HS 311 Quizzes Flashcards
All of the following statements regarding risk are correct EXCEPT:
A) Objective risk is the difference between the expected and actual losses.
B) Particular risk is a risk that will impact a large group of individuals simultaneously.
C) Subjective risk is the risk that an individual perceives based on that person’s prior experiences.
D) Speculative risk is the chance of loss, no loss, or a profit.
B) Particular risk is a risk that will impact a large group of individuals simultaneously.
Which of the following is a risk reduction technique?
A) Purchasing life insurance
B) Parking your car at the end of the parking lot, away from other cars
C) Choosing not to go skydiving
D) Buying a warranty on your new TV
B) Parking your car at the end of the parking lot, away from other cars
The immediate cause and reason for a loss occurring, such as a hurricane, is referred to as a(n)
A) hazard.
B) insurable risk.
C) peril.
D) risk.
C) peril.
Icy roads and wet floors that increase the likelihood of a loss occurring are known as which type of hazard?
A) Physical hazard
B) Character hazard
C) Moral hazard
D) Morale hazard
A) Physical hazard
Which of the following statements is (are) correct regarding insurance contracts?
I. The principle of insurable interest is closely aligned with the principle of indemnity, in that both limit the insured from experiencing a gain using insurance.
II. A subrogation clause in an insurance policy requires that the insured relinquish a claim against a negligent third party if the insurer has already indemnified the insured.
Both I and II
Insurance coverage relies on the law of large numbers, meaning
A) events that are statistically difficult to predict for a specific individual are more predictable for a large number of individuals.
B) events that are statistically difficult to predict for a large number of individuals are more predictable for an individual.
C) insurers can statistically predict whether an individual will suffer a loss more accurately than they can statistically predict whether a large number of individuals will suffer losses.
D) insurers can adequately predict the losses expected for an individual but are unable to predict the losses expected for large numbers of individuals.
A) events that are statistically difficult to predict for a specific individual are more predictable for a large number of individuals.
Antonio’s television was stolen. The television cost $1,500 when it was first bought, but it now has a fair market value of $750. If Antonio has a homeowners policy that covers losses for personal property at actual cash value (ACV), what amount is Antonio entitled to recover?
A) $600
B) $750
C) $1,500
D) The current retail price for a new replacement television
B) $750
All of the following statements regarding insurance policies are correct EXCEPT:
A) Adverse selection is the tendency of those who most need insurance to purchase insurance policies while those with the least perceived risk are less likely to pay the necessary premiums for insurance.
B) An endorsement is a modification or change to a life or health insurance policy.
C) Co-payments are loss-sharing arrangements whereby the insured pays a flat dollar amount or percentage of the loss in excess of the deductible.
D) Deductibles serve as motivation for an insured to take precautions to avoid losses or to prevent the filing of false claims.
B) An endorsement is a modification or change to a life or health insurance policy.
The correct answer is (B).
An endorsement is a modification or change to an existing property insurance policy, whereas a change to a health or life insurance policy is a rider.
Premium rates set by insurance companies are regulated at which level of government?
A) Federal
B) State
C) Local
D) None of the above
The correct answer is (B).
Insurance premiums are regulated at the state level.
Ashley owns a home with a $400,000 replacement value. This February, a blizzard causes $75,000 in damages to the home. Ashley has an insurance policy with 80 percent coinsurance and a $1,000 deductible. How much will the insurer pay if Ashley carries $300,000 of coverage?
A) $60,000.00
B) $69,312.50
C) $70,312.50
D) $75,000.00
The correct answer is (B).
[$300,000 ÷ (0.80 × $400,000)) )] × $75,000 = $70,312.50 − $1,000 deductible = $69,312.50
Which of the following must be paid if the 66-year-old owner of a Health Savings Account (HSA) makes a distribution for a non-medical expense?
I. Income taxes
II. A 20% penalty
A) I only
If a distribution from an HSA is made for non-medical expenses after the owner reaches age 65, the 20% penalty is waived but income taxes must be paid.
Belinda is a participant in her employer’s group comprehensive major medical insurance plan. The plan has a $500 deductible, a $2,500 out-of-pocket maximum, and 80 percent coinsurance. If Belinda is injured in an accident resulting in $2,000 in medical costs, how much will Belinda need to pay for the medical bills?
A) $0
B) $400
C) $800
D) $2,000
The correct answer is (C).
Belinda will need to pay the first $500 to cover the deductible, then 20% of the remaining $1,500 (that is, $300) for a total of $800.
Which of the following correctly describes the tax treatment of reimbursements received from healthcare insurance?
