Questions

Question 1

As defined in this course, risk is the probability or chance of loss.

Answer 1

False. Risk is the possibility, not the probability or chance, of loss.

Question 2

Loss is the undesirable result of risk.

Answer 2

True

Question 3

Loss exposures are much more common than actual losses.

Answer 3

True

Question 4

The extra expense a client incurs by living in a hotel after a fire has damaged his home is an example of

Answer 4

Indirect loss

Question 5

Because uncertainty is a state of mind, two clients facing the same risk situation can have varying degrees of uncertainty.

Answer 5

True

Question 6

Hazards are causes of loss, such as death, fire, or legal liability.

Answer 6

False. Perils are causes of loss. Hazards are acts or conditions that increase the chance or amount of loss caused by a peril.

Question 7

Moral hazards are evidenced by carelessness or indifference.

Answer 7

False. Attitudinal hazards are evidenced by carelessness or indifference. Moral hazards are evidenced by dishonest tendencies.

Question 8

Hazards are important in underwriting and rating applicants for insurance.

Answer 8

True

Question 9

A client can use the probability of a loss to measure the risk he or she faces.

Answer 9

False. An individual cannot effectively use the probability of a loss to measure the risk he or she faces-the individual either will or will not suffer a loss. Statistical probabilities have no relevance in this case. To use a probability to measure risk, a large number of similar exposures would be needed.

Question 10

There are a variety of benefits as well as costs associated with insurance as a technique for handling risk.

Answer 10

True

Question 11

Insurance is essentially a form of gambling risk because the policyowner pays a relatively small premium to protect against a relatively large loss.

Answer 11

False. The fact that risk is an existing condition is what removes insurance from the category of a gambling risk. Insurance does not create risk-gambling does.

Question 12

To be insurable, a risk must substantially meet the requirements of:

Answer 12

importance, accidental nature, calculability, definiteness of loss, and no excessively catastrophic loss.

Question 13

The only cost associated with pure risk is the actual loss that takes place.

Answer 13

False. In addition to the actual loss that takes place, the costs associated with pure risk include fear and worry, less-than-optimal use of resources, and the expenses of treating risks.

Question 14

Adverse selection refers to some people’s attempt to take unfair advantage of insurance.

Answer 14

False. Adverse selection is the natural tendency for those who know they are highly vulnerable to loss from a specific risk to be most inclined to acquire and retain insurance to cover that loss. Adverse selection by applicants and policyowners is counterbalanced by the care insurers exercise in underwriting.

Question 15

Employees covered under group insurance receive a certificate of insurance as evidence of their coverage.

Answer 15

True

Question 16

Risk management is a systematic process for dealing with risks, usually pure risks.

Answer 16

True

Question 17

A weakness of using the risk management process is that only insurance products are considered for treating risks.

Answer 17

False. The risk management process considers all the alternatives for treating risks.

Question 18

While loss prevention involves reducing the probability of frequency of loss, loss reduction involves lessening its severity.

Answer 18

True

Question 19

Deductibles are a form of partial risk retention that can often be used to handle high-frequency, low-severity losses efficiently.

Answer 19

True

Question 20

Self-insurance is an especially appropriate technique for small businesses and families to use in dealing with risks.

Answer 20

False. Self-insurance is generally appropriate only for large businesses that can act like an insurance company for their own risks.

Question 21

For an insurance business to operate in the long run, premiums must equal losses, expenses, and profits.

Answer 21

False. Premiums plus investment earnings plus other income must equal losses, expenses, and profits.

Question 22

The law of large numbers states that as the number of independent events increases, there is a greater chance that the actual results will be close to the expected results.

Answer 22

True

Question 23

The first step in the risk management process is risk measurement.

Answer 23

False.

1) Risk identification
2) Risk measurement
3) Choice and use of methods to treat each identified risk.
4) Administration

Question 24

In risk management, each risk can be measured in terms of frequency, severity, and variation.

Answer 24

True

Question 25

On the basis of where they are domiciled, insurers are considered foreign if incorporated in another country.

Answer 25

False. Foreign insurers are organized in another state; alien insurers are incorporated in another country.

Question 26

Insurance buyers should be careful to avoid buying coverage from a nonadmitted insurer.

Answer 26

False. Nonadmitted insurers serve a legal, valuable, and positive role in the U.S. insurance marketplace. Consumers are permitted to buy property and liability insurance from nonadmitted insurers when they cannot purchase some needed coverage from an admitted insurer. Nonadmitted insurers generally provide insurance for policyowners that present underwriting challenges, have unique risks that are hard to evaluate, or require unusually high limits of insurance.

Question 27

Stock and mutual insurers may both pay dividends-stock companies to their stockholders and mutual companies to their policyowners.

Answer 27

True

Question 28

Because mutuals are owned by their policyowners, they are usually better than stocks from a consumer’s standpoint.

Answer 28

False. Neither stocks nor mutuals are inherently superior from a consumer’s standpoint. The real issue for the insurance consumer is which specific insurer and coverages to select, not which type of insurer to select.

Question 29

To facilitate access to capital markets and diversification of activities, there is currently a trend for stock companies to convert to mutual companies.

Answer 29

False. The trend is for mutual companies to demutualize.

Question 30

A reciprocal is an unincorporated association, and each insured is also an insurer.

Answer 30

True

Question 31

Although reciprocals are usually small, a few exchanges that write auto insurance have grown to substantial size.

Answer 31

True

Question 32

When representing an insurance company, an insurance agent has only the express authority spelled out in the agency contract.

Answer 32

False. An insurance agent has implied authority and may act with apparent authority, as well as having the express authority spelled out in the agency contract.

Question 33

Nearly all life insurance agents can bind coverage.

Answer 33

False. Life insurance agents do not have authority to bind coverage.

Question 34

A broker represents the policyowner, whereas an agent is a legal representative of the insurance company.

Answer 34

True

Question 35

Key life insurance marketing systems include general agents, branch offices managed by company employees, and personal producing general agents (PPGAs).

Answer 35

True

Question 36

The primary responsibility of a personal producing general agent (PPGA) is to build an agency force for the company.

Answer 36

False. The PPGA’s main responsibility is his or her personal production.

Question 37

Exclusive agents generally receive the same commission rate for renewing a property/liability insurance policy as for initially selling the policy, whereas independent agents have traditionally received renewal commissions that are considerably smaller than their initial commissions.

Answer 37

False. Independent agents traditionally receive the same commission rate for renewing a policy as for initially selling the policy, whereas exclusive agents generally receive renewal commissions that are considerably smaller than their initial commissions.

Question 38

The purpose of underwriting is to select only those insureds who are expected to have no losses.

Answer 38

False. The purpose of underwriting is to select insureds who, on average, will produce actual loss experience comparable to the expected loss experience incorporated into the premium rates.

Question 39

Among other things, reinsurance can help insurers spread large losses and reduce the surplus drain associated with writing new business.

Answer 39

True

Question 40

Under facultative reinsurance, the insurer agrees in advance to transfer some types of risks, and the reinsurer agrees to accept those risks.

Answer 40

False. Under treaty reinsurance, the insurer agrees in advance to transfer some types of risks, and the reinsurer agrees to accept those risks. With facultative reinsurance, the insurer is under no obligation to offer the risk to the reinsurer, and the reinsurer is under no obligation to accept.

Question 41

The purpose of the claims settlement process is to determine the insurer’s liability for a given loss and to reach agreement with respect to the amount of loss or damage payable under the insurance contract.

Answer 41

True

Question 42

Most life insurance agents have their companies’ authority to settle claims.

Answer 42

False. A life insurance agent may become involved as an intermediary (such as by delivering a death proceeds check to a beneficiary), but not as an adjuster with authority to settle a claim.

Question 43

Independent adjusters usually represent the public, in contrast to staff adjusters, who represent insurers.

Answer 43

False. As with staff adjusters, independent adjusters represent insurers. Public adjusters represent the public.

Question 44

In calculating the insurance premium, the pure (net) rate is multiplied by the number of units of coverage.

Answer 44

False. In calculating the insurance premium, the gross rate (composed of the pure rate plus a loading for expenses, profit, and contingencies) is multiplied by the number of units of coverage.

Question 45

Under the loss ratio method of rate making, the actual loss ratio experienced is compared with the expected (or desired) loss ratio to determine the needed change in the existing insurance rate.

Answer 45

True

Question 46

Both life and property-liability insurers invest more heavily in bonds than in stocks.

Answer 46

True

Question 47

The general purpose of insurance regulation is to protect the public against insolvency and unfair treatment by insurers

Answer 47

True

Question 48

At the state level, insurance is regulated by legislative, administrative, and court action

Answer 48

True

Question 49

The insurance commissioner has the power to, among other things, enforce the laws passed by the legislature and interpreted by the courts, license insurers and agents, and investigate to determine whether insurers and agents are meeting the requirements of the statutes

Answer 49

True

Question 50

Insurance regulators will reject any insurance rates that are discriminatory

Answer 50

False. Insurance regulations prohibit unfair discrimination. Many insurance rates are based on fair discrimination. Life insurance rates, for example, vary by age and reflect different mortality rates for people of different ages.

Question 51

Life insurance is subject to direct rate regulation under prior approval laws that require that rates be approved before they can be used.

