Exam 3 FINA 4352

What is the general risk tolerance level of a client who is considering purchase of a variable universal life (VUL) insurance policy? A. Moderate to high B. Low C. Risk averse D. None of these

A The answer moderate-to-high. You should use risk tolerance as a guide in selecting a cash value type policy (whole life, universal, variable, or VUL) for any client.

Which of the following is NOT a characteristic of variable universal life (VUL) insurance? A. The policy must be offered with a prospectus. B. Cash values held in subaccounts are part of the insurance company's general account. C. There are increasing or decreasing death benefits. D. There are flexible premium payments.

B The answer is cash values held in subaccounts are part of the insurance company's general account. VUL insurance policies must be offered with a prospectus because of the subaccount investment options. VUL policies also feature a flexible death benefit along with flexible premiums. However, the cash values inside of the subaccounts are not part of the insurance company's general accoun

Kristen has a personal auto policy, and the liability coverage is displayed as 250/500/100. How much bodily injury liability coverage per accident does Kristen have? A) $750,000 B) $250,000 C) $500,000 D) $100,000

The answer $500,000. When liability coverage is displayed in the format shown, the first number represents the thousands of dollars of bodily injury liability coverage per person. The second number is the amount of coverage in thousands of bodily injury liability coverage per accident. The third number represents the amount in thousands of property damage liability coverage. In this case, Kristen has $250,000 in bodily injury liability coverage per person, $500,000 in bodily injury liability coverage per accident, and $100,000 in property damage coverage per accident. LO 2.3.1

Carolyn was the beneficiary of her spouse's life insurance policy with a face amount of $1,000,000 She elected the single life annuity settlement option. The settlement option will pay her $4,500 per month, and her life expectancy is 30 years. How much of each monthly payment is taxable? A)$0 B)$1,722.15 C)$2,777.85 D)$3,033.95

The answer is $1,722.15. The total amount Carolyn will receive from the settlement option is $1,620,000 ($4,500 × 360). Her tax basis is $1,000,000, so her exclusion ratio is 0.6173 ($1,000,000 ÷ $1,620,000). Therefore, $2,777.85 of each payment is excluded from gross income ($4,500 × 0.6173), and the remainder ($1,722.15) is taxable. In addition, the taxable income may be subject to the 3.8% Medicare contribution tax. LO 3.2.5

Miguel purchased a $100,000 annuity and, based on his life expectancy, the insurance company determines he could anticipate 20 years of payments of $750 per monthly. What part of each monthly payment is taxable? A) $416.67 B) $750.00 C) $333.33 D) $0

The answer is $333.33. Part of each $750 will be taxable, and part will be a nontaxable return of capital. The nontaxable amount is determined as follows: $750×$100,000($750×12×20)=$750×0.5556=$416.67$750×$100,000($750×12×20)=$750×0.5556=$416.67 For each $750 payment, $416.67 will be a nontaxable return of capital and $333.33 will be taxable. LO 3.6.2

Daniele has a universal life insurance policy with the Option B death benefit. The face amount is $500,000, and the current cash value is $225,000. The beneficiary is her son, Richard. If Daniele dies today, what amount will Richard receive as a death benefit?A) $725,000 B) $275,000 C) $500,000 D) $225,000

The answer is $725,000. Under a universal life insurance policy with the Option B death benefit (also known as the increasing death benefit option), the death benefit is the face amount of the policy plus the cash value. Richard will receive $725,000 ($500,000 + $225,000). LO 3.2.3

Stewart owns a home with a replacement cost of $300,000. He purchased $200,000 of property insurance on the house with a $1,000 deductible for all losses. The house caught on fire and sustained $100,000 worth of damage. The actual cash value (ACV) of the damaged portion of the property was $80,000. How much will Stewart receive as reimbursement for the loss? A) $82,333 B) $300,000 C) $200,000 D) $99,000

The answer is $82,333. The insurance company will pay the greater of $80,000 ACV or the coinsurance amount of $82,333, calculated as follows: $200,000 (current coverage amount) divided by $240,000 (required insurance amount) equals 0.8333; 0.8333 multiplied by the $100,000 loss equals $83,333; $83,333 minus the $1,000 deductible equals $82,333. Because the coinsurance amount of $82,333 is greater than the $80,000 ACV, Stewart will receive $82,333 as a partial payment for his $100,000 loss. If Stewart had insured his home for at least $240,000 (80% of $300,000), he would have been fully reimbursed for the loss minus the $1,000 deductible. LO 2.2.1

Donald is married and has two small children. Both he and his spouse are employed outside the home. They spend both incomes, have a mortgaged home, keep credit cards with outstanding balances each month, have little savings, and care for aging parents. Based on Donald's current life risk exposures, which of the following can be addressed with life insurance? Death before debt repayment Death before accomplishing personal goals Death of an income earner Estate tax liability A)I and III B)I and II C)III and IV D)II and IV

The answer is I and III. In this situation, the risks Donald should address are paying off debt and replacing lost income. Given these facts, there is no concern for estate taxes, and personal goals are not something that can be insured against. LO 3.1.1

Antonio is looking for ways to reduce expenses in retirement. He has been paying premiums on a whole life policy. His health is not great, and his life expectancy will be shorter than a normal person his age. Which of the following strategies and reasons would be appropriate for Antonio? A) Antonio could convert his policy to an extended term policy. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go to his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period. B) Antonio could take a reduced paid-up life policy and eliminate future premiums. Since his health is not great, this would give his heirs the maximum inheritance if he died within the next 10 years. C) Antonio could surrender the policy for cash because he could invest the money for his heirs at a better return and still reduce his expenses. D) "Antonio could add an accidental death and disability (AD&D) rider."