A) They are generally not taxed.
B) They are generally taxed at ordinary income rates.
C) They are generally taxed at ordinary income rates, net of basis (premiums paid into the policy).
D) They are generally taxed at long term capital gains rates.
The correct answer is (A).
The benefits of healthcare insurance policies are generally received tax-free.
Indemnity health insurance plans are one of the ________ flexible types of insurance policies in terms of having the freedom to pick one’s own providers, but participants pay some of the ________ premiums.
A) Most; highest
B) Most; lowest
C) Least; highest
D) Least; lowest
The correct answer is (A).
Indemnity health insurance plans give participants the freedom to choose their own health care providers, but they pay some of the highest premiums.
Which of the following policies provides the greatest degree of protection to the insured?
A) Conditionally renewable
B) Noncancelable
C) Guaranteed renewable
D) Optionally renewable
The correct answer is (B).
A noncancelable policy offers the greatest amount of protection for the insured since the insured can force the insurance company to provide continued coverage, at the same premium, simply by paying the premium on the policy.
Amanda, an employee at Computer Solutions, recently divorced her husband, Carlos. Computer Solutions has provided group health insurance coverage to Amanda and her family since she began working for the company. Carlos is unemployed but is entitled to COBRA continuation coverage for
A) 12 months.
B) 18 months.
C) 29 months.
D) 36 months.
The correct answer is (D).
Carlos may obtain group health insurance coverage under Amanda’s plan for 36 months after the divorce.
All of the following are true regarding health savings accounts (HSAs) EXCEPT:
A) HSA funds can be invested.
B) Contributions made to the HSA by the plan participant are tax-deductible as an adjustment to gross income (above-the-line).
C) If an employer makes contributions to an HSA on behalf of an employee, the employer contributions are included in the taxable income of the employee.
D) To be eligible to make HSA contributions, an individual must be covered by a high-deductible health insurance plan.
The correct answer is (C).
If an employer makes contributions to an HSA on behalf of an employee, and the contribution limits are not exceeded, the employer contribution is not included in the taxable income of the employee.
A health savings account (HSA) and a flexible spending account (FSA) have several similarities including
A) that all funds carry over from year to year.
B) their use of pretax contributions.
C) that funds are invested.
D) all of the above.
The correct answer is (B).
Both FSAs and HSAs use pre-tax contributions. Funds only carry over from year to year in an HSA, not in an FSA. Only funds in an HSA are invested; FSA funds are not invested.
Which of the following is true of medical expense insurance?
A) It meets the requirements for minimal essential coverage under the Affordable Care Act (ACA).
B) The policy limits are likely to be very low, compared with major medical policies.
C) Planners usually recommend medical expense insurance because it offers the same coverage as group major medical insurance for a similar price.
D) All of the above are true.
The correct answer is (B).
The policy limits for medical expense insurance are likely to be much lower compared to major medical policies. Medical expense insurance, on its own, will not qualify for minimal essential coverage under the Affordable Care Act (ACA).
Which of the following is true of group health insurance?
A) Employer group health insurance plans that require all employees be eligible for the plan pose the greatest adverse selection risk.
B) Group policies are underwritten by assessing specific health risks of the individuals in the group.
C) One of the downfalls of group health insurance is the high administrative costs for each of the participants.
D) None of the above are true.
The correct answer is (D).
All of the above are incorrect. Group insurance plans that require all employees to enroll in the program pose little adverse selection risk because healthy individuals do not have the ability to opt- out. To do so would leave only those with greater expected health care needs covered in the plan. Group policies are underwritten based on the characteristics of the entire group, not on individual health assessments. One of the benefits of a group insurance policy is that the administrative costs are spread out among all the individuals, leaving less administrative costs per person, compared to individual policies.
Isaiah, a financial planner, is working with his clients to determine their life insurance needs. Isaiah is determining each person’s life insurance need by estimating the cash needs of the family during and after the insured’s death. Some of the financial needs that Isaiah is considering are the payment of final expenses, medical care, and eliminating debts. Which of the following models is Isaiah using to determine the life insurance needs?
A) The human life-value approach
B) The capitalized earnings approach
C) The needs approach
D) The discretionary cash flow approach
The correct answer is (C).
Isaiah is using the needs approach to determine the life insurance needs of his clients.
All of the following statements concerning term life insurance are correct EXCEPT:
A) An individual’s mortality risk affects the price of the term insurance premiums.
B) Term insurance policies tend to be used by older individuals more frequently than by younger individuals.
