Insurance Exam Questions and Answers, Exams of Insurance Economics

Download Insurance Exam Questions and Answers and more Exams Insurance Economics in PDF only on Docsity! 1 / 25 Insurance Exam Correctly Solved Questions with Answers 1.What kind of life insurance policy issued by a mutual insurer provides a return of dividends surplus?: Participating life insurance policy. 2.A life insurance company has transferred some of its risk to another insurer. The insurer assuming the risk is called the: reinsurer 3.What is the primary purpose of a rating service company such as A.M best?: Determine financial strength of an insurance company 4.Why are dividend from a mutual insurer not subject to taxation: Because dividends are considered to be return of premium 5.A type of insurer is owned by its policy owners is called: Mutual 6.Ken is a producer who has obtained Consumer Information Reports under false pretenses. Under the Fair Credit Reporting Act, what is the maximum penalty that may be imposed on Ken?: 5k 7.Karen is a producer who has obtained personal information about a client without having a legitimate reason to do so. Under the McCarran-Ferguson Act, what is the minimum penalty for this?: 10k 8.The Do Not Call registry offers exemptions for calls placed from all the following EXCEPT: Insurance sale calls 9.ABC Insurance Company transfers part of their risk to XYZ Insurance Com- pany. This situation is called: Reinsurance 10.Which of the following is NOT considered advertising?: A rating from a rating service company, 2 / 25 such as A.M. Best 11.The cause of a loss is referred as an: peril 12.People with higher loss exposure have the tendency to purchase insurance more often than those at average risk. This is called: Adverse selection 13.All of the following are examples of pure risk except: Losing money at a casino 14.How do insurers predict the increase of individual risks?: law of large numbers 15.What is known as the immediate specific event causing loss and giving rise to risk: peril 16.Which of the following is considered to be an event or condition that increase the probability of an insured's loss: HAZARDS 17. Insurance companies determine risk exposure by which of the following?- : Law of large numbers and risk pooling 18.An example of risk sharing would be: Doctors pooling their money to cover malpractice exposures 19.Role of insurance: To transfer the risk of financial loss from an individual or business to an insurance company ... insurance spreads the costs of the unexpected financial loss to many individuals 20.life insurance: Life insurance guarantees a specific sum of money when some- one dies 21.health insurance: provides funds to cover medical bills due to sickness or injury and to also cover the loss of money because of a disability 22.Annuities: provide a stream of income by making a series of payments over a certain period of time 23.Insurance is available from who: Both private companies and the government 5 / 25 bring uniformity from state to state and simplify the marketing of insurance 50.What does state guarantee association do: Protect policy owners in the event of any insurance company going out of business, becoming insolvent or the in ability to pay claims 51.Independent Rating Services: Credit rating agencies rate or grade the financial strength & stability of insurance companies.. rates are based on claims , reserves and company profits 52.Independent rating services: AM Best Fitch Standard and Poor's Moody's Weiss 53.Nature of insurance: The purpose of insurance is to provide financial protection against losses that may be incurred due to a chance happening or event such as death, illness, or accident...provided through an insurance policy.. accumulating funds to meet these uncertain losses 54.Law of Large Numbers: The law of large numbers states that the larger the number of people, the more predictable the actual losses will be .. used this data to calculate rates... they base and allow for its successful operation 55.Speculative risk: Opportunity for either loss or gain..NO COVERED by insur- ance companies.. 56.Pure Risk: A situation that can only result in a loss, there is no opportunity for financial gain.. ONLY TYPE OF RISK that is insurable. 57.Five ways to handle risks: -Avoidance -reduction -Sharing -retention 6 / 25 -transfer 58.Risk Avoidance: Simply avoiding as many risk as possible .. EFFECTIVE but NOT ALWAYS PRACTICAL 59.Risk Reduction: Since we cannot avoid risk entirely .. attempt to lessen the possibility of a loss by taking action to reduce the risk 60.risk sharing: Group of individuals or businesses with similar exposures share the losses that occur within that group.. 