HS 311 Sample Exam 1

Question 1

A loss exposure is defined as

(A) a loss that might occur
(B) an undesirable end result of a risk
(C) the largest possible loss
(D) the probability of a loss

Answer 1

(A) a loss that might occur

Question 2

Which of the following statements concerning the beneficiary provisions in a life insurance policy is correct?

(A) Only one person may be named as a primary beneficiary, but several may be named as contingent beneficiaries.
(B) The primary beneficiary’s share of policy proceeds is generally reduced if the contingent beneficiary outlives the insured.
(C) The estate of the insured is commonly named as beneficiary to avoid transfer taxes.
(D) The contingent beneficiary will receive policy proceeds only if the primary beneficiary predeceases the insured.

Answer 2

The answer is (D). (A) is incorrect because one or more people or entities may be named as either primary or contingent beneficiaries. (B) is incorrect because the contingent beneficiary receives nothing and all proceeds go the primary beneficiary when the insured dies, unless the primary beneficiary predeceases the insured or loses entitlement to the benefits for some other reason. (C) is incorrect because transfer taxes may be incurred when the estate is the beneficiary.

Question 3

Which of the following types of insurance is often sold by mortgage lenders to provide the funds necessary to pay off a 10-year mortgage loan if the insured dies?

(A) decreasing term
(B) increasing term
(C) modified whole life
(D) 10-year renewable term

Answer 3

The answer is (A). (B) is incorrect because the amount of insurance under an increasing term policy increases while the amount needed to pay off the mortgage decreases. (C) is incorrect because the amount of insurance under a modified whole life policy remains constant while the amount needed to pay off the mortgage decreases. (D) is incorrect because the amount of insurance under a 10-year renewable term policy remains constant for 10 years while the amount needed to pay off the mortgage decreases.

Question 4

Which of the following is most likely to be a condition that will result in the payment of unemployment compensation benefits?

(A) unemployment because of a labor dispute
(B) unemployment as a result of voluntarily leaving a job without good cause
(C) unemployment resulting from discharge that was prompted by misconduct
(D) unemployment that results from adverse economic conditions

Answer 4

The answer is (D). (A), (B), and (C) are incorrect because common reasons for disqualification under unemployment compensation programs include involvement in a labor dispute, voluntarily leaving a job without good cause, and discharge for misconduct

Question 5

Which of the following statements concerning inpatient hospital care under Part A of Medicare is correct?

(A) There is a $200 annual deductible.
(B) Benefits are paid in full after the 60th day of hospitalization.
(C) There is a lifetime limit on the number of days of treatment in psychiatric hospitals.
(D) There is coverage for up to 210 days of care in each benefit period.

Answer 5

The answer is (C). (A) is incorrect because hospital benefits are not subject to an annual deductible. However, there is a benefit period deductible, and it is much higher than $200. (B) is incorrect because benefits are paid in full for only the first 60 days in each benefit period, subject to the initial deductible. (D) is incorrect because Part A pays for hospital services in full for up to 60 days in each benefit period after the deductible has been met. It provides benefits for an additional 30 days subject to a daily patient copayment. There is also a lifetime reserve of 60 additional days, but once these days are used, they are not available for future benefit periods.

Question 6

Insurance policies that give the policyowner the right to renew coverage but do not guarantee future rates are referred to as

(A) cancelable
(B) guaranteed renewable
(C) non-cancelable
(D) optionally renewable

Answer 6

The answer is (B). (A) is incorrect because the insurer has the right to cancel a cancelable policy during the period for which premiums have been paid. (C) is incorrect because future rates are guaranteed in a noncancelable policy. (D) is incorrect because the insurer has a right to refuse to renew an optionally renewable policy.

Question 7

Which of the following statements concerning ethical decision-making is correct?
(A) Ethics and compliance are synonymous.
(B) Compliance is concerned with how we should behave.
(C) Ethics is concerned with how we should behave.
(D) All of the above

Answer 7

The answer is (C). (A) is incorrect because ethics and compliance are not synonymous. Compliance deals with follow rules and regulations. Ethics involves following a moral code. (B) is incorrect because compliance does not deal with how we should act, it only deals with following rules. (D) is incorrect, by definition.

Question 8

The workers’ compensation benefits provided by a Workers Compensation and Employers Liability insurance policy are

(A) specified by state law
(B) scheduled in the policy
(C) determined by the courts
(D) subject to a dollar limit specified in the policy

Answer 8

The answer is (A). (B) and (C) are incorrect because benefits are specified by state workers’ compensation law. (D) is incorrect because the policy’s dollar limits apply only to employers liability coverage.

Question 9

The standard amount of insurance for loss of use (Coverage D) under an unendorsed HO-3 policy is what percentage of the amount of insurance for the
dwelling (Coverage A)?

(A) 10 percent
(B) 20 percent
(C) 30 percent
(D) 50 percent

Answer 9

The answer is (C). The standard limit for Coverage D is 30 percent of the Coverage A limit. Prior to 2000, the limit was 20 percent. The limit for Coverage B (other structures) is 10 percent of the Coverage A limit, while the limit for Coverage C (personal property) is 50 percent of the Coverage A limit.

Question 10

Ken has a personal auto policy (PAP) with coverage limits of $500,000 for liability (Part A), $15,000 for medical payments (Part B), $50,000 for uninsured motorists (Part C), and no underinsured motorists endorsement. If Ken receives $100,000 in bodily injuries as a result of an auto accident with another driver who has only the minimum state requirement of $35,000 of liability coverage, how would the two policies cover Ken’s injuries if the other driver was at fault?

(A) Ken’s PAP would cover the entire $100,000 under Part A because the other driver’s coverage is inadequate to compensate Ken for his injuries.
(B) The other driver’s policy would pay its limit of $35,000 while Ken’s PAP would pay $15,000 under Part B and $50,000 under Part C.
(C) The other driver’s policy would pay its limit of $35,000 while Ken’s PAP would pay $50,000 under Part C with the remaining $15,000 not covered by either policy.
D) The other driver’s policy would pay its limit of $35,000 while Ken’s PAP would pay $15,000 under Part B with the remaining $50,000 not covered by either policy.

Answer 10

The answer is (D). Ken would collect $35,000 from the other party’s liability insurer. His own policy would also pay the full $15,000 medical payment limit. There is no coverage for the remaining $50,000 because Ken does not have coverage for underinsured motorists.

Question 11

King purchased an insurance policy that will pay $200 for each day he is hospitalized, regardless of the amount billed by the hospital. This insurance policy is considered which of the following?