The answer is Antonio could convert his policy to an extended term policy. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go this his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period. Because of his shortened life expectancy, taking a cash surrender would provide the least amount of money for his heirs. Utilizing an extended term policy would create the most resources for his heirs.The AD&D rider would do nothing to benefit Antonio. LO 3.5.1

Which of the following perils is ordinarily covered in an open-perils HO-3 policy? Ice damage Lightning Flood Earthquake

The answer is I and II. HO-3 is an open-perils policy, but the general exclusions in all HO policies include earthquake and flood. LO 2.1.1

John has been working for a large medical practice as a family practice physician and recently left to start his own practice. Which of the following should he purchase to protect himself from business-related liability risks? Malpractice insurance Errors and omissions insurance A businessowners policy (BOP) A personal liability umbrella policy (PLUP)

The answer is I and III. As a medical professional, John would need malpractice insurance rather than errors and omissions insurance. A businessowners policy is also necessary, as he will be a businessowner and will have business-related liability risks typical to any other business, such as people falling on the premises. A PLUP specifically excludes business-related liability, as it is a personal policy rather than a business policy. John could probably benefit from a PLUP's protection, but it is not for business-related risks as the question asks. LO 2.4.2

Which of the following statements regarding Coverage E and Coverage F within a standard homeowners insurance policy is CORRECT? Medical payments coverage (Coverage F: Medical Payments to Others) will automatically pay for bodily injuries, regardless of fault, typically up to $1,000 per occurrence on or off the premises. Personal liability coverage (Coverage E: Personal Liability) protects the insured homeowner and all resident family members against personal liability for bodily injury and property damage that may occur on or off the premises due to negligence, up to $300,000 per occurrence. Coverage E may cover the insured for injuries or property damage caused while playing golf.

The answer is I and III. Coverage F is protection that will automatically pay for bodily injuries regardless of fault. In contrast, Coverage E only pays for bodily injury and property damage for which the insured is legally liable. If the insured causes damage to property or others while golfing, Coverage E will cover the insured up to the policy limit of $100,000. Also, Coverage E may cover the insured for injuries or property damage resulting from negligence while on the golf course. LO 2.2.2

Which of the following statements regarding the principles of risk and insurance are CORRECT? Risk is a condition in which there is a possibility of an adverse result from the expected desired outcome. A hazard is the cause of a financial loss and is the actual event for which the individual purchases insurance. A peril is a condition that increases the probability that a financial loss will occur in the future. Pure risk involves only the chance of loss or no loss.

The answer is I and IV. Risk is the condition in which there is a possibility of an adverse result from the expected desired outcome. A peril is the cause of a financial loss, and a hazard is a condition that increases the chance of financial loss. Pure risk is the risk that only involves the chance of loss or no loss. 1.1.LO 1.1.11

For life insurance to be underwritten, an insurable interest must exist when the policy is first issued. when a loss is claimed. A) II only B) Both I and II C) I only D) Neither I nor II

The answer is I only. For a life insurance policy to be underwritten, an insurable interest must exist when the policy is issued. LO LO 1.2.2

Which of the following universal life options pay a level death benefit? Option A Option B

The answer is I only. Option A pays a level death benefit. Option B provides an increasing death benefit, which is the net amount at risk plus the cash value. LO 3.2.3

Which of the following questions regarding policy replacements is CORRECT? Replacing a cash value policy with another cash value policy usually is not advantageous. The new policy will have the same contestable and suicide clause periods as the existing policy.

The answer is I only. Statement II is incorrect. The new policy will have to pass through a contestable period and a suicide clause period, through which the existing policy already may have passed. LO 3.5.2

Personal risk exposures that can be covered by life insurance include premature death before a debt is repaid. premature death before children's education is paid. the spouse without a retirement benefit outliving the spouse who is receiving a straight life annuity pension payout. premature death prior to funding the family's financial goals.

The answer is I, II, III, and IV. All of these are personal risk exposures that can be covered by life insurance. LO 3.1.1

Which of the following are methods of managing risk? Avoidance Retention Reduction Transfer

The answer is I, II, III, and IV. All of these are risk management techniques. Avoidance and reduction are methods of risk control. Retention and transfer are methods of risk financing. LO LO 1.2.1

Which of the following are types of automobile insurance coverage under a personal auto policy (PAP)? Uninsured motorists Liability insurance Medical payments Property damage

The answer is I, II, III, and IV. All of these are types of insurance coverage under a PAP. LO 2.3.1

Which of the following statements regarding malpractice and errors and omissions (E&O) insurance is CORRECT? Malpractice insurance is generally used where the deficient conduct of the insured may result in bodily harm (e.g., a physician, surgeon, or dentist). E&O insurance is coverage that provides protection against deficient acts of a professional who handles money. Malpractice insurance allows the insurance company to settle claims out of court on behalf of the professional. Most financial services professionals, including financial planners, will have E&O insurance at either the individual or group level.

The answer is I, II, III, and IV. All of these statements are correct. LO 2.4.2

Ken owns a hardware store that fills customers' propane tanks. You are Ken's insurance agent and are attempting to explain insurance terms to Ken. Which of the following statements is CORRECT? Fire is a peril. Leaving oily rags in a hardware store's repair shop area is a hazard. The handling of propane is a hazard. A pure risk is one that involves only the chance of loss or no loss; in other words, there is no chance of gain.