Answer 51

False. Life insurance is not subject to direct rate regulation. Instead, some states supervise the cost of life insurance by limiting the portion of the premium that can be used for expenses rather than claims. Also, life insurance rates are indirectly regulated through the minimum reserve requirements.

Question 52

Insurers must comply with state laws that govern the types of securities they may purchase for investment.

Answer 52

True

Question 53

Although unfair trade practices are illegal in all states, most states now permit rebating and twisting.

Answer 53

False. Most states prohibit rebating and twisting as unfair trade practices.

Question 54

Most premium taxes insurers pay to the states are used to pay for the cost of insurance regulation.

Answer 54

False. Most premium taxes paid by insurers to the states are used for revenue purposes rather than to pay for the cost of insurance regulation.

Question 55

The key to assessing the financial strength of an insurer is the size of the insurer.

Answer 55

False. Financial strength is determined by the insurer’s ability to pay claims.

Question 56

In addition to financial strength, other important criteria for selecting an insurer are its willingness to pay claims, the service it provides, and the cost of its products.

Answer 56

True

Question 57

The dominant factor in the selection of an agent is friendship.

Answer 57

False. The criteria for evaluating an agent include knowledge and ability, willingness, integrity and character, and representation.

Question 58

An insurance contract is of little value to the policyowner unless a claim for coverage is presented.

Answer 58

False. Policyowners realize the immediate benefits of relief from anxiety and freedom from worry about financial losses.

Question 59

Insurance transfers the financial risk of losses to the insurer.

Answer 59

True

Question 60

A valid offer to buy life insurance may be transmitted orally.

Answer 60

False. A written application and the first premium payment are usually submitted by the applicant as the offer to the insurer through the agent, who issues a conditional receipt.

Question 61

A 16-year-old client can always void his auto insurance policy because he is still a minor.

Answer 61

False. Clients under the age of 21 (18 in some states) are considered minors and can void many types of insurance contracts and get a full refund of premiums paid. However, state laws may hold that 16-year-olds have the legal capacity to enter into binding auto insurance contracts.

Question 62

An insurance contract is a bilateral contract.

Answer 62

False. An insurance contract is a unilateral contract.

Question 63

Property and liability insurance policies are freely assignable by policyowners without the insurer’s approval.

Answer 63

False. Because they are personal agreements between the insurer and the policyowner, property and liability insurance policies are not freely assignable by policyowners. They have to obtain the insurer’s approval to affect a transfer. Life insurance policies, however, are freely assignable by policyowners.

Question 64

An example of a condition precedent in an insurance contract is that the insured is required to cooperate with the insurer in defending a liability claim.

Answer 64

False. This is an example of a condition subsequent.

Question 65

Most insurance contracts are contracts of adhesion.

Answer 65

True

Question 66

If there is an ambiguous clause in an insurance contract, the courts will typically interpret the clause in favor of the policyowner.

Answer 66

True

Question 67

Under a contract of indemnity, the insurer pays an amount that reflects the amount of the loss up to the policy limit, subject to other policy provisions.

Answer 67

True

Question 68

Life insurance policies are considered contracts of indemnity.

Answer 68

False. Life insurance contracts are valued contracts and are not contracts of indemnity.

Question 69

Under the principle of subrogation, if the insurer indemnifies the insured for a loss, the insurer obtains whatever rights the insured had against responsible third parties

Answer 69

True

Question 70

The misrepresentation or concealment of a material fact by an applicant for insurance will void a contract that the insurer has issued to the applicant.

Answer 70

False. The misrepresentation or concealment of a material fact by an applicant for insurance will not void the contract but will make it voidable by the insurer.

Question 71

An innocent misrepresentation by an applicant for insurance constitutes fraud.

Answer 71

False. Fraud involves an active intent to deceive. The applicant making the statement must know that it is false or make the statement in reckless disregard of whether it is true or false.

Question 72

Some exclusions are found in insurance policies because the risks are typically covered by other insurance.

Answer 72

True

Question 73

The requirement that the insured must cooperate with the insurer in legal proceedings against the insured by a third-party claimant is an example of a condition subsequent.

Answer 73

True

Question 74

Under an initial deductible, the insurer will pay for all losses up to a specified deductible amount.

Answer 74

False. Under an initial deductible, the insurer will pay for losses only after they exceed a specified deductible amount. The insured must absorb all losses up to that specified amount.

Question 75

As a general legal principle, whenever the wording in an endorsement or rider conflicts with the terms of the policy to which it is attached, the endorsement or rider takes precedence.

Answer 75

True

Question 76

A shortcoming to the Social Security program is that it covers slightly less than 75 percent of working persons.

Answer 76

False. Over 95 percent of working persons are covered under Social Security. Those who do not participate may be covered under other programs.

Question 77

A person born in 1962 will be eligible to receive full Social Security retirement benefits when he or she reaches age 65.

Answer 77

False. A person born in 1962 will be eligible to receive full Social Security benefits when he or she reaches age 67.

Question 78

The definition of disability under Social Security is very rigid.

Answer 78

True

Question 79

The primary insurance amount is the amount of the Social Security benefit a worker will receive if he or she retires at full retirement age or becomes disabled.

Answer 79

True

Question 80

A family will usually reach the maximum benefit under Social Security if three or more family members are eligible for benefits.

Answer 80

True

Question 81

If a person continues to work during the period of delayed retirement, it is possible for a worker’s primary insurance amount to be higher than it would have been at full retirement age.

Answer 81

True

Question 82

There is a reduction in Social Security benefits under the earnings test for a 72-year-old person who goes back to work and earns $40,000 annually.

Answer 82

False. There is no earnings test reduction for a worker older than his or her full retirement age.

Question 83

Social Security retirement benefits begin automatically at a beneficiary’s full retirement age.

Answer 83

False. A beneficiary must apply for benefits in order for them to begin.

Question 84

Part A, the hospital portion of Medicare, is available to disabled persons under age 65 who have been eligible to receive Social Security benefits for two years because of their disability.

Answer 84

True

Question 85

Part A of Medicare pays for inpatient hospital services for up to 365 days for an uninterrupted stay in a hospital.

Answer 85

False. Part A of Medicare pays for inpatient hospital services for an uninterrupted stay of up to 90 days plus another 60 lifetime reserve days.

Question 86

A Medicare beneficiary who was released last week from the hospital but is going back after 7 days will start a new benefit period for Part A purposes.

Answer 86

False. A new 90-day benefit period begins after an individual has been out of a hospital or skilled-nursing facility for 60 consecutive days.

Question 87

Part A of Medicare provides benefits for home health care.

Answer 87

True

Question 88

Part B of Medicare pays for prostate cancer screening and certain other preventive care.

Answer 88

True

Question 89

Subject to dollar maximums, Part B of Medicare provides benefits for eyeglasses, hearing aids, and orthopedic shoes.

Answer 89

False. Benefits for eyeglasses, hearing aids, and orthopedic shoes are excluded.

Question 90

By electing a Medicare Advantage plan, a Medicare beneficiary may have more comprehensive benefits than those provided by original Medicare.

Answer 90

True

Question 91

Medicare Part D (prescription drug coverage) is a mandatory benefit financed by additional FICA taxes.

Answer 91

False. Participation in Medicare Part D is voluntary.

Question 92

A Medicare prescription drug plan with the standard benefit structure pays 90 percent of prescription drug costs after a beneficiary satisfies a $500 deductible.

Answer 92

False. A Medicare prescription drug plan with the standard benefit structure pays 75 percent of the next $2,970 of prescription drug costs after an annual deductible of $325 (in 2013) has been met. Benefits then cease until a beneficiary’s total drug cost equals $4,750 (in 2013). Subsequently, the plan pays 95 percent of covered drug costs. These dollar figures are subject to indexing.

Question 93

The formulary for a Medicare prescription drug plan must include all drugs that can be legally sold.

Answer 93

False. Medicare prescription drug plans are required to include at least two drugs in most therapeutic classes. However, most plans cover more than the minimum required number of drugs.

Question 94

Medicare beneficiaries may switch prescription drug plans at any time as long as they give 60 days notice.

Answer 94

False. Unless a beneficiary is eligible for a special enrollment period, he or she may switch plans during an election period that runs from November 15 to December 31 of each year. The new plan takes effect on the following January 1.

Question 95

Enrollment in Medicare Part B is automatic for anyone reaching age 65 as long as he or she has been paying FICA taxes.

Answer 95

False. Enrollment is automatic only if a beneficiary was receiving retirement benefits before age 65. However, the beneficiary can reject the Part B coverage. Anyone else must specifically elect coverage.

Question 96

Social Security and Medicare are based on a system of funding that the Social Security Administration refers to as partial advance funding.

Answer 96

True

Question 97

Medicare benefits are partially subject to taxation for beneficiaries above statutory income limits.

Answer 97

False. Medicare benefits are received tax free.

Question 98

Unemployment insurance is intended to provide short-term benefits (typically 26 weeks) to workers who lose their jobs.

Answer 98

True

Question 99

Workers’ compensation laws often have a short waiting period for disability income benefits.

Answer 99

True

Question 100

In virtually all cases, employees must bear the full cost of providing workers’ compensation benefits.

Answer 100

False. In almost all cases, the full cost of providing workers’ compensation benefits is borne by the employers, not the employees.