(A) a bilateral contract
(B) a contract of indemnity
(C) a valued contract
(D) an impersonal contract

Answer 11

The answer is (C). (A) is incorrect because insurance is a unilateral contract. (B) is incorrect because payments under a contract of indemnity reflect the amount of the loss. (D) is incorrect because insurance is a personal contract.

Question 12

William is covered under his employer's major medical expense plan. The plan has a calendar-year deductible of $1,000, a 75 percent coinsurance provision that applies to the next $8,000 of covered expenses, and full coverage for any remaining covered expenses. If William incurs covered medical expenses of $15,000 during the year, how much will be paid by his employer's plan?

(A) $10,500
(B) $12,000
(C) $13,000
(D) $14,000

Answer 12

The answer is (B). His employer’s plan will pay $12,000. If William incurs $15,000 of covered medical expenses, he must pay $1,000 out-of-pocket to meet the deductible. Of the remaining $14,000 of expenses, $8,000 of it is subject to the 75 percent coinsurance provision. This means that William must pay another $2,000 (.25 × $8,000 = $2,000) out-of-pocket for a total amount of $3,000 ($1,000 deductible + $2,000 coinsurance = $3,000). Subtracting $3,000 from $15,000 leaves $12,000 for the medical expense plan to cover.

Question 13

Which of the following statements describes factors that should be considered in the argument 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 life insurance policy can readily be liquidated.
(B) People are less likely to pay a life insurance premium than they are to make a voluntary investment.
(C) The life insurance industry has a questionable solvency record.
(D) Increases in life insurance cash values are subject to federal income taxes as they accrue.

Answer 13

The answer is (A). (B) is incorrect because people are more likely to pay a life insurance premium than they are to make a voluntary investment. (C) is incorrect because the life insurance industry has a solvency record unmatched by any other type of business organization. (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.

Question 14

Susan has a personal auto policy (PAP) with a liability limit of $500,000. She also has a personal umbrella policy with a limit of $1 million and a self-insured retention(SIR) of $1,000. How much will each policy pay if an injured person obtains a judgment of $800,000 against Susan as a result of an auto accident?

(A) The PAP will pay nothing, and the umbrella policy will pay $799,000.
(B) The PAP will pay nothing, and the umbrella policy will pay $800,000.
(C) The PAP will pay $500,000, and the umbrella policy will pay $299,000.
(D) The PAP will pay $500,000, and the umbrella policy will pay $300,000.

Answer 14

The answer is (D). (A) and (B) are incorrect because the umbrella policy pays only after the limits of the PAP are exhausted because the PAP is primary. (C) is incorrect because the self-insured retention (SIR) does not come into play when there is an underlying policy paying for part of the loss.

Question 15

Insurance Services Office (ISO) is which of the following?

(A) an advisory organization that develops standard policies for homeowners insurance and other lines
(B) a credit bureau that maintains and disseminates credit information on applicants for property and liability insurance
(C) a private organization that gathers and maintains medical information disclosed by applicants for life insurance
(D) a voluntary association serving state insurance commissioners

Answer 15

The answer is (A). (B) is incorrect because ISO is not a credit bureau. (C) is incorrect because it describes MIB, Inc. (D) is incorrect because it describes the NAIC.

Question 16

Jane, a restaurant critic on the staff of Local Newspaper, got a bad case of food poisoning while eating a tropical fruit salad at the Hungry Tiger restaurant she was reviewing. Because she was injured during the course of her employment, the insurance company providing Local Newspaper’s workers’ compensation insurance paid Jane’s hospital expenses. That insurance company then sued Hungry Tiger, thereby exercising its legal rights of recovery under which of the following legal bases?

(A) doctrine of indemnity
(B) doctrine of subrogation
(C) law of the jungle
(D) principle of adhesion

Answer 16

The answer is (B). (A) is incorrect because the doctrine, or principle, of indemnity refers to compensation that makes people whole following a loss.(C) is incorrect because the law of the jungle refers to unrestrained and ruthless competition. (D) is incorrect because the principle of adhesion deals with ambiguity in a contract.

Question 17

Sam and Janet Evening wish to purchase an annuity that provides an income as long as at least one of them is alive. They have no children and no interest in passing their assets to heirs. Which of the following annuities is best suited for their purposes?

(A) cash refund annuity
(B) installment refund annuity
(C) joint-and-last survivor annuity
(D) joint-life annuity

Answer 17

The answer is (C). (A) is incorrect because providing a lump-sum cash refund to heirs is inconsistent with their goals. (B) is incorrect because providing an installment refund to heirs is inconsistent with their goals. (D) is incorrect because joint-life annuity payments would cease when either Sam or Janet dies, rather than providing an income as long as at least one of them is alive.

Question 18

The extension-of-benefits provision under a group medical expense policy applies to which of the following persons when coverage terminates?

(A) anyone who is aged 21 or under
(B) anyone who is totally disabled as a result of an illness or injury that occurred while the person was covered under the contract
(C) the employee and any dependents if the employee is eligible for unemployment insurance or public assistance
(D) any employee who has at least 10 years of service

Answer 18

The answer is (B). (A), (C), and (D) are incorrect because the extension-of-benefits provision applies only to a covered employee or dependent who is totally disabled at the time of termination.

Question 19

As of this year, Brad, aged 35, has 36 credits of covered employment under the Social Security program. These credits were all earned in the last 40 calendar quarters. What is Brad’s insured status under the program?

(A) He is currently, fully, and disability insured.
(B) He is disability insured, but neither fully nor currently insured.
(C) He is currently and fully insured, but not disability insured.
(D) He is currently insured, but neither fully nor disability insured

Answer 19

The answer is (A). Brad meets the criteria for being currently, fully, and disability insured.

A person who has a minimum of six credits is fully insured if he/she has at least as many credits as there are years elapsing after 1950 (or after the year in which he/she reaches age 21).

Question 20

Which of the following statements concerning business uses of disability income insurance is correct?

(A) Benefits from key employee disability policies are designed to provide additional disability income to valuable employees.
(B) When the policy is used to fund a buy-sell agreement, the definition of disability in the policy should be the same as the definition used in the buy-sell agreement.
(C) Business overhead policies tend to have benefit durations of between 5 and 10 years.
(D) When the policy is used to fund formal salary continuation plans, the business must be both the owner and beneficiary of the policy.

Answer 20

The answer is (B). (A) is incorrect because key employee disability policies are designed to benefit the business that has lost the services of a key employee. (C) is incorrect because business overhead policies tend to be limited to benefit durations of 1 or 2 years. (D) is incorrect because either the business or the employee may be the beneficiary under a formal salary continuation plan.