The answer is I, II, III, and IV. All of these statements are correct. LO LO 1.1.1

Which of the following statements regarding insurance contracts are CORRECT? Insurance contracts are generally contracts of indemnity, meaning that the policyowner will be reimbursed by the insurer only up to the actual loss amount without the opportunity for profit. Insurance contracts are contracts of utmost good faith, meaning that both parties must disclose all facts truthfully, or the contract may be reformed or rescinded. Insurance contracts are unilateral contracts, in that all parties to the contract are legally bound to perform. Insurance contracts are aleatory contracts, meaning that the outcome is affected by chance, and the dollars collected by the parties are usually unequal

The answer is I, II, and IV. Insurance contracts are unilateral contracts, in that only one party to the contract is legally bound to perform. LO LO 1.5.1

Which of the following statements regarding different types of annuities is CORRECT? The owner of a variable annuity contract directs the investment of the contract's cash value among subaccounts and bears the investment risk. The variable annuity prospectus contains all of the variable annuity's investment choices as well as the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice. A bonus annuity may offer a bonus in the form of a credit that may be added to the initial premium (investment). An equity-indexed annuity (EIA) is a specialized type of annuity whereby the insurance company credits the contract owner with a return that is based on changes in an equity index, such as the Standard & Poor's 500 Index.

The answer is I, II, III, and IV. In a variable annuity, the owner of the contract directs the investment of the contract's cash value among subaccounts and bears the investment risk. Any financial planner who solicits or presents a variable annuity to a client should read and understand the variable annuity prospectus. The prospectus contains, but is not limited to, all of the variable annuity's investment choices as well as the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice. Any type of annuity that offers a credit based on a percentage of the premium paid is considered a bonus annuity. EIAs combine the features of traditional insurance products (e.g., guaranteed minimum return) with those of a security (e.g., returns linked to equity markets).

Which of the following are exclusions that apply to all of the standard homeowners forms? War or nuclear hazard Earthquake Flood Power failure

The answer is I, II, III, and IV. Other exclusions that apply to all of the standard homeowners forms include neglect and intentional loss. LO 2.1.1

Which of the following characteristics of life insurance contracts create favorable tax treatment? Death benefits paid to a beneficiary are not usually taxable as income. Income taxes on investment gains are tax-deferred. The earnings on the cash value are not taxed during the accumulation period.

The answer is I, II, and III. All of these are income tax characteristics of a life insurance policy. Generally, such a policy is accorded favorable tax treatment under law. LO 3.2.5

Josie has had an exciting year. She passed her CPA exam, joined a small accounting firm as a public accountant, purchased her first car, and bought a townhome. Which of the following types of insurance should she have at this point? Automobile insurance Errors and omissions insurance Homeowners insurance Malpractice insurance

The answer is I, II, and III. Josie must insure her car and home, as well as protect herself from any errors or omissions she may make as a CPA. Option IV is incorrect because malpractice insurance is necessary only where there is a possibility of bodily harm. Physicians, dentists, and chiropractors purchase malpractice insurance. LO LO 1.2.2

Limited-pay whole life insurance policies require the owner to pay premiums for a shorter period than traditional whole life insurance policies. provide lifetime coverage. have cash value accumulation. require premiums to be paid for the entire life of the insured.

The answer is I, II, and III. Limited-pay whole life policies only require the premiums to be paid for a specific period. LO 3.2.2

Under a Section 1035 exchange, which of the following policies may be exchanged on a tax-free basis? An endowment policy exchanged for another endowment policy, in which the beginning date for regular payments is no later than the original contract qualified long-term care contract, or annuity contract One annuity contract exchanged for another annuity contract A life insurance policy exchanged for another life insurance policy(on the same insured), annuity, or endowment contract An annuity contract exchanged for a life insurance policy

The answer is I, II, and III. Statement IV is not an eligible tax-free exchange under Section 1035. A taxable event occurs if an annuity is exchanged for a life insurance policy or endowment contract. LO 3.5.2

Which of the following statements regarding variable universal life insurance is CORRECT? This policy contains investment options and no minimum guaranteed rate of return. Planners must have state variable insurance and securities licenses to sell variable universal life insurance. Cash values can decline to zero, causing the policy to lapse unless additional premium payments are made. Variable universal life insurance policies are suited for individuals with lower risk tolerances and investment experience.

The answer is I, II, and III. Variable universal life insurance policies are suited for individuals with higher, not lower, risk tolerances and investment experience. LO 3.2.5

Which of the following policy sections do homeowners and auto policies share? Liability coverage Comprehensive coverage Medical payments coverage Duties after a loss

The answer is I, III, and IV. All of these sections are included in both homeowners and auto policies, except comprehensive coverage, which is only a part of a personal auto policy. LO 2.3.1

The personal liability umbrella policy (PLUP) is structured to provide a catastrophic layer of liability coverage, in addition to the current homeowners and automobile liability coverage. Which of the following are exclusions found in a PLUP? Any act committed with the intent to cause bodily injury to another Liability arising out of any personal activity Directors and officers liability Workers' compensation obligations

The answer is I, III, and IV. One of the more important exclusions found in a PLUP is liability arising out of any business activities. LO 2.2.2

Comprehensive personal liability coverage (CPL) can be acquired in which of the following ways? as an endorsement to a personal auto policy (PAP). as an individual CPL policy. as part of a homeowners policy.

The answer is II and III. CPL coverage is not available through PAPs. LO 2.2.2

Which of the following is important when selecting an insurance producer? Length of service with the company Professional designations earned Inclination to service Production awards earned

The answer is II and III. Options II and III, along with competence, experience, specialization, and a good reputation, are important when selecting an insurance producer. The production awards earned are an indication of sales ability but not necessarily what should be sought in an insurance producer. The length of time with a single insurance company may indicate nothing more than the ability to keep one's job. Experience, which should be sought in an insurance producer, is intentionally developed expertise. LO LO 1.8.1

Which of the following characteristics of inland marine coverage are explained correctly? Personal property floater risks are not eligible for coverage under inland marine policies. Many of the same items may be covered under an inland marine policy or as an endorsement to a homeowners policy. If a fishing boat is too large to be covered under a homeowners policy, it can be covered under an inland marine form called a boatowners policy. Silverware and golfing equipment may be covered under an inland marine policy.