Question 101

Workers’ compensation benefits are included in a recipient’s gross income for income tax purposes.

Answer 101

False. Workers’ compensation benefits are received free of income taxation.

Question 102

An individual’s human life value may arise out of family or business relationships.

Answer 102

True

Question 103

Yearly renewable term insurance pays the policy face value if the insured is alive at the end of the protection period.

Answer 103

False. Yearly renewable term insurance pays benefits only if the insured dies during the protection period.

Question 104

Yearly renewable term insurance premiums increase each year because of increases in the death rate at increasing ages.

Answer 104

True

Question 105

With a level-premium whole life policy, premiums in excess of the policy’s share of death claims in the early years of the contract are accumulated with interest in a reserve.

Answer 105

True

Question 106

To safeguard against adverse selection, insurers that offer term insurance on an individual basis typically allow it to be renewed, regardless of the insured’s age at the time of renewal.

Answer 106

False. Insurers offering term insurance on an individual basis often place a limit on the period during which the insurance can be renewed, in order to protect against adverse selection.

Question 107

With a whole life policy, the policyowner receives a combination of increasing cash values and decreasing (pure insurance) protection.

Answer 107

True

Question 108

With renewable term insurance, the policyowner/insured would be permitted to renew the policy if he or she had contracted a terminal disease prior to a renewal date.

Answer 108

True

Question 109

Decreasing term life insurance is sold primarily by agents who also sell property insurance.

Answer 109

False. Decreasing term insurance is sold primarily through mortgage lenders.

Question 110

Term insurance tends to be suitable when the need for protection is either purely temporary or when it is permanent but the insured temporarily cannot afford the premiums for permanent insurance.

Answer 110

True

Question 111

When using the convertibility option with the attained age method, the policyowner has the option of selecting either the insurer’s current contract or the contract that was in use when the original policy was issued.

Answer 111

False. When the attained age method is used, the insurer uses the contract currently in use. The contract originally in use is available only when the original-age (retroactive) method is used.

Question 112

Favorable investment results account for the largest portion of policyowner dividends paid by participating policies.

Answer 112

True

Question 113

Because of federal income tax reform in 1984, endowment policies play a major role in financial planning in the United States today.

Answer 113

False. Federal income tax reform in 1984 eliminated the tax-free buildup of cash values in most endowment policies, so few endowment policies are sold today.

Question 114

In exchange for investment flexibility, variable life insurance shifts the investment risk to the policyowner and provides no guarantee of either interest rate or minimum cash value.

Answer 114

True

Question 115

With variable life insurance, cash values reflect investment performance, but death benefit amounts do not.

Answer 115

False. Both the cash value and the level of death benefits reflect investment performance.

Question 116

Variable life insurance policies may be sold without an accompanying prospectus.

Answer 116

False

Question 117

The surrender charge in a universal life policy increases as the insured ages.

Answer 117

False. Surrender charges are commonly levied only during the first 10 or 15 years of the contract.

Question 118

With universal life insurance, the policyowner can skip premium payments (after the first year) and the policy will stay in force as long as there is enough money in the policy’s cash value account to cover current mortality and expense charges and any applicable surrender charges.

Answer 118

True

Question 119

With universal life insurance, death benefits are always level unless the cash value gets too close to the death benefit to comply with federal income tax law.

Answer 119

False. Under the level death benefit design, death benefits are level unless the cash value gets too close to the death benefit to comply with the federal income tax law, in which case the death benefit will start increasing. However, under the increasing death benefit design, the death benefit will increase or decrease with the policy’s cash value.

Question 120

Indexed universal life insurance incorporates the premium flexibility features of the universal life policy with the policyowner-directed investment aspects of variable life products.

Answer 120

False. The performance of indexed universal life policies is based on an external index, not on investments selected by the policyowner.

Question 121

A survivorship policy is payable upon the death of the last of two or more lives insured under the single contract.

Answer 121

True

Question 122

Most group life coverage is provided without individual evidence of insurability.

Answer 122

True

Question 123

All beneficiaries of a life insurance policy are identified in the policy declarations page.

Answer 123

True

Question 124

Standard policy provision laws require that life insurance policies include certain provisions that are worded precisely as contained in the statute.

Answer 124

False. Although certain provisions must be included, insurers can select the actual wording as long as it is at least as favorable to the policyowner as the statutory language.

Question 125

If the insured dies 2 weeks after the premium was due but not paid, the life insurance company must pay the beneficiary only an amount equal to the premiums paid in the past plus interest.

Answer 125

False. If the insured dies 2 weeks after the premium was due but not paid, the policy remains in force under the grace period provision, and the life insurance company must pay the beneficiary an amount equal to the full death benefit (possibly minus 1 month’s premium).

Question 126

If the insured dies or surrenders the policy while a loan is outstanding, the insurer deducts the loan and accrued interest from the amount otherwise payable.

Answer 126

True

Question 127

After John’s policy has been in force for 2 years during John’s lifetime, the insurer can no longer contest the policy based on a false answer in the application about John’s health.

Answer 127

True

Question 128

The use of dividends to purchase paid-up additions may be advantageous because the purchase is made at rates that do not contain a loading for expenses.

Answer 128

True

Question 129

If Bill dies 20 years after purchasing his whole life policy and the insurer discovers that he had understated his age in the application, the company will have to pay the face amount to the beneficiary because the 2-year contestability period is over.

Answer 129

False. The company would lower the death benefit to the amount that the premium paid would have purchased at the correct age. The incontestable clause does not apply to a misstatement of age.

Question 130

If an application is attached to a life insurance contract, it becomes part of the contract.

Answer 130

True

Question 131

If the premium for a whole life insurance policy is overdue at the end of the grace period, the policy will lapse and automatically pay the cash surrender value to the policyowner.

Answer 131

False. If the premium for a whole life insurance policy is not paid by the end of the grace period, the policy will lapse and automatically go under a nonforfeiture option, usually extended term. The policyowner then has a period of time to decide to keep the policy under the automatic option, surrender it for its cash value, or switch to the paid-up whole life option.

Question 132

If Sarah named her husband as primary beneficiary and her children as contingent beneficiaries of her life insurance policy, and her husband predeceases her, the death proceeds from Sarah’s policy will be paid to her husband’s estate unless she has changed the beneficiary designation.

Answer 132

False. The death proceeds from Sarah’s policy will be paid to her children as contingent beneficiaries. Upon her husband’s death, the right to receive the death proceeds from Sarah’s policy transfers to the children as contingent beneficiaries.

Question 133

If Teresa commits suicide 5 years after purchasing her whole life policy, the insurer will pay the face amount to the beneficiary.

Answer 133

True

Question 134

The person who has the power to exercise the rights in a life insurance policy is called the insured.

Answer 134

False. This person is the policyowner.

Question 135

Although accidental death benefit riders typically exclude death by suicide, they do pay for most deaths caused by disease.

Answer 135

False. Accidental death benefit riders do not pay for deaths caused by disease.

Question 136

If a person purchases a life insurance policy that the state insurance department has not approved, the policyowner can seek a refund of premiums paid or seek to enforce the policy.

Answer 136

True

Question 137

Using a simple multiple of earnings method to determine the amount of life insurance needed ignores key information about how much a client has already accumulated.

Answer 137

True

Question 138

The financial needs analysis approach considers both lump-sum needs at death and ongoing income needs.

Answer 138

True

Question 139

With the financial needs analysis approach, the amount of additional life insurance needed is determined by subtracting the resources already available from the resources needed by the surviving dependents if the client should die today, assuming all future income payments are composed solely of investment earnings on a capital sum.

Answer 139

False. With the capital needs analysis approach, the amount of additional life insurance needed is determined by subtracting the resources already available from the resources needed by the survivor’s dependents if the client should die today, assuming that future income payments can be composed solely of investment earnings on a capital sum. With the financial needs analysis approach, the amount of additional life insurance needed is determined by subtracting the resources already available from the resources needed by the survivor’s dependents if the client should die today, assuming that future income payments can be composed of a combination of investment earnings and liquidation of the capital sum.

Question 140

A major disadvantage of the financial needs analysis approach is that it fails to take into account factors that may be difficult to forecast, such as Social Security benefits and future earnings by a spouse.

Answer 140

False. A major advantage of the financial needs analysis approach is that it does take into account factors that would be available in the event of the insured’s death, such as Social Security benefits and future earnings by a spouse.

Question 141

Although term insurance is available in the marketplace, virtually all client life insurance needs are best met with whole life insurance.

Answer 141

False. In addition to a number of needs that can and should be met with term insurance, various types of permanent insurance, not just whole life, should be considered in determining how to best meet a client’s life insurance needs.

Question 142

The basic fallacy of the traditional net cost method for measuring the cost of life insurance is that it ignores the time value of money.

Answer 142

True

Question 143

The surrender cost index indicates the cost of surrendering the policy for the cash value at some future point in time.

Answer 143

True

Question 144

When presenting a life insurance illustration concerning a participating policy, it is important for an agent to assure the client that dividends will always be paid in the future.

Answer 144

False. The NAIC model regulation prohibits insurers and their agents from stating or implying that the payment or amount of nonguaranteed elements is guaranteed, and a participating policy’s dividends are not guaranteed.