Question 21

Which of the following statements is correct if the life income settlement option in a cash value life insurance policy is exercised?

(A) The policy will provide an income to beneficiaries for as long as the insured lives.
(B) The policy’s death benefit will be increased.
(C) The policy’s death proceeds will be used to purchase a single-premium annuity for the beneficiary.
(D) The policy’s periodic premium will be increased.

Answer 21

The answer is (C). (A) is incorrect because settlement options are exercised when the insured dies. (B) is incorrect because the settlement option is a way of distributing the benefit, not of modifying its value. (D) is incorrect because settlement options are exercised after the insured dies, at which time no more premiums are payable.

Question 22

Which of the following statements concerning the federal income tax treatment of insured group medical expense plans is correct?

(A) All employee contributions under a contributory plan are tax deductible to the employee as a medical expense.
(B) Benefits are taxable to an employee to the extent that the employer paid the cost of coverage.
(C) Contributions by the employer for an employee’s coverage create an income tax liability for the employee.
(D) Contributions by the employer for an employee’s coverage are generally tax deductible to the employer.

Answer 22

The answer is (D). (A) is incorrect because employee contributions are tax deductible only for employees who itemize deductions and then only to the extent that expenses exceed 7.5 percent of the employee’s adjusted gross income. (B) is incorrect because medical expense benefits are not taxable income to the employee unless they exceed any medical expenses incurred. (C) is incorrect because employer contributions do not create any tax liability for an employee.

Question 23

Which of the following is the standard inflation provision in most long-term care insurance policies?

(A) a 3 percent simple annual benefit increase option
(B) a 5 percent compound annual benefit increase option
(C) a pay-as-you-go option without evidence of insurability
(D) an automatic annual increase option based on the consumer price index

Answer 23

The answer is (B). (A), (C), and (D) are incorrect because these inflation provisions are much less common.

Question 24

Which of the following statements concerning prescription drug plans is correct?

(A) Nonprescription drugs are typically covered as long as they are ordered by a physician on a prescription form.
(B) Benefits are usually provided for the administration of drugs that cannot be self-administered.
(C) Most plans have a copayment for each prescription.
(D) A reimbursement approach is usually used to provide benefits.

Answer 24

The answer is (C). (A) is incorrect because prescription drug plans normally cover only those drugs that are required by either federal or state law to be dispensed by prescription. One frequent exception, however, is injectable insulin. (B) is incorrect because no coverage is provided for the charges to administer drugs. (D) is incorrect because a service approach is usually used to provide benefits. Prescriptions are filled upon receipt of a prescription, proper identification, and any required copayment.

Question 25

Ohm Insurance Company, incorporated in Springfield, Illinois, was formed in 1952 by a group of investors who own shares in the company. Ohm is currently licensed to sell life insurance in the states of Illinois, Pennsylvania, and Maryland. When Ohm is doing business in Pennsylvania, which of the following would be a correct classification of Ohm?

(A) alien insurer
(B) foreign insurer
(C) extraterritorial insurance company
(D) non-admitted insurance company

Answer 25

The answer is (B). (A) is incorrect because an alien insurer is based in another country. (C) is incorrect because extraterritorial refers to out-of-state coverage, not an out-of-state insurer. (D) is incorrect because Ohm is licensed in Pennsylvania.

Question 26

Which of the following statements concerning the elimination period in a long-term care insurance policy is correct?

(A) Most comprehensive policies have separate elimination periods for facility care and home health care.
(B) A tax-qualified policy must have an elimination period of at least 90 days.
(C) The effect of the elimination period is to reduce a policy’s maximum benefit period.
(D) The applicant typically selects the length of the elimination period from three to five available options.

Answer 26

The answer is (D). (A) is incorrect because most comprehensive long-term care insurance policies have a single elimination period that can be met with a combination of days from when an insured is in a long-term care facility or receiving home health care services. (B) is incorrect because a tax-qualified policy can have an elimination period of any length of time, assuming it is acceptable under state law. The only 90-day requirement is that the insured be certified as being unable to perform the required number of ADLs for at least 90 days. (C) is incorrect because the elimination period only postpones the date until benefits start. Once they start, the maximum benefit period applies.

Question 27

Daisy does not own a car but occasionally borrows one from friends. The friends have little money, and if they have insurance at all, it is only for minimum limits. Daisy, on the other hand, is well-to-do. To protect herself against a liability claim while she is driving a friend’s car, Daisy can purchase a personal auto policy (PAP)with a(n)

(A) auto loan/lease coverage endorsement
(B) coverage for damage to your auto (maximum limit of liability) endorsement
(C) miscellaneous type vehicle endorsement
(D) named non-owner coverage endorsement

Answer 27

The answer is (D). (A) is incorrect because the auto loan/lease coverage endorsement would provide “gap” coverage in the event the actual cash value of an auto Daisy owns or leases is less than the amount she owes on the auto. (B) is incorrect because the coverage for damage to your auto (maximum limit of liability) endorsement provides stated amount coverage on an owned auto. (C) is incorrect because the miscellaneous type vehicle endorsement is used to cover motor homes, motorcycles, all-terrain vehicles, dune buggies, and golf carts.

Question 28

Phantom Insurance Company employs claims representatives based in five Midwestern states but has no claims employees in California, where one of its policyowners is involved in a serious auto accident. Phantom will most likely use which of the following to adjust the claim?

(A) independent adjuster
(B) insurance agent
(C) public adjuster
(D) staff adjuster

Answer 28

The answer is (A). (B) is incorrect because insurance agents usually adjust only small, uncomplicated claims. (C) is incorrect because public adjusters represent the public, not insurers. (D) is incorrect because staff adjusters are employees of the insurer, and according to the question, Phantom has no employees in California.

Question 29

Which of the following definitions of disability used in a group disability income plan is the most restrictive or harshest for the insured employee?

(A) the inability of the employee to perform each and every duty of his or her own occupation
(B) the inability of the employee to engage in any occupation for compensation
(C) the inability of the employee to engage in any occupation for which he or she is qualified by training, education, or experience
(D) the inability of the employee to engage in his or her own occupation for 24 months and any occupation for which he or she is qualified thereafter

Answer 29

The answer is (B). (A) is incorrect because it is the most liberal definition for the employee, since the inability to perform one major duty would constitute disability. (C) is incorrect because it is more liberal for the employee than (B) but not as liberal as (A) because the employee could perform several different occupations based on qualifications even if he or she could not perform one of the major duties of his or her own occupation. (D) is incorrect because it is very liberal for a period of 24 months before becoming less so but still more liberal than (B).