C) Unlike other forms of life insurance, term life insurance policies do not have cash accumulation features.
D) An annual renewable term policy (ART) permits the policyholder to purchase term insurance in subsequent years without evidence of insurability.
B) Term insurance policies tend to be used by older individuals more frequently than by younger individuals.
The premiums for term life insurance increase as the mortality risk increases. Therefore, premiums for term life insurance are often unaffordable for older individuals, making this type of life insurance much more common among younger individuals.
A key disadvantage of annual renewable term, compared to level term, is that:
A) It only covers a fixed term, after which the insured receives no coverage.
B) It becomes increasingly expensive to maintain coverage as the insured ages.
C) It is generally associated with lower death benefits.
D) It is difficult to purchase in most states.
The correct answer is (B).
Annual renewable term policies become increasingly expensive as the insured ages. In contrast, level term policies have a fixed, level premium.
Violetta sells commercial real estate and works on a commission. She wants a substantial amount of permanent life insurance protection, but because of her irregular income, she is not sure she will be able to pay a fixed premium every year. Which of the following should Violetta consider?
A) A guaranteed renewable term insurance policy
B) A modified whole life insurance policy
C) A single-premium immediate annuity
D) A universal life insurance policy
D) A universal life insurance policy
Option (A) is incorrect because a guaranteed renewable term policy has a fixed premium. Option (B) is incorrect because, although a lower premium is charged for the first few years, a modified whole life insurance policy still has a fixed premium. Option (C) is incorrect because Violetta is currently interested in permanent life insurance protection, not an annuity.
Which of the following statements concerning the uncertainty of investment gains or losses in a variable life insurance policy is correct?
A) It is jointly borne by both policyowner and insurer.
B) It is nonexistent.
C) It is borne by the policyowner.
D) It is borne by the insurer.
The correct answer is (C).
Options (A), (B), and (D) are incorrect because the policyowner bears the risk of investment gains or losses in a variable life insurance policy.
Which of the following statements concerning universal life insurance is (are) correct?
Policyowners must pay a target premium each year.
A withdrawal of cash value is treated as a loan.
Neither I nor II
Statement I is incorrect because the target premium is only a suggested premium Statement II is incorrect because withdrawals from a universal life policy resemble withdrawals from a savings account and incur no indebtedness.
Which of the following statements concerning insurable interest is (are) correct?
I. Life insurance requires that insurable interest exists at the time of a claim.
II. Without an insurable interest, insurance would be a wager or gambling contract.
II only
Statement I is incorrect because life insurance requires an insurable interest only when an insurance contract is purchased.
In conducting a needs analysis to determine the amount of life insurance an individual with dependents requires, all the following types of needs must be considered EXCEPT:
A) income to meet the individual’s retirement needs.
B) ongoing income needs of the surviving dependent family members.
C) the need to fund the children’s education.
D) lump-sum cash needs at the individual’s death.
The correct answer is (A).
A needs analysis presumes that the individual dies. Retirement needs of the individual’s survivors, however, are considered.
Which of the following statements describes factors that should be considered when deciding whether it is better to buy term life insurance or to buy permanent insurance and invest the premium difference?
A) The cash value of a permanent life insurance policy can readily be liquidated.
B) For clients in higher marginal tax brackets, the cost of permanent policy premiums is somewhat offset by their tax deductibility.
C) Only the death benefit from a term policy is received income-tax-free.
D) Increases in life insurance cash values are subject to federal income taxes as they accrue.
The correct answer is (A).
(B) is incorrect because life insurance premiums are not tax deductible. (C) is incorrect because death benefits from both term and permanent policies are received income-tax-free. (D) is incorrect because increases in cash values are not subject to federal income taxes as they accrue, in contrast to the earnings in a separate investment program, which are often taxed as ordinary income.
Which of the following statements concerning life insurance contracts are correct?
A) The assignment clause combats abuse by the insurance company, stating that once a policy has been in effect for a period of time, the insurer may not cancel the policy due to a material misrepresentation or omission.
B) The suicide clause is designed to hedge against the risk that individuals with suicidal thoughts will purchase life insurance and, shortly thereafter, commit suicide.
C) Most life insurance policies provide a grace period, typically spanning one year after the premium due date for the policy owner to pay an overdue premium.
D) All of the above are correct.
The correct answer is (B).
Option (A) is incorrect because it describes the incontestability clause. Assignment is the process of transferring all or part of the policy’s ownership rights. Option (C) is incorrect because the grace period typically spans one month.
Which of the following test(s) can be used to determine whether or not a life insurance contract meets the definition of a modified endowment contract (MEC)?