The answer is II and IV. Option I is incorrect because most coverages available to an individual as separate inland marine policies are also available as endorsements to a homeowners policy. Option III is incorrect because a boatowners policy is not an inland marine policy. LO 2.2.1

Which of the following is a common property coverage that can be included in a commercial package policy? A) Boiler and machinery B) Workers' compensation C) Commercial liability D) General liability

The answer is boiler and machinery. Coverage for boiler and machinery is a property coverage, while the other answer choices provide liability coverage. LO 2.4.1

Reginald is the beneficiary of his father's life insurance policy. The face amount of the policy is $250,000, and Reginald selects the single life annuity settlement option. His life expectancy is 20 years. Assuming Reginald lives for only 12 years after payments begin, which of the following statements regarding payments to him under this settlement option is CORRECT? Payments will continue to Reginald's designee for an additional eight years. A portion of each payment Reginald receives is includible in his gross income. Any unrecovered tax basis in the settlement option that remained at Reginald's death is deductible on his final income tax return.

The answer is II only. Under the single life annuity settlement option, the annuity payments stop when the beneficiary dies. Each payment includes a taxable interest component and a nontaxable principal component. A beneficiary of an annuity from a life insurance settlement option who dies before his life expectancy cannot deduct any unrecovered basis. LO 3.3.1

Which of the following limits an insurer's liability for covered losses? Misrepresentations by an agent acting within the agent's authority An insurable interest by the insured Other insurance coverage The actual cash value of a loss

The answer is II, III, and IV. Options II, III, and IV are factors limiting an insurer's liability for covered losses, but I is not. An insurer is bound by an agent's misrepresentations while acting within the scope of the agent's authority. LO LO 1.3.1

Claire, 49, owns a life insurance policy. Her basis in the policy is $50,000, and the cash value is $75,000. The policy is not a modified endowment contract. Claire is dissatisfied with the policy and is interested in surrendering it or exchanging it for another financial product, but she does not want to incur an income tax liability. Which of the following transactions would allow Claire to accomplish her goal? Surrender the policy for $75,000 in cash and purchase another policy Exchange the policy for another life insurance policy Exchange the policy for a variable annuity Exchange the policy for a qualified long-term care insurance policy A)II only B)II, III, and IV C)II and III D)I and III

The answer is II, III, and IV. Statements II, III, and IV describe transactions that can be accomplished under Section 1035 of the Internal Revenue Code without recognizing any gain or loss. Statement I (surrendering the policy for cash and purchasing another policy) would result in taxable income of $25,000. LO 3.5.2

Which of the following are important when selecting an insurance company? Competence Training Ratings by the ratings companies History

The answer is III and IV. Options III and IV, along with the NAIC Watchlist, the size and age of the company, operating ratios, persistency, average policy size, lines of business, investment returns, and direct recognition, are all things one should look at when evaluating an insurance company. Competence and training are important when evaluating insurance producers, not companies. LO LO 1.8.1

Which of the following about a businessowners policy (BOP) is true? A BOP includes liability coverage only. There are six parts to a BOP. BOPs are a specific, standard package of coverage. BOPs can be customized to a specific business.

The answer is IV only. A BOP includes both property and liability coverage and consists of four parts: common policy conditions, property coverage, causes of loss and exclusions, and liability coverage. BOPs are quite customizable so that the coverage a business needs can be added to the basic framework of the policy. LO 2.4.1

Which of the following is an example of a moral hazard? A) A driver slams on her brakes for no reason other than to cause the driver behind her to rear-end her car. B) A car is damaged by a hailstorm. C) A homeowner carelessly burns leaves on a windy day, resulting in fire damage to his house. D) A person falls and breaks her hip.

The answer is a driver slams on her brakes for no reason other than to cause the driver behind her to read-end her car. A moral hazard occurs when dishonesty causes a loss or causes the amount of the loss to be overstated on a claim. Intentionally causing a loss is an example of a moral hazard. LO LO 1.7.1

Which of the following is true for property coverage in a commercial package policy (CPP)? A CPP provides broader coverage but is a bit more expensive than a collection of monoline forms. No customization is allowed, as all potential risks are covered in the standard CPP. The standard CPP includes building, contents, and commercial automobile coverage. The CPP is designed for larger businesses.

The answer is IV only. A CPP is a standard package of what used to be monoline forms offered at a discount. The standard CPP includes coverage for buildings, contents, and liability coverage. Additional coverage is available for things like commercial autos, glass, and specific, unique-to-the-business causes of loss. Thus, a CPP is customizable so it can accommodate many different businesses. The CPP is designed for larger businesses, while the business owner policy is designed for smaller businesses. LO 2.4.1

A client is in the process of purchasing a universal life insurance policy. The client desires an increasing death benefit. Which of the following universal life death benefit options will meet the client's needs? A)None of these B)Option B C)Option A D) Option C

The answer is Option B. Option B provides an increasing death benefit. LO 3.2.3

Which of the following definitions describes an accelerated death benefit rider found in insurance policies? A) A benefit under long-term care insurance that provides reimbursement for occasional full-time care at home for a person who is receiving home health care B) A provision for the replacement of lost earnings due to less-than-total disability C) A benefit rider that pays a portion of the death benefit to an individual deemed terminally ill, usually with a life expectancy of 24 months or less D) A benefit under a long-term care insurance policy that continues to pay a long-term care facility for a limited time if a patient must temporarily leave because of hospitalization

The answer is a benefit rider that pays a portion of the death benefit to an individual deemed terminally ill, usually with a life expectancy of 24 month or less. If the accelerated death benefit rider is included in an existing policy, it serves as a source of funds for either a terminally or chronically ill insured. This rider typically provides that, if an individual is terminally ill, usually with a life expectancy of 24 months or less, the insurance company will pay out a portion of the death benefit. The most common amount paid is 50% of the face amount. The other 50% is paid out as an income tax-free death benefit to the insured's named beneficiary. LO 3.3.3