Question 30

Lynn owns the commercial building that houses her business. The property insurance policy covering the building has an 80 percent coinsurance clause. If the replacement cost of the building is $500,000 and Lynn has it insured for $300,000 on a replacement cost basis, how much would the insurance company pay (ignoring any deductible) if the building were to suffer fire damage with a replacement cost of $100,000?

(A) $60,000
(B) $75,000
(C) $80,000
(D) $100,000

Answer 30

The answer is (B).

If the amount of insurance is less than 80 percent of replacement cost, the insurer will pay the portion of the cost to repair or replace the damage that the limit of insurance bears to 80 percent of the replacement cost at the time of loss. This is explained by the following formula:

$500,000 *.8 = $400,000
$300,000 / $400,000 = 0.75
$100,000 * 0.75 = $75,000

Question 31

A state requires prior approval of proposed rate changes only if they exceed 5 percent of existing rates. No prior approval is needed for proposed rate changes at 5 percent or less. This is an example of

(A) a use-and-file law
(B) a file-and-use law
(C) a flex-rating law
(D) open competition

Answer 31

The answer is (C). (A) is incorrect because with a use-and-file law, rates are filed within a specified time after they are first used, and they may be disapproved. (B) is incorrect because a file-and-use law permits immediate use of filed rates without affirmative approval, although the commissioner may disapprove rates within a certain time period. (D) is incorrect because open competition relies on competition, rather than regulation, to set rates.

Question 32

An insurance company that has not gained approval to place insurance business from a department of insurance in the jurisdiction where it or a producer wants to sell insurance is known as a(n)

(A) unlicensed company
(B) unregistered party
(C) unapproved firm
(D) unauthorized entity

Answer 32

The answer is (D). An entity that has not gained approval to place insurance business from a department of insurance in the jurisdiction where it or a producer wants to sell insurance is referred to an unauthorized entity.

Question 33

Insurance as a technique for treating risks is most suitable when used for risks that involve

A) a low loss frequency and high loss severity
(B) a high loss frequency and low loss severity
(C) both a low loss frequency and low loss severity
(D) both a high loss frequency and high loss severity

Answer 33

The answer is (A). (B) is incorrect because retention is most suitable for risks with high loss frequency and low loss severity. (C) is incorrect because retention is most suitable for risks with low loss frequency and low loss severity. (D) is incorrect because avoidance is most suitable for risks with high loss frequency and high loss severity.

Question 34

Which of the following homeowners forms is designed for the owners of condominium units?

(A) HO-2
(B) HO-4
(C) HO-6
(D) HO-8

Answer 34

The answer is (C). (A) is incorrect because HO-2 is designed for owner-occupants of dwellings. (B) is incorrect because HO-4 is designed for tenants of residential property. (D) is incorrect because HO-8 is designed for owner-occupants of dwellings.

Question 35

Which of the following types of life insurance allows the policyowner to increase or decrease premium payments to virtually any amount desired as long as there is sufficient cash value to cover mortality costs and expenses?

(A) current assumption whole life insurance
(B) variable life insurance
(C) universal life insurance
(D) ordinary life insurance

Answer 35

The answer is (C). (A), (B), and (D) are incorrect because current assumption whole life, variable life, and ordinary life have fixed premiums. Truly flexible premiums are a distinctive feature of universal life insurance.

Question 36

Robert sued Heather for injuries received in an auto accident. Based on the facts presented, the jury determined that Robert was 20 percent at fault and Heather was 80 percent at fault. Under a comparative negligence law, the jury award to Robert would be

(A) nothing
(B) 20 percent of his actual damages
(C) 80 percent of his actual damages
(D) 100 percent of his actual damages

Answer 36

The answer is (C). Under a comparative negligence law, Robert would have his judgment reduced by 20 percent, which is the degree of his fault.

Question 37

Sarah lives with her mother and stepfather. She is an eligible dependent for medical expense coverage under both of their medical expense plans as well as
under the plan of her father. There is no court decree that establishes responsibility for Sarah’s medical expenses. Which of the following statements describes the priority of benefits if all three plans contain the usual coordination-of-benefit (COB) provisions?

(A) The mother’s plan is primary, and neither the father’s plan nor the stepfather’s
plan pays anything.
(B) The mother’s plan is primary, the stepfather’s plan is secondary, and the
father’s plan pays last.
(C) The father’s plan is primary, the mother’s plan is secondary, and the
stepfather’s plan pays last.
(D) The mother’s plan and father’s plan each pay 50 percent of the expenses.

Answer 37

The answer is (B). Under the usual COB provision, the plan of the parent with custody is primary, the plan of the stepparent who is the spouse of the parent with custody is secondary, and the plan of the parent without custody is tertiary.

Question 38

Which of the following statements defining ethics is (are) correct?

I. Ethics is both a field of study and a skill.

II. Ethics is a branch of philosophy that investigates, among other things, how we should behave.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 38

The answer is (C). Both I and II are correct.

Question 39

Which of the following statements concerning state high-risk pools for individual medical expense coverage is (are) correct?

I. As a result of state subsidies, premiums tend to be much lower than in 	the regular marketplace.

II. Benefits for preexisting conditions are often subject to a waiting period.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 39

The answer is (B). I is incorrect because ACA will require premiums to be the same based on ratings that do not take health conditions into account.

Question 40

Which of the following statements concerning stakeholder theory is (are) correct?

I. Stakeholder theory was designed as a theory of management decision-making.

II. Stakeholder theory is a helpful way to consider decision-making for financial services professionals.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 40

The answer is (C). Both I and II are correct.

Question 41

Which of the following statements concerning partial-disability benefits is (are) correct?

I. They tend to discourage persons returning to work before total 	recovery from a disability.

II. They are usually payable prior to the period for which an insured 	qualifies for total-disability benefits.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 41

The answer is (D). I is incorrect because partial-disability benefits tend to encourage a return to work prior to total recovery. II is incorrect because they are payable only after a person receives total-disability benefits for a specified period of time.

Question 42

Which of the following statements concerning premiums for individual medical expense insurance policies is (are) correct?

I. The total premiums for a year will be higher if paid in installments rather than a single annual premium.

II. If a premium is not paid within the grace period, the policy will lapse as of the end of the grace period.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 42

The answer is (A). II is incorrect because individual medical expense policies lapse at the beginning of the grace period unless the premium is paid within the grace period.

Question 43

Which of the following statements concerning group insurance is (are) correct?

I. The group insurance contract provides coverage to a number of persons.

II. Individual members of the group are usually not required to show any evidence of insurability when initially eligible for coverage.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 43

The answer is (C). Both I and II are correct.