Question 145

False. The NAIC model regulation prohibits insurers and their agents from stating or implying that the payment or amount of nonguaranteed elements is guaranteed, and a participating policy’s dividends are not guaranteed.

Answer 145

False. Only those life insurance policy replacements involving agent or insurer distortion or misrepresentation of facts constitute twisting. Sometimes a policyowner can substantially improve his or her situation by replacing an existing policy with a new one from either the same or a different company.

Question 146

With a Sec. 1035 exchange, a policyowner is able to avoid taxation when canceling one life insurance policy, collecting the cash surrender value, and using it to purchase a similar life insurance policy.

Answer 146

False. A taxable event occurs when an existing insurance policy with a cash value is surrendered, even if the policyowner then uses the proceeds to purchase another policy on the same insured. A 1035 exchange can avoid taxation, but it must involve a transaction that takes place directly between the insurers.

Question 147

If a group of substandard risks is to be treated fairly, the degree of extra mortality the group represents and the approximate period in life when the extra mortality is likely to occur must both be known within reasonable limits.

Answer 147

True

Question 148

The most common method of dealing with risks that present an increasing hazard is to assess a flat extra premium.

Answer 148

False. The most common method of dealing with risks that present an increasing hazard is to use extra percentage tables. A flat extra premium is normally used when the hazard is thought to be constant or decreasing.

Question 149

It is common practice to remove the extra premium upon proof that the insured is no longer substandard.

Answer 149

True

Question 150

Viatication, or the selling of a life insurance policy to a viatical settlement provider, is a securities transaction subject to SEC regulation.

Answer 150

False. Viaticals are not deemed securities and are not subject to SEC regulation.

Question 151

Federal privacy laws regarding viaticals protect insureds from being identified and their medical information from being provided to third-party investors.

Answer 151

False. There are no federal privacy laws regarding viatical agreements.

Question 152

One of the common uses of life insurance in business is to serve as an alternative to a properly designed buy-sell agreement.

Answer 152

False. One of the common uses of life insurance in business is to serve as a method of funding, not of replacing, a properly designed buy-sell agreement.

Question 153

In a traditional split-dollar plan, the executive contributed an amount equal to the annual increase in the policy’s cash surrender value, while the corporation paid the remainder of the annual premium.

Answer 153

False. In a traditional split-dollar plan, the corporation contributed an amount equal to the annual increase in the policy’s cash surrender value, while the executive paid the remainder of the annual premium.

Question 154

In nearly all cases, the beneficiary of a life insurance policy must include the proceeds paid by reason of the insured’s death in the beneficiary’s gross income for federal income tax purposes.

Answer 154

False. In general, and subject to some exceptions, proceeds paid under a life insurance contract by reason of the insured’s death are excludible from gross income for federal income tax purposes.

Question 155

The inside buildup in a permanent life insurance policy is subject to taxation if it is left inside the policy.

Answer 155

False. The inside buildup in a permanent life insurance policy is not subject to taxation as long as it is left inside the policy.

Question 156

A gift involves a completed transfer and acceptance of property for less than full and adequate consideration.

Answer 156

True

Question 157

The federal gift tax applies to lifetime transfers of property as well as to transfers occurring at death.

Answer 157

False. The gift tax applies only to gifts during the donor’s lifetime.

Question 158

If Sally transfers all incidents of ownership in a life insurance policy on her life to her grown son through a gift and she dies a year later, the life insurance is included in her estate.

Answer 158

True

Question 159

The person whose life governs the duration of payments in an annuity is called the annuitant.

Answer 159

True

Question 160

Annuities serve essentially the same function as life insurance.

Answer 160

False. Annuities serve the function of liquidation of a principal sum, regardless of how it was created. Life insurance creates an estate or principal sum.

Question 161

If Jack would like to accumulate money for his planned retirement in 20 years, he should purchase an immediate annuity with periodic premiums.

Answer 161

False. Jack should purchase a deferred annuity with periodic premiums. Immediate annuities do not provide for accumulation and cannot be purchased with periodic premiums.

Question 162

If Rachel purchases a life annuity with 20 years certain to liquidate her retirement savings and is still alive at the end of 20 years, her annuity benefit payments will cease.

Answer 162

False. If Rachel is still alive at the end of 20 years, her annuity benefit payments will continue until her death.

Question 163

An installment refund annuity promises to keep paying installment benefits to the annuitant and/or beneficiary until the total equals the purchase price of the annuity plus interest at a guaranteed rate.

Answer 163

False. An installment refund annuity makes payments for the life of the annuitant. If the annuitant dies before receiving monthly payments equal to the purchase price of the annuity, the annuity also pays installment benefits to the annuitant’s estate and/or beneficiary until the total equals the purchase price of the annuity.

Question 164

A joint-and-last-survivor annuity continues to pay benefits as long as any of the annuitants are alive.

Answer 164

True

Question 165

During the liquidation period, a variable annuity promises to pay a variable number of annuity units of fixed value in each payment period.

Answer 165

False. During liquidation, a variable annuity pays a fixed number of annuity units of variable value in each payment period.

Question 166

Indexed annuities offer a minimum guaranteed interest rate.

Answer 166

True. An indexed annuity in the United States is a type of tax-deferred annuity whose credited interest is linked to an equity index—typically the S&P 500 or international index. It guarantees a minimum interest rate if held to the end of the surrender term and protects against a loss of principal.

Question 167

Annuity considerations are generally calculated using the same mortality rates as are used in calculating life insurance premiums.

Answer 167

False. Annuity considerations are not calculated using the same mortality rates as those used in calculating life insurance premiums.

Question 168

A charitable gift annuity has the same financial safeguards as an annuity provided by an insurance company.

Answer 168

False. It is very important to evaluate the charity’s long-term solvency. If a charity goes bankrupt or faces financial difficulty, the annuitant is merely a general creditor.

Question 169

If properly designed, a structured settlement can provide periodic payments of income that the claimant receives tax free during his or her life and that the claimant’s beneficiaries receive thereafter for the balance of any guaranteed period.

Answer 169

True.

Question 170

For a client in poor health, the underwriter might offer an impaired risk annuity that requires a higher premium for the same benefits.

Answer 170

False. When a client’s life expectancy is reduced, the insurer is most likely to provide annuity payments for a shorter period of time. Consequently, the premium to provide a given level of benefits is lower than the premium charged to an annuitant with a normal life expectancy.

Question 171

In response to ethical concerns involving unethical behavior in annuity sales, the NAIC has drafted a model regulation requiring insurance producers to have reasonable grounds for believing that a proposed annuity is suitable for the consumer.

Answer 171

True.

Question 172

Medical expense insurance is the most significant type of employee benefit in terms of both the number of persons covered and the dollar outlay.

Answer 172

True

Question 173

Maternity-related expenses are usually excluded from major medical plans.

Answer 173

False. The Pregnancy Discrimination Act requires that benefit plans of employers with 15 or more employees treat pregnancy, childbirth, and related conditions the same as other illnesses.

Question 174

Major medical plans contain internal limits for certain types of medical expenses.

Answer 174

True

Question 175

Many major medical plans with a calendar-year deductible also have a carryover provision that allows any expenses applied to the deductible and incurred during the last 3 months of the year also to be applied to the deductible for the following year.

Answer 175

True

Question 176

Many major medical expense plans place a limit on the amount of out-of-pocket expenses that a covered person must bear during any time period.

Answer 176

True

Question 177

Extended care facility benefits cover rest or domiciliary care for the aged.

Answer 177

False. Extended care facility benefits are not designed to cover rest or domiciliary care for the aged. These benefits are for people who require convalescence under supervised skilled nursing.

Question 178

Basic hospice care benefits cover treatments that attempt to cure seriously ill patients.

Answer 178

False. Hospice care does not attempt to cure medical conditions but tries to ease terminally ill patients’ physical and psychological pain associated with dying.

Question 179

Managed care plans typically encourage preventive care and the attainment of healthier lifestyles.

Answer 179

True

Question 180

HMOs typically provide out-of-area coverage for all medical services because their scope is national.

Answer 180

False. HMOs may operate in a geographic area no larger than a single metropolitan area, and most HMOs offer out-of-area coverage only in the case of medical emergencies.

Question 181

Cost controls of HMOs tend to discourage preventive care.

Answer 181

False. By providing and encouraging preventive care, HMOs attempt to detect and treat medical conditions at an early stage, thereby avoiding expensive medical treatment in the future.

Question 182

A PPO often has different deductibles and coinsurance for network and nonnetwork charges.

Answer 182

True

Question 183

PPOs typically provide benefits for a much wider array of medical procedures if nonnetwork providers are used.

Answer 183

False. For the most part, PPOs pay benefits for the same medical procedures, whether they are performed by a network or nonnetwork provider. However, a few procedures may be covered only if they are received from network providers.

Question 184

An exclusive-provider organization (EPO) is so named because it allows members to pay an additional premium for the right to see the most prominent specialist in a medical field.

Answer 184

False. An EPO does not provide coverage outside the preferred-provider network, except in those infrequent cases when the network does not contain an appropriate specialist.

Question 185

A point-of-service plan allows members to be reimbursed for treatment received outside the HMO network.

Answer 185

True

Question 186

Consumer-directed medical expense plans give employees increased choices and responsibilities for care.

Answer 186

True

Question 187

High-deductible medical expense plans give employees an incentive to avoid unnecessary medical care.