61.Reciprocal insurance exchange: Formal risk sharing arrangement 62.Risk Retention (Self insurance): Able to financial ability to fund losses by themselves when they occur 63.Risk Transfer: MOST EFFECT WAY TO HANDLE RISK 64.Most common method of transferring risk: insurance 65.Elements of Insurable Risk: due to chance, definite and measurable, pre- dictable, not catastrophic, randomly selected and large loss exposure 66.Due to chance: Can't be catastrophic and must be randomly selected 67.What are the four essential element to be considered legally binding?: -of- fer and acceptance -consideration -legal purpose -competent parties 68.Offer and acceptance: An offer is accepted after it has been approved by the insurance company's underwriters 69.Consideration: A consideration is something of value that each party gives to the 7 / 25 other...the consideration on the part of the INSURED is the payment of premium....Consideration on the part of the insurance company is a promise to pay in the event of loss 70.Legal Purpose: If the insurance contract has a insurable interest and the in- sured has provided written consent, it has legal purpose. 71.Competent Parties: -legal age -Mentally capable of understanding the terms -not under influence of drugs or alcohol 72.Special features of insurance contracts: -aleatory -Adhesion -Unilateral -Personal contract -conditional -valued or indemnity -UTMOST good faith -warranties -representation -concealment 73.representation: a statement believed to be true to the best of one's knowledge but they are NOT guaranteed to be true for insurance purposes..representations are the answers the applicant for insurance gives to the questions on the insurance ap- plication..untrue statements on the application are considered misrepresentations and could void the contract 74.Concealment: is the legal term for the intentional withholding of information of a material fact that is crucial in making a decision.—insurance,concealment is a withholding of information 10 / company ..ALL ACTING on behalf of the insurance company—or principal 88.Types of agent Authority: express, implied, apparent 89.Apparent Authority: The appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. 90.Waiver: the act of voluntarily giving up a legal right, claim or privilege 91.Estoppel: Legal process used to prevent a party from reclaiming a right or privilege that was already waived. legal consequence of the waiver. 92.Patrol evidence rule: Prevents parties from changing the meaning of a written contract by trying to introduce oral or written statements made before the formation of the contract 93.Implied Agent Authority: Implied authority is authority not expressed or written into the agent contract , but which the agent is assumed to have in order to transact the business of insurance for the principal.. comes from express authority 94.Express Agent Authority: Authority is the authority granted to the agent by the principal, which is the insurance company , as written in the agency contracts 95.According to life insurance contracts law, insurable interest exists: At the time of application 96.A professional liability for which producers can be sued for mistakes of putting policy into effect is called: errors and omissions 97.Which of the following is an example of the insured's consideration: A paid premium 98.What is implied authority defined as: Authority that is not specifically given to an agent in the agency contract, but that an agent can reasonably assume to carry out his/her duties 99.The power given to an individual producer that is not specifically ad- dressed in his/her 11 / contract is considered what type of authority?: Implied 100. The term which describes the fact that both parties of a contract may Not receive the same value is referred to as: Aleatory 101. According to the principle of Utmost Good Faith, the insured will an- swer questions on the application to the best of their knowledge and pay the required premium, while the insurer will deal fairly with the insured and it's: promises made 102. Insurable interest does NOT occur in which of the following relation- ships?: Business owner and business client 103. The deeds and actions of a producer indicate what kind of authority?: - apparent 104. What type of clause describes the following statement "we have issued the policy in consideration of the representation in your application and payment of the first term premium": Consideration clause 105. Bob and Tom start a business. Since each partner contributes an impor- tant element to the success of the business, they decide to take life insurance policies out on each other, and name each other as beneficiaries. Eventually, they retire and dissolve the business. Bob dies 12 months later. The policies continue in force with no change. Both partners are still married at the time of Bob's death. In this situation, who will receive Bob's policy proceeds?: Tom 106. Which contract element is insurable interest a component of?: legal pur- pose 107. Ambiguities in an insurance policy are always resolved in favor of the: - insured 108. Under a contract of adhesion: the terms must be accepted or rejected in full 109. Which of the following is present when an applicant stands to lose value if the insured 12 / dies?: insurable interest 110. Term Life Insurance: temporary life insurance provided for a specific period of time.. called pure life insurance or pure death protection ... provide for the greatest amount of coverage for the lowest