Which of the following statements best describes a morale hazard? A) An act or condition that increases the likelihood of the occurrence of a peril and/or increases the severity of a loss if a peril does occur B) A false and material statement made by an applicant for insurance, providing a basis for the insurer to void the contract C) A condition of carelessness or indifference on the part of an individual as to whether a loss occurs and/or the size of a loss if one does occur D) An unintentional tort in the form of an action or omission that leads to the injury of another party

The answer is a condition of carelessness or indifference on the part of an individual as to whether a loss occurs and/or the size of a loss if one does occur. A morale hazard is a condition of carelessness or indifference as to whether a loss occurs and/or the size of a loss if one does occur. A homeowner's failure to lock the house doors at night is considered a morale hazard because it increases the probability of theft or loss. LO LO 1.1.1

Because clients can only accept or reject an insurance contract and cannot modify its terms, the contract is said to be A) an aleatory contract. B) a contract of adhesion. C) a contract of utmost good faith. D) a contract of indemnity.

The answer is a contract of adhesion. A contract of adhesion is a contract that a potential client can only accept or reject—not modify its terms or provisions. LO LO 1.6.1

All of the following statements concerning categories of annuities are correct except A) a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase. B) a straight life annuity provides periodic (usually monthly) income payments that continue as long as the annuitant lives and terminates at the annuitant's death. C) a joint-and-last-survivor annuity provides income that ceases only upon the last death among the covered lives. D) an annuity may be paid periodically in a fixed amount for a period determined by the insurer.

The answer is a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase. A single premium immediate annuity is one in which the first benefit payment is made one payment interval after the date of purchase. LO 3.6.1

A periodic annuity payment that is guaranteed to pay a set amount is a feature of A) a deferred annuity. B) a variable annuity. C) a fixed annuity. D) a deferred variable annuity.

The answer is a fixed annuity. To guarantee fixed payments to the annuitant, the insurer invests the premiums during the accumulation period in bonds, mortgages, and other fixed-income securities with a guaranteed return. LO 3.6.2

A life insurance contract with low fixed premiums during the first three to five years and higher fixed premiums for the remainder of the policy period is called A) an increasing term policy. B) a modified premium whole life policy. C) a limited-pay whole life policy. D) a variable life policy.

The answer is a modified premium whole life policy. Modified premium whole life policies are designed for individuals, such as young professionals, who want permanent life insurance but are not yet able to afford the higher premiums of traditional whole life insurance. The increase to an ultimately higher premium should match an anticipated increase in the policyowner's income. LO 3.2.2

Which of the following is an insurance producer who has the authority to hire agents to work for them? A) A producing general agent B) A career agent C) A captive agent D) A broke

The answer is a producing general agent. Producing general agents may, but do not have to, hire agents to work for them. The other options represent individual producers. LO LO 1.3.1

Which of the following definitions best defines insurable interest? A) A right or relationship with regard to the subject matter of an insurance contract, such that the insured will suffer financial loss from damage, loss, or destruction to that subject matter B) Any right to the economic benefits of a piece of property, such as a life insurance policy C) The increase in the cash value or investment fund of a permanent life insurance policy D) The process of determining when, how much, and where to insure risks

The answer is a right or relationship with regard to the subject matter of an insurance contract, such that the insured will suffer financial loss from damage, loss, or destruction to that subject matter. An insurable interest is a right or relationship with regard to the subject matter of an insurance contract, such that the insured will suffer financial loss from damage, loss, or destruction to that subject matter. LO LO 1.5.1

In settling an insured's loss, the duties of the insured do NOT include which of the following? A) Providing notice of loss B) Accepting any settlement offered by the insurer C) Protecting property D) Providing proof of loss

The answer is accepting any settlement offered by the insurer. The insured is not obligated to accept any settlement offered by the insurer. The duties of the insured include providing notice of loss, protecting property, and providing proof of loss. LO LO 1.7.1

The replacement cost of personal property minus depreciation is the property's A) appraised value. B) coinsurance value. C) actual cash value. D) amortized value.

The answer is actual cash value. This value is the personal property's replacement cost less depreciation. LO 2.1.1

If Mega Insurance Company has an A+ Superior rating with A.M. Best Company, what should a planner tell his client about the rating? A) An evaluation of the financial strength of an insurance company is best obtained by consulting more than one rating service. B) This rating means the company is safe, and the client will never lose money. C) AAA+ is the highest rating given by A.M. Best. D) This rating is the highest rating given by any rating service.

The answer is an evaluation of the financial strength of an insurance company is best obtained by consulting more than one rating service. The highest rating awarded by A.M. Best is A++. A rating service focuses on the financial condition of the insurance company (loss reserves and surpluses) and the reliability of its claims-paying ability. The rating assigned to an insurance company may vary, depending on the rating service. A financial planner should advise clients to purchase products from companies that are in the highest rating tiers of each rating service. LO LO 1.8.1

Which of the following professionals would likely need errors and omissions insurance? A) A physician's assistant B) A certified nursing assistant C) An orthopedic surgeon D) An insurance agen

The answer is an insurance agent. Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys). LO 2.4.2

Which of the following professionals would likely need malpractice insurance? A) An accountant B) A financial advisor C) An attorney D) An oncologist

The answer is an oncologist. Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys). LO 2.4.2

The state insurance department, headed by the state insurance Commissioner: administers compliance. sets regulations implementing legislation.