Answer 187

True

Question 188

Benefit carve-outs are often used as a method of cost containment through the use of managed care techniques.

Answer 188

True

Question 189

Most prescription drug plans cover nonprescription drugs as long as a physician orders them on a prescription form.

Answer 189

False. Drugs for which prescriptions are not required by law are usually not covered, even if a physician orders them on a prescription form.

Question 190

A successful behavioral health program should permit patient access on a 24-hour basis.

Answer 190

True

Question 191

For purposes of group medical expense benefits, a 27-year-old woman is fully covered as a dependent child under her father’s coverage if she is living at home and is a full-time student.

Answer 191

False. Any unmarried dependent children who are full-time students are usually covered only up to age 23 or 26.

Question 192

Most group medical expense plans contain a coordination-of-benefits (COB) provision under which coverage as an employee is primary to coverage as a dependent.

Answer 192

True

Question 193

The typical dental plan limits benefits to the least expensive type of accepted dental treatment for a given dental condition.

Answer 193

True

Question 194

Limited-benefit plans typically contain high deductibles.

Answer 194

False. Limited-benefit plans typically pay benefits on a first-dollar basis, but subject to dollar maximums.

Question 195

Supplemental medical and dental benefits for executives are normally self-funded.

Answer 195

False. For tax reasons, supplemental medical and dental benefits for executives are usually insured.

Question 196

Premium contributions by an employer to group medical and dental coverage for an employee are considered taxable income to the employee.

Answer 196

False. Premium contributions by an employer to group medical and dental coverage for an employee do not create any income tax liability for the employee.

Question 197

Using a simple multiple of earnings method to determine the amount of life insurance needed ignores key information about how much a client has already accumulated.

Answer 197

True

Question 198

The financial needs analysis approach considers both lump-sum needs at death and ongoing income needs

Answer 198

True

Question 199

With the financial needs analysis approach, the amount of additional life insurance needed is determined by subtracting the resources already available from the resources needed by the surviving dependents if the client should die today, assuming all future income payments are composed solely of investment earnings on a capital sum.

Answer 199

False. With the capital needs analysis approach, the amount of additional life insurance needed is determined by subtracting the resources already available from the resources needed by the survivor’s dependents if the client should die today, assuming that future income payments can be composed solely of investment earnings on a capital sum. With the financial needs analysis approach, the amount of additional life insurance needed is determined by subtracting the resources already available from the resources needed by the survivor’s dependents if the client should die today, assuming that future income payments can be composed of a combination of investment earnings and liquidation of the capital sum.

Question 200

A major disadvantage of the financial needs analysis approach is that it fails to take into account factors that may be difficult to forecast, such as Social Security benefits and future earnings by a spouse.

Answer 200

False. A major advantage of the financial needs analysis approach is that it does take into account factors that would be available in the event of the insured’s death, such as Social Security benefits and future earnings by a spouse.

Question 201

Although term insurance is available in the marketplace, virtually all client life insurance needs are best met with whole life insurance.

Answer 201

False. In addition to a number of needs that can and should be met with term insurance, various types of permanent insurance, not just whole life, should be considered in determining how to best meet a client’s life insurance needs.

Question 202

The basic fallacy of the traditional net cost method for measuring the cost of life insurance is that it ignores the time value of money.

Answer 202

True

Question 203

The surrender cost index indicates the cost of surrendering the policy for the cash value at some future point in time.

Answer 203

True

Question 204

When presenting a life insurance illustration concerning a participating policy, it is important for an agent to assure the client that dividends will always be paid in the future.

Answer 204

False. The NAIC model regulation prohibits insurers and their agents from stating or implying that the payment or amount of nonguaranteed elements is guaranteed, and a participating policy’s dividends are not guaranteed.

Question 205

All life insurance policy replacements involve twisting and thus are detrimental to the policyowner.

Answer 205

False. Only those life insurance policy replacements involving agent or insurer distortion or misrepresentation of facts constitute twisting. Sometimes a policyowner can substantially improve his or her situation by replacing an existing policy with a new one from either the same or a different company.

Question 206

With a Sec. 1035 exchange, a policyowner is able to avoid taxation when canceling one life insurance policy, collecting the cash surrender value, and using it to purchase a similar life insurance policy.

Answer 206

False. A taxable event occurs when an existing insurance policy with a cash value is surrendered, even if the policyowner then uses the proceeds to purchase another policy on the same insured. A 1035 exchange can avoid taxation, but it must involve a transaction that takes place directly between the insurers.

Question 207

If a group of substandard risks is to be treated fairly, the degree of extra mortality the group represents and the approximate period in life when the extra mortality is likely to occur must both be known within reasonable limits.

Answer 207

True

Question 208

The most common method of dealing with risks that present an increasing hazard is to assess a flat extra premium.

Answer 208

False. The most common method of dealing with risks that present an increasing hazard is to use extra percentage tables. A flat extra premium is normally used when the hazard is thought to be constant or decreasing.

Question 209

It is common practice to remove the extra premium upon proof that the insured is no longer substandard.

Answer 209

True

Question 210

Viatication, or the selling of a life insurance policy to a viatical settlement provider, is a securities transaction subject to SEC regulation.

Answer 210

False. Viaticals are not deemed securities and are not subject to SEC regulation.

Question 211

Federal privacy laws regarding viaticals protect insureds from being identified and their medical information from being provided to third-party investors.

Answer 211

False. There are no federal privacy laws regarding viatical agreements.

Question 212

One of the common uses of life insurance in business is to serve as an alternative to a properly designed buy-sell agreement.

Answer 212

False. One of the common uses of life insurance in business is to serve as a method of funding, not of replacing, a properly designed buy-sell agreement.

Question 213

In a traditional split-dollar plan, the executive contributed an amount equal to the annual increase in the policy’s cash surrender value, while the corporation paid the remainder of the annual premium.

Answer 213

False. In a traditional split-dollar plan, the corporation contributed an amount equal to the annual increase in the policy’s cash surrender value, while the executive paid the remainder of the annual premium.

Question 214

In nearly all cases, the beneficiary of a life insurance policy must include the proceeds paid by reason of the insured’s death in the beneficiary’s gross income for federal income tax purposes.

Answer 214

False. In general, and subject to some exceptions, proceeds paid under a life insurance contract by reason of the insured’s death are excludible from gross income for federal income tax purposes.

Question 215

The inside buildup in a permanent life insurance policy is subject to taxation if it is left inside the policy.

Answer 215

False. The inside buildup in a permanent life insurance policy is not subject to taxation as long as it is left inside the policy.

Question 216

A gift involves a completed transfer and acceptance of property for less than full and adequate consideration.

Answer 216

True

Question 217

The federal gift tax applies to lifetime transfers of property as well as to transfers occurring at death.

Answer 217

False. The gift tax applies only to gifts during the donor’s lifetime.

Question 218

If Sally transfers all incidents of ownership in a life insurance policy on her life to her grown son through a gift and she dies a year later, the life insurance is included in her estate.

Answer 218

True

Question 219

The primary goal of life insurance coverage for young clients is estate liquidity, whereas for older clients it tends to be estate enhancement.

Answer 219

False. Life insurance can provide estate enhancement for young clients as well as estate liquidity/wealth replacement for older clients.

Question 220

The term group health plan as used for COBRA purposes is broad enough to include long-term care plans.

Answer 220

False. The term group health plan as used for COBRA purposes is broad enough to include dental plans and vision care plans, but not long-term care plans. Long-term care coverage is not subject to the COBRA rules.

Question 221

A qualified beneficiary can obtain COBRA coverage after a qualifying event without having to provide evidence of insurability.

Answer 221

True

Question 222

COBRA coverage is automatic for qualified beneficiaries who lose their group health coverage because of a qualifying event.

Answer 222

False. COBRA coverage is not automatic but must be elected.

Question 223

The insurance company has the right to refuse conversion of group medical expense coverage for anyone who is covered under Medicare.

Answer 223

True

Question 224

The HIPAA group-to-individual portability rules apply in a state only if the state does not have its own plan.

Answer 224

True

Question 225

AARP and many professional societies have programs through which their members can obtain medical expense coverage.

Answer 225

True

Question 226

The purchaser of an individual major medical policy has to select the annual deductible and lifetime maximum limit he or she wants in the policy.

Answer 226

True

Question 227

ERISA requires that self-funded, employer-provided medical expense plans include state-mandated benefits.

Answer 227

False. ERISA exempts noninsured plans from state insurance mandates. This exemption includes a self-funded, employer-provided medical expense plan.

Question 228

HMO coverage for individuals is typically less expensive than an individual major medical policy.

Answer 228

False. Because of the emphasis on first-dollar coverage and preventive medicine, HMO coverage for individuals is typically more expensive than an individual major medical policy.

Question 229

Only 10 percent of Medicare recipients have some type of coverage to supplement Medicare.

Answer 229

False. Estimates indicate that about two-thirds of Medicare recipients have some type of coverage to supplement Medicare.

Question 230

Group Medicare supplements that employers offer to their retirees may differ from individual Medicare supplement policies.

Answer 230

True

Question 231

Insurance companies are allowed to permanently exclude benefits for preexisting conditions from their Medicare supplement policies.