premiums .. example: if insured dies during the policy term, policy pays a death benefit to the beneficiary However if the policy is canceled or expires prior to the insured's death.. nothing is payable ...there is no cash value or any living benefits available 111. Three basic types of term coverage: - level term insurance - increasing term insurance - decreasing term insurance 112. Level Term Insurance: Most common type of Temporary protection..level = death benefits that does not change throughout the life of the policy 113. Decreasing term policies: Feature a level premium and a death benefit the decrease each year.. primarily used when the amount of protection needs to de- crease over a period of time..most common is to insure the payment of a mortgage ..it will decrease as the outstanding mortgage loan balance decreases each year.. death benefit will be 0 at the end of the policy 114. Increase term policies: Features level premium and a death benefit that increase each year..amount of increase is set at a specific amount of percentage.. 115. Special features of term policy's: -renewable -convertible -renewable and convertible 116. Term policy - renewable: The policy policy owner the right to renew the coverage at 15 / 133. Calculating premiums: Once an insurance company determines that an ap- plicant is insurable, they need to establish an appropriate policy premium. -the premium will be used to cover the cost and expenses to keep the policy in force 134. Three primary factors used in determining premiums: mortality, interest, and expense 135. mortality: Rate of death . Mortality tables help insurance companies predict life expectancy and the probability of death for a given group 136. interest: Premiums are paid before claims are incurred, insurance companies invest the money in an effort to earn interest...interest is a primary factor in lowering premium rates 137. Expense (Loading Charge): Expenses are factors into the premium.. 138. Death Benefit Proceeds (settlement option): Methods used to pay the death benefit to beneficiary upon the insured death.. may also change that option at any time during the life of the insured 139. Common death settlement option: -Lump sum cash option -Interest only option -Fixed period Option -life income option -1035 exchange 140. Lump sum cash option: Upon the death of the insured the policy is designed to pay the proceeds in cash called a lump sum. As a rule this lump sum is not taxable as income. 141. Interest only option: the insurance company retains the policy proceeds and pay interest on the proceeds to the recipient beneficiary at regular intervals. the insurer usually guarantees a certain rate of interest and will often pay interest in excess of 16 / the guaranteed rate. 142. Fixed period option (period certain): proceeds will be paid out in equal installments over a specified period of years 143. Fixed Amount Option: a fixed amount is periodically paid to the beneficiary 144. life income option: provides the recipient with an income that he or she cannot outlive 145. 1035 exchange: Internal Revenue Code Section 1035 allows for the exchange of existing insurance policies into another without incurring any tax liability on the interest and/or investment gains in the current contract. a cash value life insurance policy is exchanged for another cash value life insurance policy or an annuity for an annuity there will be no income tax on these transactions 146. Beneficiaries: there a few restrictions on who may be named a beneficiary on who may be named a beneficiary of a life insurance policy. the decision rests sole with the policy owner they will receive the policy proceeds will be paid upon the death of the insured. they can be individuals, businesses, trusts, estates, or even charities. 147. types of beneficiary: Primary- the first entitled to proceeds on the insureds death. Contingent- entitled if primary dies before insured. Revocable- policyholder can change designation without beneficiary's consent. Irrevocable- Cannot be changed without beneficiary's consent. 148. primary beneficiary: a beneficiary who has the first claim to the policy pro- ceeds after the death of insured. they can name more than one. 149. Secondary beneficiary: the contingent beneficiary or tertiary beneficiary has second 17 / claim in the event the primary beneficiary is dies before the insured Contingent beneficiaries do not receive anything if the primary beneficiary is still living at the time of the insured's death 150. Per Stirpes: the method of proportionately dividing an estate between benefi- ciaries according to their deceased ancestor's share 151. per capita: by the head, evenly distributes benefits among the living named beneficiaries 152. changing of the beneficiary revocable: may change a revocable beneficiary at any time and without the knowledge or consent of the beneficiary 153. Changing a Beneficiary- irrevocable: policy owner may not change the ben- eficiary without written consent of the beneficiary. also may not borrow against the policy's cash value 154. Uniform simultaneous death act: the contingent beneficiary receives the death benefit proceeds 155. spendthrift trust clause: prevents the beneficiaries reckless spending of ben- efits by requiring that the benefits be paid in fixed installments 156. Which settlement option involves having the proceeds remain with the insurer and earnings paid on a monthly basis to the beneficiary?: Interest only 157. Which settlement option involves having the proceeds remain with the insurer and earning paid on a monthly basis to the beneficiary: Interest only 20 / through an investigation and interviews with associates, friends, neighbors; consumer must be advised of this report in writing 3 days within the date the report was requested 175. Fair Credit Reporting Act: Under the fair credit report act , if someone apply- ing for insurance is declined or modified because of information contained in either a consumer or investigate report, the person has the right to know what was in the report , and will be provided with the name and address of the reporting agency 176. Risk Classifications (underwriting): If the application is accepted then un- derwriting must then determine the risk of rating classification to be used in deciding what her or not the applicant should pay a higher or lower premium 177. Risk classification: Standard, substandard, and preferred 178. Risk classification standard risk: Standard risks are People who , according to a company's underwriting standards are entitled to insurance protection without extra rating or special treatment restrictions they are considered an average risk 179. Substandard Risk: An applicant or insured who has a higher than normal probability of loss, and who may be subject to an increased premium. 180. Preferred Risk: An insurance classification for applicants who have a lower expectation of incurring loss, and who, therefore, are covered at a reduced rate. 181. Field Underwriting procedures: - The agent is the company's front line, and is referred to as a field underwriter because the agent is usually the one who has solicited the potential insured - As a field underwriter, the agent has many important responsibilities during the underwriting process and beyond, including the following: proper solicitation of applicants, helping prevent adverse selection, completing the application, obtaining 21 / the required signatures, collecting the initial premium, delivering the policy, and issuing the receipt 182. Condition receipt: With a conditional receipt the applicant is covered by the insurance company as of the date of the date of the application, providing that the insurance company approves them for insurance 183. Backdating: Sometimes it is possible to lower the premium rate by backdating an application for insurance -If the applicant chooses to do this, the policy may be backdated for no more than 6 months -The only reason that an application may be backdated is to lower premium 184. What would happen if a life insurance applicant is given a conditional receipt from an insurance agent and then dies the next day: The claim will be paid if the application is approved 185. An insurance applicant with a below-average likelihood of loss is typically considered to be a: preferred risks 186. Which of the following is a requirement for any changes in an insurance application: Change must be initialed by the applicant 187. An insurance producer is often responsible for field underwriting during the application process. All of these are possible field underwriting role's except: 188. An insurance producer is often responsible for field underwriting during the application process. All of these are possible field underwriting roles except: Providing commission information to the applicant 189. an application's character and personal habits can be obtained for under- writing purposes from which source?: Investigate consumer report 190. Which of these is likely to occur when life or health insurance is being applied for?: Medical history from the insured may be reviewed and reported 22 / 191. Which of these is considered to be a document that describes the critical segment of a life insurance policy?: Policy summary 192. An individual most likely will have an insurable interest in insuring a person's life if: An economic interest exists for the continuance of the insured's life 193. Preferred risk policies with reduced premiums are issued by insurance companies because the insured has: better than average mortality or morbidity experience 194. Which of the following would be considered n underwriting duty of an agent?: Completing all applications and collecting initial premiums 195. An insurance company needs to obtain personal information from a third party concerning an applicant. Which law do all insurers and their producers need to comply with: Fair Credit Reporting Act 196. Which of the following Describes person who is not acceptable by an insurer at standard rate because of heath history occupational or hobbies: - Substandard risk 197. Field underwriting performed by the producer involves: completing the application and collecting