The answer is both I and II. As part of the executive branch of government, the insurance commissioner is responsible for enforcing laws pertaining to the insurance industry in his state. As such, both options are correct. LO LO 1.4.1

Which of the following is a life insurance dividend option? A) Joint income B) Cash surrender C) Cash D) Extended term

The answer is cash. Taking the dividend in the form of cash (the insurance company mails a check) is a dividend option. Cash surrender and extended term are nonforfeiture options. Joint income is a settlement option. LO 3.3.2

Which defense against liability reduces the defendant's proportion of liability based upon the injured party's contribution to the total negligence that causes injury? A) Assumption of risk B) Contributory negligence C) Comparative negligence D) The last clear chance rule

The answer is comparative negligence. This is an alternative to the contributory negligence defense. Comparative negligence reduces the defendant's liability in some proportion based upon the injured party's contribution to the total negligence that causes the injury. If the jury determines that the injured party was 20% to blame for the injury, the plaintiff's award might be reduced by 20%. LO LO 1.7.1

An insurance contract requires an exchange of value to be considered a legally binding document. What is the term used to describe this requirement? A) Consideration B) Legal capacity C) Legal form D) Legal object

The answer is consideration. Consideration occurs when there is an exchange of value. The insurance contract requires an exchange of value to be legally binding. For most insurance, the promise to pay the premium is usually sufficient consideration to make the contract binding; however, for life insurance, the premium must be paid before the insurance contract is binding for the insurer. The submission of a completed insurance application (offer) plus the payment of the first premium (consideration) to the insurance company will generally create a binding contract if the application would pass standard underwriting requirements. LO LO 1.6.1

Inland marine insurance for business A) is designed to cover personal autos. B) includes the liability of the property owner. C) is designed primarily to cover personal watercraft. D) covers domestic goods in transit.

The answer is covers domestic goods in transit. Inland marine is often part of a commercial package policy. LO 2.4.1

Which of the following insurance policy riders prevents the policy from lapsing as a result of nonpayment of premiums during the insured's disability? A) Accidental death benefit rider B) Accelerated death benefit rider C) Guaranteed insurability option D) Disability waiver of premium

The answer is disability waiver of premium. In most cases, the disability waiver of premium rider requires total disability (as defined in the policy) before the rider is triggered. The guaranteed insurability rider allows the insured to purchase additional insurance, regardless of insurability, at specified intervals up to a specified maximum age. LO 3.3.3

Which of the following is NOT a method of handling risk? A) Reduction B) Elimination C) Retention D) Transfer

The answer is elimination. The four methods of managing risk are avoidance, retention, reduction, and transfer. LO LO 1.2.2

Which of the following statements regarding the basis for policy premiums on a personal automobile policy (PAP) is NOT correct? A) An automobile that is driven only for pleasure costs less to insure than one that is driven to work daily. B) Young male drivers have the highest rate of automobile accidents. C) A multicar discount is generally available for insureds who own more than one automobile. D) Farm-use vehicles generally have higher premiums.

The answer is farm-use vehicles generally have higher premiums. Farm-use vehicles generally have reduced premiums. LO 2.3.1

Which of the following life insurance policies is commonly used in business continuation agreements? A) Endowment life B) Adjustable life C) Second-to-die life D) First-to-die life

The answer is first-to-die life. First-to-die life policies are commonly used in business continuation agreements. Second-to-die life policies are typically used to pay any federal estate tax obligation. LO 3.2.4

Which of the following is the period during which the owner of a life insurance policy is allowed to pay an overdue premium? A) Waiver of premium period B) Reinstatement period C) Grace period D) Contestable period

The answer is grace period. The insurance remains in force during the grace period. The grace period prevents the policy from lapsing by providing the policyowner with additional time to pay an overdue premium. If the insured dies within the grace period, the company deducts the overdue premium from the death benefit payable to the beneficiary. LO 3.3.1

Your clients have a penthouse in New York where they spend several months per year, as well as a home in Virginia where they typically spend the winter. They regularly have their butler move their favorite art and collectibles between houses. In addition, they frequently travel for business overseas. Part of the business includes entertaining international guests and hosting formal events and yacht parties. The wife carries her expensive jewelry when they travel. While at hotels, they keep the jewelry in the hotel safe. Which combination of coverages should they consider that would best meet their needs? A) Homeowners coverage on both homes, watercraft coverage, an inland marine policy, and a large umbrella policy, at a minimum B) Homeowners and an umbrella policy with a personal property rider to protect their jewelry C) An inland marine policy to protect the yacht and homeowners coverage for both homes, with high personal property limits to protect their property D) Homeowners on both homes and a large umbrella policy

The answer is homeowners coverage on both homes, watercraft coverage, an inland marine policy, and a large umbrella policy, at a minimum. Based on business activities and where they travel, other insurance they could consider is business liability, personal liability coverage, kidnap insurance, and a host of other types of coverages. Many wealthy clients carry special medical insurance that ensures they will be taken to a high-quality hospital and accompanied by doctors from such prestigious medical facilities as the Cleveland Clinic. Having a butler also indicates a need for specific coverage. Working with an agent who is familiar with supporting high net worth clients would be critical. LO 2.2.1

In calculating life insurance needs, which of the following can be defined as the present value of the family's share of the decedent breadwinner's future earnings? A) Human life value B) Portfolio value C) Net present value D) Conversion value

The answer is human life value. Human life value is the family's share of the earnings of the breadwinner. The projected value of the decedent breadwinner's future earnings is discounted to its present value to determine the human life value. LO 3.4.1

All of the following are steps in the risk management process except A) monitoring the plan for any changes and/or updates. B) analyzing and evaluating the information to identify risk exposures facing the client. C) identifying the insurance required to cover every risk. D) identifying risk management goals.

The answer is identifying the insurance required to cover every risk. While insurance is certainly an option for handling risk, it is not and should not be the only option utilized to cover every risk. LO LO 1.2.1

Umbrella policies cover liability and are generally in addition to homeowners and auto coverage. Which one of the following statements about umbrella policies is CORRECT? A) If an item such as watercraft is not covered by an underlying policy, it may not be covered under the umbrella for liability issues. B) Comprehensive liability is broader than umbrella policies. C) Policies will cover injuries to family members intentionally committed by a welcome guest while in the residence if there is a basic homeowners policy. D) The umbrella policy covers the claims first, and if there are excess claims, the underlying homeowners or auto insurance will cover the balance.