Answer 231

False. Insurance companies are not allowed to exclude benefits because of preexisting conditions as of January 1, 2014. Under prior law, some policies immediately provided benefits for preexisting conditions or had an exclusion period shorter than 6 months.

Question 232

Most specified disease insurance policies in the marketplace today cover only cancer.

Answer 232

False. Most specified disease insurance policies cover cancer as well as other diseases.

Question 233

More than half of the states have established some type of high-risk pool, whereby anyone turned down for medical expense coverage in the normal marketplace can obtain coverage through the pool.

Answer 233

True

Question 234

A high-deductible health plan used with an HSA must apply the policy deductible to any preventive care the policy covers.

Answer 234

False. A high-deductible health plan used with an HSA is permitted to waive any deductible requirements for preventive care.

Question 235

Both the account holder of an HSA and the account holder’s employer may make a contribution to the account.

Answer 235

True

Question 236

Account holders can invest HSA funds in cash value life insurance policies.

Answer 236

False. Account holders can use many types of investments for HSA funds. However, life insurance is a prohibited investment vehicle.

Question 237

An individual can take distributions from an HSA at any time.

Answer 237

True. However, there may be adverse tax consequences if distributions are taken for purposes other than paying medical expenses of the account holder or the account holder’s spouse or tax dependents.

Question 238

A surviving spouse who is the beneficiary of an HSA can use the account balance for his or her own medical expenses.

Answer 238

True

Question 239

Benefits from an individually purchased medical expense policy are generally received free of federal income taxation.

Answer 239

True

Question 240

Individuals who itemize deductions for income tax purposes are allowed to deduct all unreimbursed medical expenses, regardless of their amounts.

Answer 240

False. Individuals who itemize deductions for income tax purposes are allowed to deduct most unreimbursed medical expenses to the extent that they exceed 10 percent of their adjusted gross income as of tax year 2013.

Question 241

At all working ages, the probability of being disabled for at least 90 consecutive days is much greater than the chance of dying.

Answer 241

True

Question 242

The definition of disability under the Social Security program is less restrictive than that in most individual or group disability income contracts.

Answer 242

False. Although most employed persons are potentially eligible for disability benefits under the Social Security program, its definition of disability is more restrictive than that in most individual or group contracts

Question 243

Employer-provided short-term disability income plans typically provide benefits for a limited period of time, such as 6 months or less.

Answer 243

True

Question 244

Employer-provided short-term disability income plans typically provide benefits for a limited period of time, such as 6 months or less.

Answer 244

False. Insurance companies that offer disability income policies are very concerned about overinsurance and the accompanying moral hazard and, consequently, limit the amount of benefits relative to the individual’s income. As a result, many individuals with coverage through other sources are ineligible for additional disability income protection.

Question 245

Short-term disability income contracts typically limit coverage to occupational disabilities.

Answer 245

False. The majority of short-term disability contracts limit coverage to nonoccupational disabilities because employees have workers’ compensation benefits for occupational disabilities.

Question 246

Most employers provide long-term disability income coverage for their employees.

Answer 246

False. Most employers do not provide long-term disability income insurance.

Question 247

Sick-leave plans generally replace all lost income for a limited period of time, starting on the first day of disability.

Answer 247

True

Question 248

Most sick-leave plans are open to part-time employees.

Answer 248

False. Almost all sick-leave plans are limited to permanent full-time employees.

Question 249

Most sick-leave plans are coordinated with social insurance programs.

Answer 249

True

Question 250

Long-term disability plans often limit benefits to salaried employees because claims experience has traditionally been less favorable for hourly paid employees.

Answer 250

True

Question 251

Group disability income contracts typically specify that no benefits will be paid unless the employee is under the care of a physician.

Answer 251

True

Question 252

Most group disability income contracts exclude disabilities that result from pregnancy.

Answer 252

False. Most group disability income contracts cover disabilities that result from pregnancy because it is illegal under federal law for an employer with 15 or more employees to exclude these disabilities. Employers with fewer than 15 employees may still exclude pregnancy disabilities unless the employers are subject to state laws to the contrary.

Question 253

Group long-term disability income contracts often exclude benefits for disabilities that result from preexisting conditions.

Answer 253

True

Question 254

Group short-term disability income contracts generally have 30-day waiting periods.

Answer 254

False. Group short-term disability income contracts typically have no waiting period for disabilities that result from accidents, but a waiting period of 1 to 7 days for disabilities that result from sickness.

Question 255

Group long-term disability income contracts typically require disabled employees who return to work to complete a new waiting period before any benefits can be reinstated if they subsequently decide they are unable to keep working.

Answer 255

False. Most insurers include a rehabilitation provision in their long-term disability income contracts as an incentive to encourage disabled employees to return to active employment as soon as possible. This provision permits employees to enter a trial work period. If the trial work period indicates that the employees are unable to work, the full benefits will be reinstated without the employees having to satisfy a new waiting period.

Question 256

Benefits from a fully contributory group disability income insurance plan are includible in a recipient’s gross income.

Answer 256

False. Benefits from a fully contributory plan are received free of income taxation.

Question 257

Planners should advise their clients to buy any-occupation individual disability income policies because they are very liberal in defining disability.

Answer 257

False. Any-occupation policies have more strict definitions of disability than policies using own-occupation definitions of disability.

Question 258

Residual disability benefits focus on how much income reduction has been sustained as a result of the disability, rather than on the physical limitations of the disability itself.

Answer 258

True

Question 259

Most individual disability income policies are conditionally renewable, subject to evidence of insurability.

Answer 259

False. Most individual disability income policies are guaranteed renewable at least to some age, such as 65 or 67.

Question 260

The premium for an individual disability income policy with a 2-year benefit period can be as low as 40 to 50 percent of the premium required to extend the benefits to age 65.

Answer 260

True

Question 261

Insurance companies often require repeated verification that an individual’s disability still satisfies the qualifications for benefit eligibility.

Answer 261

True

Question 262

The best way to adjust benefits upward for inflation before the insured is disabled is to purchase new policies to supplement the in-force policies incrementally as the insured’s income increases.

Answer 262

False. The most attractive way to adjust benefits upward for inflation while the insured is not disabled is to use riders that automatically increase the base benefit amount on a formula basis.

Question 263

Most individual disability income policies include a waiver-of-premium provision.

Answer 263

True

Question 264

Individual disability income policies are prohibited from having an incontestability provision because of the potential for fraud.

Answer 264

False. The laws of all states require that disability income policies contain incontestability provisions.

Question 265

The purpose of a Social Security offset rider to an individual disability income policy is to provide benefits during the waiting period for Social Security disability income benefits.

Answer 265

False. The purpose of a Social Security offset rider is to provide additional benefits to a disabled person who does not qualify for Social Security disability income benefits.

Question 266

The underwriting process for individual disability income insurance is much more complex than for individual life insurance.

Answer 266

True

Question 267

Business overhead expense policies are available to cover many of the ongoing costs of operating a business while the business owner is totally disabled.

Answer 267

True

Question 268

Benefits from key employee disability policies are payable to the wife or husband of the disabled key employee.

Answer 268

False. Benefits from key employee disability policies are payable to the business entity when the insured key employee is disabled. These policies are not designed to provide continuance of salary for the key employee.

Question 269

Buy-sell agreements triggered by the disability of an owner can be funded with disability policies.

Answer 269

True

Question 270

Both group and individual medical expense policies typically cover custodial care in a nursing home.

Answer 270

False. Both group and individual medical expense policies exclude custodial care.

Question 271

The Medicaid program in most states will provide nursing home care to low-income individuals.

Answer 271

True

Question 272

NAIC model legislation regarding long-term care policies has become federal law and applies retroactively to older policies.

Answer 272

False. The NAIC model legislation establishes guidelines that have been adopted by several states (not federally). Furthermore, older policies that are still in existence and were written prior to the adoption of the model legislation or one of the later revisions may be unaffected.

Question 273

NAIC model legislation regarding long-term care policies requires that a shopper’s guide must be delivered to all prospective applicants.

Answer 273

True

Question 274

Under the Health Insurance Portability and Accountability Act (HIPAA), a “Qualified long-term care insurance contract” must provide for a cash surrender value that can be borrowed if an insured is seriously ill.

Answer 274

False. A long-term care insurance contract cannot provide for a cash surrender value or other money that can be borrowed or paid, assigned, or pledged as collateral for a loan.

Question 275

Under HIPAA, a “chronically ill person” must be unable to perform at least four activities of daily living (ADLs).

Answer 275

False. Under HIPAA, a chronically ill person must be unable to perform only at least two activities of daily living.

Question 276

Coverage under a group long-term care insurance contract must be offered through a cafeteria plan to receive favorable tax treatment.

Answer 276

False. Coverage under a group long-term care insurance contract cannot be offered through a cafeteria plan on a tax-favored basis.

Question 277

One of the benefits that may be available under a comprehensive long-term care insurance contract is adult day care.

Answer 277

True

Question 278

Long-term care policies written on a per diem basis pay for actual long-term care expenses up to a maximum amount.

Answer 278

False. Benefits paid are a specified amount per day that is independent of the actual charge for long-term care.

Question 279

Variations exist among long-term care insurance policies as to how home health care services are counted toward satisfaction of the elimination period.

Answer 279

True

Question 280

One advantage to the insured of having a long-term care insurance policy that uses a pool of money concept is that daily benefit payments from the pool of money can exceed the otherwise stated policy benefit.