initial premium 198. All of these are considered sources of underwriting in determining weath- er or not to accept a risk EXCEPT: National association of insurance underwriters 199. All of these are typically sources of underwriting information for life or health insurance EXCEPT: Disclosure authorization response 200. An employee under a group insurance policy has the right to name a beneficiary and the right to: convert to an individual policy in the event of employment termination 201. Converting a group plan to permanent life insurance requires: the conver- sion being applied for within 31 days of termination 25 / period 222. disability must meet.: The inability to engage in any gainful work that exists in the national; economy, the disability must result from a medically determinable physical or mental impairment that is expected to result in early death or has lasted or is expected to last for a continuous period of 12 month. 223. available social security benefits: Old Age Benefit and Spouse Benefits. 224. Old age benefits: Provides a lifetime benefit starting at age 65 or a reduced benefit starting at age 62 this benefit is based on the workers averaged earnings during their working years 225. spouse benefits.: Also known as Survivor Benefits allow a spouse and depen- dent children to receive benefits from a deceased worker. 226. How long must an individual be unable to engage in any gainful activity due to physical or mental disability in order to qualify for Social Security Total Disability?: 12 months 227. An insured's status under social security can be described as: fully in- sured 228. The period in which there are no Social Security benefits for the surviving spouse is called the: blackout period 229. How does one qualify as a fully-insured individual under Social Security disability coverage?: Individual has been credited with the appropriate number of quarters of coverage 230. all of the following statements correctly describe the purpose of social security Except: It provides a source of income for a meaningful standard of living during retirement 231. purpose of an annuity: -provides income for a specific number of years or for life. an annuity protects person against outliving their money -annuities are not life insurance, but a way of accumulating money and liquidating an estate 26 / 232. Annuity owner: The "owner" is the person who purchases the contract and has all of the rights such as naming the beneficiary and surrendering the annuity. The owner, however, does not have to be the one who receives the benefits; it could be the annuitant or the beneficiary. 233. Annuitant: The person that buys an annuity; may or may not be an annuity's policyowner. 234. Accumulation period: The pay-in period, period of time over which the annu- itant makes premium payments into the annuity. earn interest on a tax deferred basis. 235. Annuity period: annuitization period, liquidation period, pay-out period; time over which the sum that has been accumulated during the accumulation period is converted into a stream of income Payments to the annuitant. Note: if the annuitant dies during the accumulation period, the beneficiary will receive the cash value or premiums paid whichever is greater 236. Annuity funding: -a single payment (lump sum) periodic payments, in which premiums are paid in installments over a period of time. 237. Immediate annuity: One that is purchased with a single lump sum payment and provides income payments that start within one year from the date of purchase 27 / 238. Deferred annuity: is an annuity in which the income payments begin sometime after one year from the date of purchase. can be funded either with a single lump sum or through periodic payments 239. annuity payout options: Specify how annuity funds are to be paid out. They are very similar to the settlement options used in life insurance and determine how the policy proceeds are distributed to the beneficiaries 240. straight life income option: Known as pure life, will pay a specific amount for the remainder of the annuitant's life. Provides the highest monthly benefit for an individual annuity. They are guaranteed for the lifetime of the annuitant there is not guarantee that all the proceeds will be full fully paid out. Payments will stop after the annuitant's death 241. Life with period certain: Another annuity payout that is contingent on the annuitant dying. Under this option the annuity payments are guaranteed for the entire lifetime of the annuitant and for a specified period of time to the beneficiary. 242. fixed annuities: provide a fixed guaranteed payout payments that do not vary from one payment to another and guaranteed minimum rate of interest 243. Variable Annuities: A variable annuity is a type of annuity contract, the value of which can vary based on the performance of an underlying portfolio of mutual funds. Variable annuities differ from fixed annuities, which provide a specific and guaranteed return. The value of a variable annuity is based on the performance of an underlying portfolio of mutual funds selected by the annuity owner.