Question 44

Methods of risk financing include which of the following? 

	I. risk retention

	II. loss prevention

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 44

The answer is (A). II is incorrect because loss prevention is not a method of risk financing but a method of risk control, which typically involves reducing the probability or severity of loss.

Question 45

Which of the following statements concerning the legal requirement of offer and acceptance in a life insurance contract is (are) correct?

I. The offer can be made in the form of an oral request by the prospect to the agent.

II. Acceptance typically occurs when the agent receives the offer and binds the coverage.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 45

The answer is (D). I is incorrect because in life insurance the offer must be made in a written application. II is incorrect because in life insurance acceptance is held by most courts to occur when the applicant meets the normal underwriting standards of the insurer, including a medical examination if required.

Question 46

Which of the following statements concerning the federal income tax treatment of premiums paid for property and liability insurance is (are) correct?

I. Premiums for policies on nonbusiness property are deductible as casualty expenses by individual taxpayers.

II. Premiums for policies on business property are deductible business expenses for a corporation.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 46

The answer is (B). I is incorrect because nonbusiness property insurance premiums are not tax deductible.

Question 47

Which of the following types of managed care plans permit those covered by the plan to elect, at the time medical treatment is needed, whether to receive treatment from practitioners associated with the plan or those outside the plan’s network?

I. Preferred Provider organizations (PPOs)

II. Point of Service Organizations (POSs)

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 47

The answer is (C). Both I and II are correct because they allow a member to elect treatment outside the provider network.

Question 48

Phil, aged 62, owns an individual flexible premium deferred annuity that currently has an accumulated value of $460,000. If Phil has paid $240,000 in premiums over the years, which of the following statements concerning tax treatment of benefits received from the annuity is (are) correct?

I.  If Phil currently withdraws $150,000 from the annuity while it is still in its accumulation period to begin construction of a lakeside cabin for 	his 	retirement years, the $150,000 is treated as taxable income.

II.  If Phil begins receiving monthly payments for life from the annuity, a portion of each monthly income payment will be treated as taxable income.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 48

The answer is (C). Both I and II are correct.

Question 49

Which of the following statements concerning the federal income tax treatment of tax-qualified long-term care insurance policies is (are) correct?

I. The first $100 of benefits received each day is subject to income taxation.

II. Premiums may be deducted in full as long as they are less than 7.5 percent of a taxpayer's adjusted gross income.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 49

The answer is (D). I is incorrect because benefits under qualified long-term care insurance contracts are received tax free with the exception of those paid under per diem contracts that exceed a specified daily limit that is indexed for inflation. II is incorrect because premiums for long-term care insurance are deductible only up to specified limits. In addition, persons other than the self-employed can deduct medical expenses, including long-term care premiums, only to the extent the expenses exceed 7.5 percent of adjusted gross income.

Question 50

The Financial Services Modernization Act, also known as the Gramm-Leach-Bliley Act, addressed some issues involving the regulation of banks and insurance. Which of the following statements concerning the act is (are) correct?

I. State insurance regulators have primary regulatory authority for 	insurance activities in banks.

	II. State insurance regulators have primary regulatory authority over the banking activities of banks that sell insurance.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 50

The answer is (A). II is incorrect because insurance commissioners do not regulate
banking activities.

Question 51

Which of the following statements concerning the damages involved in liability claims is (are) correct?

I. Compensatory damages are designed to financially compensate a claimant who has suffered a loss.

II. Punitive damages are designed to indemnify a claimant for pain and suffering.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 51

The answer is (A). II is incorrect because punitive damages are designed to punish a claimant whose outrageous conduct contributed to a loss. Compensatory damages may include indemnification for pain and suffering.

Question 52

Which of the following statements concerning health savings accounts (HSAs) is (are) correct?

I. The current year's contribution for a participant is reduced by a portion of any unused amounts in an HSA that are attributable to prior years' contributions.

	II. The high-deductible health plans used with HSAs are permitted to waive the deductible requirement for preventive care.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 52

The answer is (B). I is incorrect because account balances are carried over, and the size of an HSA balance carried over from prior years has no effect on a current year’s contributions.

Question 53

Many long-term care insurance policies provide the services of a care coordinator.  Functions of such a person may include which of the following?

	I. assessing an insured's condition

	II. periodically evaluating ongoing plans of care

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 53

The answer is (C) Both I and II are correct because they are functions of a care coordinator.

Question 54

Which of the following statements concerning insurable interests is (are) correct?

I. A property insurer often pays claims when an insured party suffers a loss to covered property in which that party lacks an insurable interest.

II. A bank or other mortgage holder that finances the purchase of real estate has an insurable interest in the mortgaged property.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 54

The answer is (B). I is incorrect because an insured party must have an insurable interest at the time of the loss in covered property that has suffered a loss.

Question 55

Which of the following statements concerning NAIC model legislation for long-term care insurance that pertains to marketing is (are) correct?

I. The policy must allow policyowners to have a 90-day free look.

II. Insurers must establish procedures to prohibit excessive insurance from being sold.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 55

The answer is (B). I is incorrect because NAIC model legislation requires a 30-day free look.

Question 56

Which of the following statements concerning insurance company investments is (are) correct?

I. The aggregate amount invested by property-liability insurers is much larger than the aggregate amount invested by life insurers.

II. Liquidity is a major consideration for the investment of funds by 	most life insurers.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 56

The answer is (D). I is incorrect because the aggregate amount invested by property-liability insurers is much smaller than the amount invested by life insurers. II is incorrect because liquidity is not a major consideration for most life insurers, since their investable funds will not need to be paid out until well into the future.

Question 57

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.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 57

The answer is (C). Both I and II are correct.

Question 58

Which of the following statements concerning Medicare Advantage plans is (are) correct?

I. They require the insured to have a high-deductible medical expense policy.

II. They may provide a higher level of benefits than the original Medicare program.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 58

The answer is (B). I is incorrect because there is no requirement that enrollees in Medicare Advantage plans must have a high-deductible medical expense policy.

Question 59

Which of the following statements concerning reinsurance agreements is (are)
correct?

I. Treaty reinsurance enables an insurer that is underwriting a policy to decide whether that specific policy will be reinsured.

II. With facultative reinsurance, some types of exposures are automatically reinsured.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 59

The answer is (D). I is incorrect because treaty reinsurance is automatic and does not require a specific decision for each policy that is reinsured. II is incorrect because facultative reinsurance is optional and requires a specific decision for each policy that is reinsured.