Answer 280

False. Daily benefits from a pool of money cannot exceed the daily policy benefits stated in the policy.

Question 281

Most states require long-term care policies to offer some type of inflation protection that the applicant can purchase.

Answer 281

True

Question 282

Most insurance companies offer a discount if both spouses purchase long-term care policies from the same company.

Answer 282

True

Question 283

Partnership policies are typically structured as non-tax-qualified policies.

Answer 283

False. Partnership policies must be designed as tax-qualified policies.

Question 284

What is EL insurance?

Answer 284

Employer’s Liability Insurance (EL) provides coverage to the employer for any work-related bodily injury or disease aside from the liability that is already imposed on the employers by the worker’s compensation law. These have to prove that employer negligence occurred to cause the injury.

Question 285

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?

Answer 285

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.

Question 286

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?

Answer 286

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 287

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?

Answer 287

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 288

Insurance Services Office (ISO) is what?

Answer 288

ISO is an advisory organization that provides a wide range of services for insurance companies, including the development and filing of standardized insurance policies. Many property and liability companies purchase the services of ISO, and its policy forms are commonly used.
There are six standard ISO homeowners forms:
• Homeowners 2—Broad Form
• Homeowners 3—Special Form
• Homeowners 4—Contents Broad Form
• Homeowners 5—Comprehensive Form
• Homeowners 6—Unit-Owners Form
• Homeowners 8—Modified Coverage Form

Question 289

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 289

(D)Contributions by the employer for an employee’s coverage are generally tax deductible to the employer.

Question 290

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 290

(B)a 5 percent compound annual benefit increase option

Question 291

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 291

(B)a 5 percent compound annual benefit increase option

Question 292

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 292

(C)Most plans have a copayment for each prescription.

Question 293

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 293

(D)The applicant typically selects the length of the elimination period from three to five available options.

Question 294

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 294

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 295

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
Correct (C)a flex-rating law
(D)open competition

Answer 295

(C)a flex-rating law

(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 296

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 296

(D)unauthorized entity

Question 297

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 297

(A)a low loss frequency and high loss severity

Question 298

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 298

(B)The mother’s plan is primary, the stepfather’s plan is secondary, and the father’s plan pays last.

Question 299

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.

Answer 299

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

Question 300

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. ACA prohibits ratings based on the health status of individuals as well as preexisting exclusions.

Answer 300

(B)II only

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 301

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.

Answer 301

Neither.

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.

Partial Disability - This is defined as the inability to do some of the specific duties relating to a job. Its purpose is to pay limited benefits to an insured who is
attempting to return to work after a minimum specified period of total disability. Typically,
the benefit is equal to 50 percent of the basic total disability benefit and is only paid for a
limited period, such as 3, 6, or 12 months.

Question 302

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.

Answer 302

(A)I only

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 303

Methods of risk financing include which of the following?

I. risk retention
II. loss prevention

Answer 303

(A)I only

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 304

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.

Answer 304

(D)Neither I nor II

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 305

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 (POS) plans

Answer 305

Both I and II are correct because they allow a member to elect treatment outside the provider network.

Question 306

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

Answer 306

Both I. & II.

Question 307

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.

Answer 307

(B)II only

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 308

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.

Answer 308

(B)II only

I is incorrect because NAIC model legislation requires a 30-day free look.

Question 309

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.

Answer 309

Both I and II are correct.

Question 310

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.

Answer 310

(B)II only

I is incorrect because the commission rates for renewal policies tend to be the same as for new policies.

In the exclusive agency system compensation comes mainly from commissions on the sale of new business, with lower commission rates on renewals.

Question 311

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.

Answer 311

Both I and II are correct.

Question 312

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.

Answer 312

Neither are correct.

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 313

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 313

(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.

nonforfeiture clause. In an insurance policy, a clause that will allow for the insured individual to receive all or some of the benefits or a partial refund on the premiums that have already been paid if the insured stops paying their premium resulting in a policy lapse.

Reduced Paid Up Life Insurance also allows for the continuation of the life insurance coverage without the paying of additional premiums; however, the face value (death benefit) of the original policy is reduced.

Question 314

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 314

(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.

nonforfeiture clause. In an insurance policy, a clause that will allow for the insured individual to receive all or some of the benefits or a partial refund on the premiums that have already been paid if the insured stops paying their premium resulting in a policy lapse.

Question 315

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 315

(A)the Federal Insurance Management Association (FIMA)

FIMA administers the national flood insurance program, which provides coverages for dwellings and commercial buildings and their contents.

Question 316

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 316

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

Question 317

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 317

(C)The policy guarantees that the owner will keep possession of the property if a defect in the title is discovered.

Title insurance indemnifies the insured up to policy limits but provides no guarantee that the policyowner will retain possession of the property.

Question 318

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 318

(C)limit the policy’s protection period

he approaches described in (A), (B), and (D) make permanent
insurance available to substandard applicants.

Question 319

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 319

(C)Premiums generally increase at each annual renewal as an insured ages.

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 320

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 320

(A)a nonowned van driven by the insured on a regular basis

The PAP precludes coverage for any nonowned vehicle furnished
for the regular use of an insured.

Question 321

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 321

(B)The employee is fired for gross misconduct.

Termination for gross misconduct is an exception to the COBRA rules.

Question 322

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 322

(A)a licensed Harley Davidson motorcycle while it is being ridden on the driveway at the insured location

Homeowners policies do not provide liability coverage for vehicles licensed for use on public roads.

Question 323

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 323

(D)cash value

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

Question 324

What is the difference between risk and uncertainty?

Answer 324

risk is defined as the possibility of loss.

Uncertainty is the state
of mind of being unsure.

As a consequence, uncertainty can vary significantly from one person to another, even when each is confronted with the same set of facts, the same objective reality, or the same risk.

Question 325

Sally, a single working mother with two young children, recently learned that her stress at work is giving her high blood pressure. Sally is concerned that if she were to die, her children would no longer have her income to support them until they are grown. In Sally’s case, what is an example of each of the following?

a. risk
b. peril
c. hazard

Answer 325

a. Risk—the possibility of Sally’s children losing her financial support
b. Peril—Sally’s death
c. Hazard—her high blood pressure, which increases the chance of loss

Question 326

What four steps might a client use in applying the risk management process?

Answer 326

The four steps in the risk management process are identification, measurement, choice and use of methods to treat each identified risk, and administration.

Question 327

Match the following:
Compensatory damages are designed to?
Punitive damages are designed to?

• To financially compensate or reimburse a
  claimant who has suffered a loss.
• To punish a wrongdoer, or tortfeasor, whose outrageous conduct has caused another party to suffer a loss.

Answer 327

• Compensatory damages, designed to financially compensate or reimburse a
claimant who has suffered a loss
• Punitive damages, designed to punish a wrongdoer, or tortfeasor, whose outrageous conduct has caused another party to suffer a loss

Question 328

Property losses can occur to either real or personal property.

Answer 328

True

Question 329

Open-perils coverage refers to a policy that contains a very long list of named perils.

Answer 329

False. Open-perils coverage refers to a policy that covers all losses to covered property unless the loss is specifically excluded. Some named-peril policies contain a very long list of named perils.

Question 330

A typical property insurance policy requires that whenever a property loss occurs, the insured must give prompt notice to the insurer.

Answer 330

True

Question 331

The key difference between a settlement on an actual cash value basis and a replacement cost basis is that depreciation is considered in calculating the actual cash value of the loss.

Answer 331

True

Question 332

Deductibles both minimize attitudinal hazard and lower premium costs.

Answer 332

True

Question 333

Most property and liability policies contain a provision that specifies how an insurer’s obligation is affected by the existence of other insurance that covers a loss.

Answer 333

True

Question 334

Compensatory damages are intended to punish a wrongdoer whose outrageous conduct has caused injury or damage to another party.

Answer 334

False. Compensatory damages are intended to indemnify a person for the costs resulting from his or her injury or damage.

Question 335

All liability losses involve either bodily injury or property damage.

Answer 335

False. Liability losses can involve bodily injury, property damage, personal injury, contractual liability, wrongful acts, or other offenses.

Question 336

Torts can result from negligence or contractual obligations.

Answer 336

False. Torts can result from negligence, intentional acts or omissions, and strict or absolute liability.

Question 337

Negligence is the failure to exercise the proper degree of care required by the circumstances.

Answer 337

True

Question 338

If Pete was only 20 percent at fault for an auto accident in a state that relies on the contributory negligence standard, he could collect 80 percent of his damages from the other party.

Answer 338

False. If Pete was only 20 percent at fault for an auto accident in a state that relies on the contributory negligence standard, he could collect no damages from the other party.

Contributory negligence is the legal principle
whereby an injured person cannot recover damages for injuries from another negligent person if the injured party was also negligent. Such a person is said to be contributorily negligent and is barred from recovery, no matter how slight the negligence.

Question 339

People can be held responsible only for their own negligent acts.

Answer 339

False. People can be responsible not only for their own negligent acts but also for those of others. For example, employers can be personally liable for the torts of their employees. In states with vicarious liability laws, the owner of an auto can be liable for the acts of another person driving the car.

Question 340

In a liability insurance policy, the insurance company has an obligation to provide a defense at its expense.

