligations.

Question 6

TAXATION ON LIFE INSURANCE

Answer 6

• Modified Endowment Contract (MEC) tax on annual cash value build-up and penalty for withdrawals before age 59 ½.

Question 7

Legal reserves associated with cash values development:

Answer 7

premiums in the early policy years are more than sufficient to fund death claims.

Question 8

ART or YRT right to renew

Answer 8

may be limited to a specific age or to a specific number of years.

Question 9

Risk pooling:

Answer 9

combination of risks by individuals exposed to loss from a particular source.

Question 10

Dividends are taxable to the extent

Answer 10

total dividends exceed total premiums paid.

Question 11

MEC:

Answer 11

a penalty tax applies to withdrawals by the policyowner under age 59 ½