Question 60

Which of the following statements concerning the operation of a variable annuity is (are) correct?

I. During the accumulation period, it is to the annuitant's advantage for stock prices to be relatively high.

II. During the liquidation period, it is to the annuitant's advantage for stock prices to be relatively low.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 60

The answer is (D). I is incorrect because the premiums purchase more accumulation units when stock prices are relatively low. II is incorrect because the value of each annuity unit decreases when stock prices are low, reducing the annuitant’s dollar income.

Question 61

Which of the following statements concerning the independent agency system in property and liability insurance is (are) correct?

I. Commission rates paid to an agent on the sale of new business tend to be less than those paid for renewals.

II. The agent owns the business and is able to place it with any one of several companies at renewal time.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 61

The answer is (B). I is incorrect because the commission rates for renewal policies tend to be the same as for new policies.

Question 62

Which of the following statements concerning managed care provisions in traditional medical expense plans is (are) correct?

I. Mandatory second surgical opinions typically apply to any surgical procedure.

	II. Home health care benefits are typically provided indefinitely as long as they are ordered by a physician.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 62

The answer is (D). I is incorrect because mandatory second surgical opinions typically apply only to a specified list of procedures. II is incorrect because home health care benefits typically apply to a maximum number of visits per calendar year or to a period of time, such as 90 days after benefits commence.

Question 63

Which of the following statements concerning the capital needs analysis approach to determining how much life insurance the family head should carry is (are) correct?

I. The amount of capital needed to meet an income objective is found by multiplying the income objective by the after-tax investment return rate.

II. The lower the after-tax investment return rate, the higher the capital fund needed to produce the income objective.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 63

The answer is (B). I is incorrect because the amount of capital needed to meet an income objective is found by dividing the amount of additional income needed by the applicable interest rate that represents the after-tax rate of investment return anticipated on the capital sum.

Question 64

Which of the following statements concerning an annuitant’s options at the maturity date of a deferred annuity is (are) correct?

I. The annuitant can elect to have the accumulation applied under any 	annuity form the company offers.

II. The annuitant can usually elect to take a lump-sum payment in lieu of 	an annuity.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 64

The answer is (C). Both I and II are correct.

Question 65

Astronomical Insurance Company accidentally issued a life insurance policy that had not been approved in Texas to a Texas man who wished to insure his life. Which of the following statements concerning this policy is (are) correct?

I. The policy is voidable at the option of the policyowner.

II. The insured's beneficiary will be unable to collect benefits if the mistake is discovered after the insured's death.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 65

The answer is (A). II is incorrect because the beneficiary will be permitted to enforce the policy as though it complied with Texas law.

Question 66

Which of the following statements concerning the findings of behavioral psychologists on the subject of risk tolerance is (are) correct?

I. Most people are more risk tolerant than they are risk averse.

II. A person who is highly risk tolerant in physical or social activities is 	also highly risk tolerant in financial matters.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 66

The answer is (D). I is incorrect because most people are more risk averse than they are risk tolerant. II is incorrect because the fact that a person is highly risk tolerant in physical or social activities does not necessarily mean that he or she is also highly risk tolerant in financial matters.

Question 67

Which of the following statements concerning financing the Social Security and Medicare programs is (are) correct?

I. The tax rate for self-employed persons is equal to the combined tax 	rate for employees and employers.

II. The wage base on which taxes are paid increases quarterly based on changes in the rate of inflation.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 67

The answer is (A). II is incorrect because the wage base is adjusted annually.

Question 68

Which of the following statements concerning the appropriate use of life insurance in estate planning is (are) correct?

I. Life insurance may be used to provide a larger estate for the insured's heirs.

	II. Life insurance may be used to pay death taxes.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 68

The answer is (C). Both I and II are correct.

Question 69

Which of the following statements concerning the definitions of terms used in an
insurance policy is (are) correct?

I. Words or phrases defined in the policy typically appear in boldface type or quotation marks when they are used elsewhere in the policy.

II. Words not defined in the policy are given their ordinary or normal meaning.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

Answer 69

The answer is (C). Both I and II are correct.

Question 70

All the following statements concerning insurance underwriting are correct EXCEPT

(A) An insurer attempts to select applicants who will have loss experience comparable to the company’s expected loss experience.
(B) The underwriting process often begins with the agent.
(C) Underwriting is independent of insurance pricing.
(D) Underwriters sometimes explain steps a borderline applicant can take to become acceptable.

Answer 70

The answer is (C). Underwriting involves both the selection and pricing of applicants.

Question 71

All the following statements concerning the nonforfeiture options in life insurance are correct EXCEPT

(A) All states have laws that require insurers to provide at least a minimum nonforfeiture value to policyowners.
(B) The reduced paid-up option generally provides the same amount of death protection as the original policy, but for a reduced period of time.
(C) If a policy lapses for nonpayment of premiums and another option has not been selected, the extended term option usually goes into effect automatically.
(D) If a policy is surrendered for its cash value, all benefits under the policy cease.

Answer 71

The answer is (B). The reduced paid-up option produces a reduced death benefit for the life of the insured.

Question 72

Depending on the options in his or her area, a hard-to-insure driver may be able to find auto insurance coverage from any of the following EXCEPT

(A) the Federal Insurance Management Association (FIMA)
(B) a specialty insurer
(C) an automobile insurance plan
(D) a joint underwriting association (JUA)

Answer 72

The answer is (A). FIMA administers the national flood insurance program, which provides coverages for dwellings and commercial buildings and their contents.

Question 73

All the following are reasons for demutualization of an insurance company EXCEPT

(A) to enable the insurer to raise capital quickly
(B) to enable the insurance company to diversify its activities by acquiring other insurers or other types of financial institutions through the issuance
or exchange of stock
(C) to better protect the insurer from a hostile takeover
(D) to facilitate payment of certain types of noncash compensation to the insurance company’s key executives and board members

Answer 73

The answer is (C). Vulnerability to a hostile takeover is a disadvantage of demutualization.

Question 74

All the following statements concerning life insurance dividend options are correct EXCEPT

(A) With the accumulation-at-interest option, dividends will be kept in the equivalent of an interest-bearing account for the benefit of the policyowner.
(B) With the cash option, dividends will be paid to the policyowner in cash.
(C) With the fifth dividend option, dividends will be used to purchase 1-year term insurance.
(D) With the paid-up additions option, dividends will be used to pay up the policy prior to age 65.

Answer 74

The answer is (D). With paid-up additions, each dividend is used to purchase fully paid-up whole life insurance.