The answer is if an item such as watercraft is not covered by an underlying policy, it may not be covered under the umbrella for liability issues. People who think, "The fishing boat is worth just $1,200, so I won't cover it" are forgetting that liability could exceed $1 million. LO 2.2.2

The final expenses of an estate include all of the following except A) the decedent's investments. B) burial expenses. C) the decedent's outstanding debts. D) expenses of last illness.

The answer is the decedent's investments. The decedent's investments would be considered assets, not expenses. Though disposition of these assets could possibly incur some expense, the assets themselves are not expenses. LO 3.1.1

Once you have constructed a risk management plan for the client, what is the next step in the risk management process? A) Identifying risk management goals B) Implementing the recommendations C) Gathering pertinent data to determine risk exposure D) Monitoring the plan for any changes and/or updates

The answer is implementing the recommendations. The steps in the risk management process are to 1) identify and establish risk management goals, 2) gather pertinent data to determine risk exposures, 3) analyze and evaluate the information to identify risk exposures facing the client, 4) construct a risk management plan, 5) implement the recommendations, and 6) monitor the recommendations for needed changes. LO LO 1.2.1

Which of the following is NOT a characteristic of term life insurance? A)Most term life insurance policies permit the insured to renew the policy each year without having to provide evidence of insurability. B)Coverage is usually affordable (especially at younger ages). C)In a decreasing term policy, the amount of the death benefit decreases while the premium remains level. D)Interest is accumulated on the cash value.

The answer is interest is accumulated on the cash value. Term life insurance does not have a cash value. LO 3.2.1

All of the following are exclusions from Coverage C: Personal Property of a Homeowners Policy except A) jewelry. B) credit cards. C) property of roomers or boarders. D) animals, birds, and fish.

The answer is jewelry. Jewelry is covered under Coverage C; however, coverage is typically limited to a maximum dollar amount of $1,500. The addition of an endorsement can increase the coverage limit for jewelry and other personal property items. LO 2.1.1

Samantha has a homeowners policy. Her dog bites the mailman, and he incurs emergency room expenses of $600. What is the consequence of this event? A) Medical payments coverage is applicable, and liability coverage is applicable if Samantha is held legally liable. B) Samantha needed a personal liability umbrella policy for coverage of this type of risk. C) Only medical payments coverage applies, not liability coverage. D) There is no coverage under this policy because pets are excluded.

The answer is medical payments coverage is applicable, and liability coverage is applicable if Samantha is held legally liable. Section II of a homeowners policy applies regardless of whether the insured is legally liable. Personal liability coverage applies if the insured is legally liable. LO 2.2.2

Barbara left her car parked on top of a hill while visiting at a friend's house. Unfortunately, she forgot to apply her emergency brake, and her car rolled down the hill, injuring two children who were playing. Which of the following doctrines may influence Barbara's liability in this situation? A) Attractive nuisance B) Strict liability C) Assumption of risk D) Negligence

The answer is negligence. The doctrine of attractive nuisance is exemplified by a homeowner not fencing in a below-ground swimming pool and then children drowning in the pool. Barbara, by failing to apply her emergency brake at the top of a hill, was negligent. LO LO 1.6.1

Which of the following statements regarding the reinstatement clause in a life insurance policy is true? A) The owner can reinstate a lapsed policy without repaying missed premiums. B) No insurance coverage will have been in place from the date of the lapse to the date all reinstatement requirements are submitted. C) Proof of insurability is never required prior to reinstatement. D) Policy loans are forgiven due to the lapse.

The answer is no insurance coverage will have been in place from the date of the lapse to the date all reinstatement requirements are submitted. Assuming reinstatement is granted, no coverage is available during the lapsed period. LO 3.3.1

The personal auto policy (PAP) provides coverage under the liability section for A) the owner of an auto being used by the named insured and not owned by the named insured. B) pleasure use of nonowned motorcycles by the named insured. C) nonresidents operating the owned auto with permission. D) any four-wheeled, off-road, sport all-terrain vehicle

The answer is nonresidents operating the owned auto with permission. Any individual operating an insured's automobile with the insured's permission is covered under a PAP. LO 2.3.1

Dawn, 55, recently received a lump sum settlement of $100,000 from a civil suit she filed against a drunk driver. She wants to invest the $100,000 in an annuity that will begin making monthly payments to her when she retires at age 65. She does not expect to make any additional premium payments to the annuity. Dawn has a high risk tolerance and wants to be able to invest her premium in subaccounts of her own choosing. She is not interested in receiving a guaranteed minimum return on her investment. Which of the following annuities best meets Dawn's needs?

The answer is single premium deferred variable annuity. Because Dawn expects to make only one premium payment and wants income payments to begin in the future, a single premium deferred annuity best meets her needs. She needs a variable annuity because neither a fixed annuity nor an equity-indexed annuity will allow her to invest in subaccounts. LO 3.6.1

Which of the following statements regarding malpractice insurance is CORRECT? A) Only a limited number of companies issue professional liability insurance policies. B) Professional liability insurance is a good alternative to an umbrella liability policy. C) Malpractice insurance policies exclude intentional acts of the professional from coverage. D) There is generally one standard form that is used for most professionals who need errors and omissions insurance.

The answer is only a limited number of companies issue professional liability insurance policies. Relatively few companies sell this product due to its highly specialized nature. The act for which a physician or dentist might be sued might well be the exact act the provider intended. The result may not be what the patient wanted, leading to a lawsuit. Thus, intentional acts are not excluded from malpractice insurance. There are generally different forms used for each type of professional under all forms of professional liability insurance. An umbrella policy may extend the limits of an underlying professional liability policy, but professional liability insurance does not replace an umbrella policy. LO 2.4.

