Test 3- Chapter 25 Insurance and Pension Funds

Question 1

protection against uncertainty of loss; offer investment products

Answer 1

risk management

Question 2

Prudential, AIG, and MetLife were all declared Systemically important financial institutions by the Financial Stability Oversight Council in 2013-2014. Metlife sued the Financial Stability oversight council. why?

Answer 2

they didn’t want to be declared systemically important because it entailed they are more heavily regulated by the FED and have higher capital requirements than their non-SIFI competitors

Question 3

the regulation of insurance and pension funds are mostly regulated by who?

Answer 3

state agencies

Question 4

the National Association of Insurance Commissioners (NAIC) coordinates what?

Answer 4

regulation among state agencies regarding national issues

Question 5

SIFI designate insurance firms fall under?

Answer 5

federal regulation in addition to state

Question 6

Insurance Holding Companies (IHC) that own banks are subject to?

Answer 6

federal regulation

Question 7

what is the ownership structure for insurance companies?

Answer 7

95% are stock owned, but some are mutually owned (owned by the policy holders)

Question 8

what are the four types of life insurance policies?

Answer 8

whole life
term life
variable life
universal life

Question 9

when should one get life insurance?

Answer 9

when they have people depending upon them

Question 10

which type of life insurance policy does this describe:
combination of insurance and investment products, designed to offer protection over clients entire life

builds cash value, has some flexibility, but very expensive (fees added to premium)

possibly advantageous for investors who max out other investment contributions, such as 401(k) or IRAs

Money is given to your beneficiary when you die, so you pay a high premium

has value-building component, and you can get your money back eventually

tax deferred

Answer 10

whole life

Question 11

describe term life insurance?

Answer 11

temporary insurance, cheapest to purchase, and best for most people

Question 12

describe variable life insurance

Answer 12

benefits are based on some underlying assets of policy. usually somewhat complex and expensive compared wit other options. based on stock index, bond index or combination

Question 13

describe universal life insurance

Answer 13

combines whole life and term: builds cash value over a limited life

possibly advantageous for wealthy investors

Question 14

which type of life insurance is the most suggested?

Answer 14

term life

Question 15

what kinds of things does property and casualty insurance cover?

Answer 15

primarily auto, home, and commercial buildings

but it covers fire, theft, liability, business, auto, buildings, boats, and jewelry

Question 16

insurance purchased by insurance companies to offset risk; reallocates portion of risk and returns to other firms

Answer 16

reinsurance

Question 17

this is an example of ______________:
an insurance company thinks they’re going to get in financial trouble if there’s a big earthquake and they have a lot of liabilities to pay out, so they give another company some of the premiums, and the other company helps pay out if anything happens

Answer 17

reinsurance

Question 18

What are the biggest sources and uses of insurance companies funds?

Answer 18

source: annuities are biggest
uses: bonds are biggest

Question 19

Insurance companies are smart and tend to manage money well and not take on too many risks, therefore liquidity risk is ______ for life insurance but _______ for property at times.

Answer 19

low

high

Question 20

what are interest rate and credit risk like for insurance companies?

Answer 20

interest rate- moderate

credit risk- (low-moderate)

Question 21

Pooled money for retirement income; employer created (most employers outsource)

Answer 21

Pension Funds

Question 22

what are the two kinds of pension funds?

Answer 22

public and private fund

Question 23

which kind of pension fund does this describe:

created/backed by government entity (state, local, federal, CALPERS)

Answer 23

public fund

Question 24

describe a private pension fund

Answer 24

created/backed by firms and non-government entities

Question 25

describe a defined-benefit plan

Answer 25

payout is set by formula, not investment returns

few offered today, but based on salary and years of service

employer funded

the longer you work the higher the payout

Question 26

in a defined contribution plan the benefit is __________ and is based on _________ ___________

Answer 26

unknown

investment returns

Question 27

what kind of plan does this describe:
employer always contributes and employer usually contributes

investment grows tax-free, employer contributions are tax deductible, account is portable (account is fully funded if firm fails or employee leaves that firm)

Answer 27

defined-contribution plan

Question 28

which kind of IRA is this:

contributions are tax deductible and grow tax-free. funds are taxed upon withdrawal.

Answer 28

traditional IRA

Question 29

which kind of IRA is this:

after tax contributions grow tax-free, never taxed

Answer 29

Roth IRA

Question 30

pension benefit guaranty corporation (PBGC) was established by the government, but is funded by the industry, and provides _________ in case of defined benefit failure

Answer 30

insurance