Question 75

All the following statements concerning directors and officers (D&O) liability insurance are correct EXCEPT

(A) An insuring agreement in the policy covers directors and officers for their personal liability as directors and officers.
(B) Coverage applies to claims for bodily injury and property damage.
(C) An insuring agreement in the policy reimburses the corporation for any sum it is required or permitted to pay to indemnify directors and officers.
(D) D&O insurance is purchased by the corporation but its officers and directors are the insureds.

Answer 75

The answer is (B). D&O policies cover liability arising out of wrongful acts and exclude coverage for bodily injury and property damage, which should be covered under the firm’s other policies.

Question 76

All the following statements concerning sources of financing for long-term care are correct EXCEPT

(A) Medicaid is available to anyone aged 65 or older, regardless of financial resources.
(B) A continuing care retirement community should be entered in advance of the need for long-term care.
(C) Home equity may be accessed through a loan or a reverse mortgage.
(D) The support of relatives may diminish because of their physical condition and financial needs.

Answer 76

The answer is (A). Medicaid provides benefits, which usually include nursing home care and home health care, to the “medically needy,” and a person is not eligible unless he or she is either poor or has a low income and has exhausted most other assets.

Question 77

Basic benefits that must be included in all Medicare supplement (medigap) policies include all the following EXCEPT

(A) the first 3 pints of blood each year
(B) the Part B percentage participation for Medicare-approved charges for physicians’ and medical services
(C) the hospital inpatient deductible under Part A of Medicare
(D) 365 additional days of hospitalization coverage after Medicare benefits end

Answer 77

The answer is (C). Although coverage for the Part A Medicare deductible is available in some plans, it is not one of the basic benefits that must be offered in all Medicare supplement (medigap) plans.

Question 78

The steps in the risk management process include all the following EXCEPT

(A) administration
(B) regulation
(C) identification
(D) measurement

Answer 78

The answer is (B). The steps in the risk management process are risk identification, risk measurement, choice and use of alternative methods of treatment, and risk administration.

Question 79

The cash value in a life insurance policy has all the following characteristics
EXCEPT

(A) It makes permanent death protection possible at affordable rates.
(B) It serves as a major source of an insurer’s investable funds.
(C) It can serve as collateral when the policyowner applies for credit.
(D) It increases the insurer’s net amount at risk.

Answer 79

The answer is (D). The cash value decreases the insurer’s net amount at risk.

Question 80

All the following statements concerning group disability income contracts are
correct EXCEPT

(A) The insurance company usually offers a conversion policy to any terminating employee who was covered under the contract for at least 2 years.
(B) The insurance company has the right to have a disabled employee examined by a physician of its own choice.
(C) The insurance company may provide a cost-of-living adjustment to prevent inflation from eroding the purchasing power of benefits being received.
(D) The insurance company often allows a worker to enter a trial work period in rehabilitative employment without having benefits totally terminated.

Answer 80

The answer is (A). A conversion privilege is rarely included in group disability income contracts.

Question 81

All the following statements concerning title insurance are correct EXCEPT

(A) The policy limit is usually the purchase price of the property, even if the value increases because of inflation.
(B) The premium is paid only once.
(C) The policy guarantees that the owner will keep possession of the property if a defect in the title is discovered.
(D) The policy provides protection only against unknown title defects that have occurred prior to the effective date of the policy but are discovered after
the effective date.

Answer 81

The answer is (C). Title insurance indemnifies the insured up to policy limits but provides no guarantee that the policyowner will retain possession of the property.

Question 82

All the following statements concerning monthly Social Security benefits for family members of a deceased or retired worker are correct EXCEPT)

(A) The 15-year-old child of a deceased worker is eligible to receive 75 percent of the worker’s PIA (primary insurance amount).
(B) The 15-year-old child of a retired worker is eligible to receive 50 percent of the worker’s PIA.
(C) The 65-year-old spouse of a deceased worker is eligible to receive 75 percent of the worker’s PIA.
(D) The 65-year-old spouse of a retired worker is eligible to receive 50 percent of the worker’s PIA.

Answer 82

The answer is (C). The surviving spouse of a deceased worker is eligible to receive 100 percent of the worker’s PIA at full retirement age.

Question 83

In order for a risk to be considered insurable, it must substantially meet all the following requirements EXCEPT

(A) Losses must be accidental, rather than intentional, from the standpoint of insureds.
(B) The insurer should be able to obtain reasonable projections of future losses.
(C) The determination and measurement of losses should be clear and definite.
(D) The amount of potential losses should be relatively unimportant to insureds.

Answer 83

The answer is (D). Because of the element of expense in carrying on the business of insurance, premiums include a charge to provide for this cost. In the case of risks that are of no great importance to insureds, the cost of handling the business would make the rate prohibitive. To make a risk insurable, the amount of future loss payments must be of such importance as to make them, rather than the insurer’s expenses, the principal component in the premium charged.

Question 84

All the following are insured persons under the medical payments coverage of the personal auto policy (PAP) EXCEPT

(A) a friend of the named insured who is injured while occupying the named insured’s covered auto
(B) a pedestrian who is struck and injured by the named insured’s covered auto
(C) the named insured who is injured while occupying a friend’s auto
(D) a member of the named insured’s family who is struck and injured by an auto while crossing the street

Answer 84

The answer is (B). Medical payments provide benefits for a covered vehicle’s occupants. It also covers the named insured or a family member who is a pedestrian struck by another vehicle.

Question 85

An HO-3 Special Form homeowners policy provides coverage that is broader in some respects than the coverage of an HO-2 Broad Form. All the following
statements concerning the HO-3 are correct EXCEPT

(A) The dwelling building is covered against loss by more perils in an HO-3 than in an HO-2.
(B) Other structures are covered against loss by more perils in an HO-3 than in an HO-2.
(C) The premium is higher for an HO-3 than the premium for comparable coverage in an HO-2.
(D) Personal property is covered on a replacement cost basis in an HO-3, but it is covered for actual cash value in an HO-2.

Answer 85

The answer is (D). Personal property is covered for actual cash value in all homeowners policies. The personal property replacement loss settlement endorsement can be used to add replacement cost coverage on personal property.

Question 86

All of the following are components of the decision making process of the financial services professional EXCEPT

(A) The client
(B) The organization
(C) The community
(D) The beneficiaries of the plan, excluding the client’s family.

Answer 86

The answer is (D). Beneficiaries, including the client’s family and dependents, are included in the decision-making process of the financial services professional.