I. The corridor test
II. The seven-pay test
Both I and II
Both the corridor test and the seven-pay test are used to determine whether or not a life insurance contract is a MEC
An owner-insured of a viatical settlement is not subject to income tax on the capital gains of the policy if
A) the death benefit is less than $1 million.
B) the individual is less than 65 years of age.
C) the individual is terminally ill.
D) the owner-insured’s basis in the policy is greater than $1 million dollars.
The correct answer is (C).
If the owner-insured of a life insurance policy is terminally ill at the time the policy is sold, the gain in the policy is not subject to income tax. Terminal illness is defined as having a life expectancy of less than 24 months.
How are withdrawals from the cash value of a permanent life insurance policy typically taxed?
A) Using the “first in, first out” (FIFO) method in which withdrawals up to the policyowner’s basis are withdrawn tax-free and any additional withdrawals are taxed at ordinary income rates.
B) Using the “last in, first out” (LIFO) method in which gains above the policyowner’s basis are withdrawn first and taxed at ordinary income rates.
C) Such withdrawals are generally not subject to taxation unless the policy is a Modified Endowment Contract (MEC).
D) Withdrawals of cash value are not permitted; to access the cash value, policyowners may take tax-free policy loans or surrender the policy.
The correct answer is (A).
The policyowner’s basis in the policy may be withdrawn without triggering tax consequences.
Which of the following statements concerning a properly designed buy-sell agreement is (are) correct?
I. It ensures that a business owner’s estate can sell the business for a reasonable price.
II. It should specify how the purchase price will be established.
Both I and II are correct.
With regard to employer-paid group term life insurance, the employee is free from income tax liability for the first __________ of term life insurance protection.
A) $25,000
B) $50,000
C) $75,000
D) $100,000
The correct answer is (B).
The first $50,000 of death benefit protection received by the employee is tax-free
Members of a four-person partnership want to enter into a buy-sell arrangement. How many life insurance policies would need to be purchased to properly fund coverage of the partnership using a cross-purchase agreement?
One policy
Four policies
Eight policies
Twelve policies
The correct answer is (D). 12
Each owner would need to purchase a life insurance policy on each of the other owners. Therefore a total of 12 policies would need to be purchased.
4 × (4 − 1) = 4 × 3 = 12
Members of a three-person partnership want to enter into a buy-sell arrangement. How many life insurance policies would need to be purchased to properly fund coverage of the partnership using an entity-purchase agreement?
One policy
Three policies
Six policies
Nine policies
The correct answer is (B). 3
With an entity-purchase buy-sell arrangement, the business would purchase life insurance policies on each owner. Therefore, a total of 3 policies, one for each owner, would need to be purchased.
An insured’s life insurance policy has been classified as a modified endowment contract (MEC). When the insured passes away, the policy’s death benefit is subject to which of the following tax treatments?
The beneficiary receives the death benefit tax-free.
The death benefit is subject to ordinary income taxation.
The death benefit is subject to capital gains taxation.
The sum of all premiums paid are received as a tax-free return of basis while the remainder of the death benefit is subject to capital gains taxation.
The correct answer is (A).
Whether a policy is classified as a MEC does not affect the tax treatment of that policy’s death benefit: the death benefit is still received tax-free by the beneficiary.
Which of the following is a taxable event?
A beneficiary receives the death benefit from a modified endowment contract (MEC).
An insured takes a policy loan from the cash value of a universal life insurance policy.
An insured receives an interest payment after electing the interest-only surrender option.
A beneficiary receives a $100,000 death benefit from a group term life insurance policy.
The correct answer is (C).
When the interest-only surrender option is selected, the death benefit is left with the insurance company. Gains on that balance are received as taxable interest income. Answer (A) is incorrect because death benefits from a MEC are received tax-free by the beneficiary. Answer (B) is incorrect because policy loans, like all loans, are not considered taxable income. Answer (D) is incorrect because death benefits from group term life insurance policies are received tax-free by the beneficiary.
A Section 1035 exchange would allow which of the following tax-free exchanges?
A modified endowment contract (MEC) to typical life insurance policy.
A deferred annuity to a life insurance policy.
A modified endowment contract (MEC) to an annuity.
All of the above.
The correct answer is (C).
A life insurance policy, whether a typical policy or a MEC, may be exchanged tax-free for an annuity. Answer (A) is incorrect because a MEC cannot be converted to a typical policy; “once a MEC, always a MEC”. Answer (B) is incorrect because annuities may not be exchanged for life insurance policies tax-free under Section 1035.