Answer 340

True

Question 341

Property and liability insurance premiums paid for business coverage are generally deductible as a business expense.

Answer 341

True

Question 342

Standardized property and liability insurance policies largely eliminate the need for consumers to make choices other than policy amounts.

Answer 342

False. Many additional choices must be made. With property insurance, consumers often need to decide which causes of loss will be covered and to select a deductible. Because most policies contain exclusions and limitations, consumers also need to ensure that their policy or policies cover all significant property that is exposed to loss. Endorsements or additional policies may be needed to provide some necessary coverages. With liability insurance, it is important to recognize that large claims or judgments can consume a client’s financial resources and to make sure that all relevant sources of liability loss are recognized and covered, using additional policies or endorsements as necessary.

Question 343

The liability section is identical for all ISO homeowners forms.

Answer 343

True

Question 344

Coverage for children over the age of 21 under their parents’ homeowners policy is discontinued, even if the children continue to reside in their parents’ household.

Answer 344

False. Regardless of age, children are covered under their parents’ homeowners policy as long as they continue to reside in their parents’ household.

Question 345

The limits for homeowners Coverages B, C, and D are part of the Coverage A limit.

Answer 345

False. The limits for homeowners Coverages B, C, and D are additional amounts of insurance and do not affect the amount of coverage (Coverage A) on the dwelling.

Section I of the HO-3 contains five categories of property coverage:
• Coverage A for the dwelling building
• Coverage B for other structures, such as a garage not attached to the house
• Coverage C for household contents and other personal property
• Coverage D for loss of use

Question 346

Damage to an attached garage is covered under Coverage A in an HO-3 policy, but damage to a detached garage is covered under Coverage B.

Answer 346

True

Question 347

An HO-3 policy covers damage to the insured’s residence building against open perils, including earthquake and flood.

Answer 347

False. An HO-3 policy covers damage to the insured’s residence against open perils but excludes, among other things, earthquake and flood.

Question 348

In a homeowners policy, losses under all property coverages are settled on a replacement cost basis.

Answer 348

False. In a homeowners policy, losses to the dwelling under Coverage A are settled on a replacement cost basis, while losses under personal property Coverage C are settled on an actual cash value basis (unless an endorsement is added for replacement cost).

Question 349

In an HO-3 policy, the personal property of any insured is covered while located anywhere in the world.

Answer 349

True

Question 350

In a homeowners policy, the amount payable for the loss of money and securities is limited only for theft.

Answer 350

False. In a homeowners policy, the amount payable for the loss of money and securities is limited for all perils.

Question 351

A homeowners policy provides coverage for additional living expenses incurred while a family lives elsewhere during repairs for a covered property loss.

Answer 351

True

Question 352

The liability coverage contained in an unendorsed homeowners policy provides protection against suits for bodily injury and property damage.

Answer 352

True

Question 353

Liability coverage in an unendorsed homeowners policy excludes coverage for liability arising out of business and professional activities as well as the use of an auto.

Answer 353

True

Question 354

Benefits under the medical payments coverage in the homeowners policy are paid only to persons other than an insured.

Answer 354

True

Question 355

A person who owns and lives in a condominium unit should carry an HO-4 Contents Broad Form, because the association covers the building and detached structures.

Answer 355

False. A person who owns and lives in a condominium should carry an HO-6 Unit-Owners Form. A renter should buy an HO-4 Contents Broad Form.

Question 356

Clients with expensive jewelry and silverware should consider adding a scheduled personal property endorsement to their homeowners policy.

Answer 356

True

Question 357

The identity fraud expense coverage endorsement would reimburse a victim of identity theft for money stolen from his bank account.

Answer 357

False. The identity fraud expense coverage endorsement provides up to $15,000 in coverage for expenses that may be incurred as a result of identity thief, but it does not reimburse an insured for the theft itself.

Question 358

Most flood insurance is written through the?

Answer 358

NFIP. (National Flood Insurance Program.)

Question 359

FAIR plans are often able to provide coverage on hard-to-insure residential property.

Answer 359

True

Question 360

Title insurance provides protection against all title defects, regardless of when they occur or are discovered.

Answer 360

False. Title insurance provides protection only against unknown title defects that have occurred prior to the effective date of the policy but were discovered after the effective date.

Question 361

Applied ethics is the study of how to apply general moral beliefs to particular situations.

Answer 361

True

Question 362

“Ethical fading” refers to the intensification of our moral intentions.

Answer 362

False. The confidence of the American public in the integrity and professionalism of the financial services industry is under threat. This level of public distrust is not only disheartening, it also has real consequences. One of these consequences is an increased amount of government regulation as frustrated consumers and regulators look to try and enforce a higher standard of conduct. Increased compliance obligations, while irritating to ethical practitioners and their clients, can have more serious consequences such as the stripping of the ethical motivation for acting well. This is a process called “ethical fading.”

Question 363

All ethical decision-making should be intuitive and spontaneous.

Answer 363

False. Successful ethical decision-making is a skill. As such, it often involves thinking hard to balance multiple considerations. This vision of ethical decision-making differs from the “common sense” view that ethical decision-making is intuitive (without deliberate rational thought) and instantaneous.

Question 364

Moral perception is the ability to correctly recognize (and assign the appropriate weight) to the morally salient facts of a situation.

Answer 364

True

Question 365

Stakeholders are individuals or groups of individuals who are impacted by the result of a decision or who can impact the decision making process.

Answer 365

True

Question 366

Professional responsibilities or “role-specific” responsibilities apply to everyone, in virtue of their nature as human beings.

Answer 366

False. While many of our ethical obligations are equally intuitive, this is not always the case. In these situations, it is helpful to consider both our general moral responsibilities and our professional or “role-specific” responsibilities. While general moral responsibilities apply to human persons simply in virtue of being human, professional responsibilities are voluntary in the sense that we willingly assume them when we undertake the mantle of professionalism.

Question 367

Our intentions are irrelevant to the moral quality of our actions.

Answer 367

False. Your intention is the goal that you hope to accomplish by performing an action. Intentions are relevant for two reasons: First, it impacts our assessment of the person who performed the action, and second, it impacts how the action will be performed.

Question 368

A publicity test shows whether you believe that your action is in alignment with the manner in which you represent yourself and your values to other people.

Answer 368

True

Question 369

It is important to consider the symbolism of our actions and how they may be interpreted by other people.

Answer 369

True

Question 370

What is the purpose of the statistical data in a mortality table?
(A) It indicates the number of individuals exposed to the risk of illness, sickness, and disease at each age.
(B) It indicates the pure life insurance premium for an insured at any age.
(C) It shows how many persons alive at different ages are expected to die during the coming year.
(D) It shows which individuals are expected to die during the coming year.

Answer 370

The answer is (C). (A) is incorrect because it describes a morbidity table. (B) is incorrect because a mortality table shows probabilities, not premium. Premiums are based in part on the information in a mortality table. (D) is incorrect because it indicates aggregate probabilities, not predictions regarding specific individuals.

Question 371

Every insurance policy contains one or more provisions spelling out the basic promise the insurer makes in the policy, such as the promise to pay money if a certain type of event occurs. Insurance policy provisions of this type are known as which of the following?

(A) conditions
(B) insuring agreements
(C) financial risks
(D) miscellaneous provisions

Answer 371

(B) insuring agreements

Question 372

Which of the following statements correctly describes a coverage need that can be met with an auto loan/lease coverage endorsement?

(A) The client’s outstanding obligation on a leased auto exceeds the vehicle’s current actual cash value.
(B) The client wants to trade in his or her car before the term of the lease has expired.
(C) The lender exercises an option to renegotiate the terms of an adjustable lease.
(D) The lender wants to be included as the payee on any claim check.

Answer 372

A) The client’s outstanding obligation on a leased auto exceeds the vehicle’s current actual cash value.

The answer is (A). (B), (C), and (D) are incorrect because auto loan-lease coverage applies when total loss to a leased vehicle or a financed auto results in the insured’s being required to pay the lessor or lending company an amount that exceeds the actual cash value of an insured auto; the endorsement fills that gap.

Question 373

Which of the following statements concerning the typical conversion provision found in group medical insurance contracts is correct?

(A) Evidence of insurability is required.
(B) Conversion must be elected prior to the termination of the group coverage.
(C) The insurer has the right to refuse to issue a policy to anyone who is covered by Medicare.
(D) Coverage for preexisting conditions is limited for the first 6 months of coverage.

Answer 373

The answer is (C). (A) is incorrect because no evidence of insurability is required. (B) is incorrect because covered persons commonly have 31 days from the date of termination of the group coverage to exercise the conversion privilege. (D) is incorrect because there is no limitation of benefits for preexisting conditions.

Question 374

Ways to Deal with Substandard Applicants
• Hazard increases with age
– Age rate-up
– Extra percentage table
• Hazard remains constant
– Flat extra premium
• Hazard decreases with time or is temporary
– Flat extra premium
– Lien
– Special dividend class
– Limit policy type to one with high savings component

Answer 374

Ways to Deal with Substandard Applicants
• Hazard increases with age
– Age rate-up
– Extra percentage table
• Hazard remains constant
– Flat extra premium
• Hazard decreases with time or is temporary
– Flat extra premium
– Lien
– Special dividend class
– Limit policy type to one with high savings component