Question 87

Compared with a lump-sum settlement, the advantages of a structured settlement
for the injured party include all the following EXCEPT

(A) The settlement can never be prematurely exhausted because the income payments are guaranteed for life or for a fixed period.
(B) The risk that a settlement will be dissipated through mismanagement is significantly reduced when converted into periodic payments.
(C) A periodic income not only provides a degree of financial security but also allows benefits to be better matched with future needs.
(D) A settlement paid in a lump sum is taxable income, whereas a structured settlement paid as periodic income is tax free.

Answer 87

The answer is (D). Neither a lump-sum settlement nor a structured settlement for bodily injury damages is taxable income.

Question 88

All the following statements regarding surety bonds are correct EXCEPT

(A) Judicial bonds are required under statutory law.
(B) Fiduciary bonds are often required of persons who act as administrators, trustees, and guardians.
(C) Litigation bonds require a person or organization seeking a court remedy to protect other parties from damages if the party seeking the remedy does
not prevail.
(D) Bail bonds guarantee that a bonded person will appear in court at the appointed time.

Answer 88

The answer is (A). Judicial bonds are required by courts.

Question 89

Managed care plans are characterized by all the following EXCEPT

(A) unrestricted access to physicians and hospitals
(B) utilization review at all levels
(C) an emphasis on preventive care and healthy lifestyles
(D) providers of medical care sharing in financial results

Answer 89

The answer is (A). One of the basic characteristics of managed care plans is controlled access to specialists and hospitals.

Question 90

Mr. Smith has health problems that reduce his life expectancy. All the following are methods life insurers use to provide coverage to persons like Mr. Smith EXCEPT

(A) assess a flat extra premium
(B) create a lien against the policy
(C) limit the policy’s protection period
(D) rate the policy using an extra percentage table

Answer 90

The answer is (C). The approaches described in (A), (B), and (D) make permanent insurance available to substandard applicants.

Question 91

All the following statements concerning joint-life insurance are correct EXCEPT

(A) A first-to-die policy pays beneficiaries upon the death of any insured.
(B) A second-to-die policy must be a term insurance contract.
(C) A survivorship policy written on two individuals pays beneficiaries upon the death of the last insured.
(D) Joint-life policies are sometimes used to fund business buy-sell agreements.

Answer 91

The answer is (B). Joint-life policies are usually some form of cash value insurance.

Question 92

All the following are ways in which Medicare prescription drug plans may differ from the standard benefit structure specified by federal law EXCEPT

(A) lower initial deductibles
(B) the use of tiered copayments
(C) more extensive formularies
(D) fewer benefits in the coverage gap

Answer 92

The answer is (D). The standard benefit structure does not provide benefits in the coverage gap, but some plans that provide more comprehensive benefits may provide
such benefits.

Question 93

All the following statements concerning individual disability income insurance policies are correct EXCEPT

(A) Many policies contain a presumptive-disability provision for certain types of losses.
(B) Rehabilitation benefits may be provided over and above any periodic income benefits.
(C) Premiums generally increase at each annual renewal as an insured ages.
(D) Incontestability provisions are required by all states.

Answer 93

The answer is (C). Premiums for disability income policies are based on the policyowner’s age at the time of policy issuance and remain level for the duration of the coverage.

Question 94

All the following statements concerning life insurance policy loans are correct
EXCEPT

(A) A policy loan accrues interest on the borrowed funds at either a fixed rate or variable rate depending on the option selected by the policyowner at the
time of application.
(B) The policyowner is required to repay a policy loan before being permitted to surrender the policy for its cash value, make a withdrawal from the cash
value, or take another policy loan.
(C) If the insured dies while a policy loan is outstanding, the insurer recovers the outstanding balance of the loan and accrued interest from the death benefits.
(D) A life insurance policy will terminate if the policy loan balance plus unpaid interest ever exceeds the policy’s cash value.

Answer 94

The answer is (B). The policyowner is not required to repay a policy loan.

Question 95

All the following are covered autos under the liability part (Part A) of the personal auto policy (PAP) EXCEPT

(A) a nonowned van driven by the insured on a regular basis
(B) a camper trailer owned by the named insurer
(C) a borrowed auto used by the insured as a temporary substitute for a covered auto that was stolen
(D) a newly acquired auto that replaces a covered auto listed in the policy

Answer 95

The answer is (A). The PAP precludes coverage for any nonowned vehicle furnished for the regular use of an insured.

Question 96

All the following statements concerning variable life insurance are correct EXCEPT

(A) Agents who sell variable life policies must be licensed as both life insurance agents and securities agents.
(B) Variable life policies provide guarantees of both the interest rate and a minimum cash value.
(C) Variable life policies can be sold only after the prospective purchasers have had a chance to read the prospectus.
(D) Variable life policies become more acceptable to consumers after a long period of stock market increases.

Answer 96

The answer is (B). Variable life policies provide no guarantee of either interest rate or minimum cash value.

Question 97

All the following are qualifying events under COBRA EXCEPT

(A) The employee dies.
(B) The employee is fired for gross misconduct.
(C) The employee’s hours are reduced so he or she is no longer eligible for coverage.
(D) The employee and his or her spouse have legally separated.

Answer 97

The answer is (B). Termination for gross misconduct is an exception to the COBRA rules.

Question 98

Coverage E—Liability of a homeowners policy provides motor vehicle liability coverage for all the following motor vehicle exposures EXCEPT

(A) a licensed Harley Davidson motorcycle while it is being ridden on the driveway at the insured location
(B) a John Deere riding mower while it is being used to mow the insured’s lawn
(C) an unlicensed antique auto while it is in dead storage in the insured’s garage awaiting restoration
(D) an insured’s motorized wheelchair while being used in a shopping mall

Answer 98

The answer is (A). Homeowners policies do not provide liability coverage for vehicles licensed for use on public roads.

Question 99

When using the net payment cost index to determine the cost of a life insurance policy, it is necessary to consider all the following factors EXCEPT

(A) the policy's accumulated dividends
(B) the policy's accumulated premiums
(C) an interest rate
(D) cash value

Answer 99

The answer is (D). The 20th-year cash value is not subtracted in calculating the net payment cost index.

Question 100

When a life insurance agent submits an application for a life insurance policy that replaces a client’s existing policy, all the following must be done EXCEPT

(A) The agent must accept a reduced first-year commission to remove the financial incentive for twisting.
(B) The agent must include a statement with the application noting that the policy is a replacement.
(C) The replacing insurer must give the applicant at least a 20-day free look at the new policy.
(D) The replacing insurer must notify the other insurer of the proposed replacement.

Answer 100

The answer is (A). Although high first-year commissions on new policies provide a financial incentive for twisting, there is no requirement that a reduced commission be
accepted on a replacement policy.