Which of the following dividend options allows for acquiring additional insurance with no underwriting? A) Paid-up additions B) Cash C) Reduced premium D) Accumulate at interest

The answer is paid-up additions. With the paid-up additions dividend option, a small amount of permanent insurance with a cash value equal to the dividend is purchased with no underwriting required. The paid-up additions and one-year term dividend options both allow the policyowner to acquire more death benefit at no additional cost, other than using the dividend instead of taking it as cash. LO 3.3.2

Which of the following is the role of the legislative branch in regulating the insurance industry within a state? A) Interpreting and applying the laws in place relative to the insurance industry B) Creating model legislation relative to the insurance industry C) Passing laws relative to the insurance industry D) Enforcing the laws in place relative to the insurance industry

The answer is passing laws relative to the insurance industry. The legislative branch votes on and passes laws relative to the insurance industry. These laws are enforced by the executive branch, and disputes concerning the interpretation or application of the law is handled by the judicial branch. The National Association of Insurance Commissioners provides model legislation that may or may not be enacted by the several states. LO LO 1.4.1

Edith plans to purchase a permanent life insurance policy rather than buying term and investing the difference. Which of the following does NOT support her decision? A) Most people are not inclined to save. Receiving a bill from an insurance company may result in a savings program that would otherwise not be funded. B) Permanent insurance policies have more variable investment choices available to them than are available in noninsurance investment vehicles. C) The tax treatment of a life insurance contract generally is more favorable than investing in nondeferred vehicles. D) The perceived difficulty of getting at money in a permanent contract often discourages individuals from doing so, thereby encouraging policy continuation.

The answer is permanent insurance policies have more variable investment choices available to them than are available in noninsurance investment vehicles. There is a greater variety of investment possibilities outside of insurance policies than in them. LO 3.5.1

A homeowners insurance policy can be endorsed with an HO-15 to A) provide flood insurance. B) absorb the deductible. C) cover the homeowner's automobiles. D) provide open-peril coverage for personal property owned, used, or worn by the insured.

The answer is provide open-peril coverage for personal property owned, used, or worn by the insured. The HO-15 provides open-peril coverage for personal property owned, used, or worn by the insured. LO 2.2.1

If a client wishes to be rewarded with lower life insurance premiums for maintaining good health, which of the following types of life insurance policies would be most appropriate? A)Convertible term B)Whole life C)Decreasing term D)Reentry term

The answer is reentry term. Reentry term is a policy under which the insurance company may renew coverage at a lower premium rate than the guaranteed renewal rate, provided that, at the time of renewal, the insured furnishes satisfactory evidence of continued insurability. A reentry term policy, therefore, rewards individuals who remain in good health as they continue to age while maintaining insurance coverage for other insureds who no longer qualify for lower rates. LO 3.2.1

Which of the following is a disadvantage of a firm self-insuring? A) Self-insurance eliminates selling costs. B) Self-insurance reduces costs by eliminating or reducing insurance company profit. C) Self-insurance avoids state premium taxes. D) Self-insurance raises the possibility that the business will have to pay higher income taxes.

The answer is self-insurance raises the possibility that the business will have to pay higher income taxes. Premiums paid to an insurer are tax-deductible, whereas monies paid into a self-insurance fund are not. Only the costs of losses actually incurred are tax-deductible, making this a disadvantage of self-insuring. LO LO 1.2.1

Which of the following statements regarding participating and nonparticipating life insurance is CORRECT? A)Stock companies are owned by the stockholders and usually offer nonparticipating policies. B)Nonparticipating life insurance is a policy in which dividends are paid only on the excess of premium. C)Mutual companies are owned by their stockholders and usually offer nonparticipating policies. D)Participating life insurance is a policy in which no annual dividends are paid to the policyowners.

The answer is stock companies are owned by the stockholders and usually offer nonparticipating policies. Dividends are not paid on nonparticipating life insurance policies. Mutual companies are owned by their policyholders and may offer participating policies. LO 3.2.2

All of the following statements concerning the methods of providing life insurance protection are correct except A) an insurance company can use two approaches to provide life insurance protection: term life insurance, which is temporary, or whole life insurance, which is permanent protection that builds up a cash reserve or savings component. B) term life insurance is a good choice for people who need permanent life insurance protection. C) term life insurance is a form of life insurance in which the death proceeds are payable if the insured dies during a specified period and nothing is paid if the insured survives to the end of that period. D) because death rates rise at an increasing rate as the insured ages, the net premium for term life insurance also rises at an increasing rate.

The answer is term life insurance is a good choice for people who need permanent life insurance protection. Term life insurance may not be appropriate for meeting a permanent life insurance need because the protection expires at the end of the term. LO 3.2.1

Which of the following HO policy forms provides the highest level of building and personal property coverage? A) HO-3 B) HO-2 C) HO-5 D) HO-15

The answer is the HO-5. The HO-5 policy form provides open-perils coverage on buildings and personal property. The HO-2 policy form only provides broad form coverage on buildings and personal property. The HO-3 policy form provides open form coverage on buildings and broad form coverage on personal property. The HO-15 is technically an endorsement and not a form, and provides open-peril coverage to personal property. A combination of the HO-3 form and the HO-15 personal property endorsement is the equivalent of the HO-5. LO 2.1.1

Which of the following gave states the authority to regulate the insurance industry? A) The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) B) The National Association of Insurance Commissioners (NAIC) C) The McCarran-Ferguson Act of 1945 D) The state insurance commissioners

The answer is the McCarran-Ferguson Act of 1945. Under the McCarran-Ferguson Act of 1945, insurance is regulated primarily at the state level. The NAIC issues model insurance legislation that individual states are free to adopt if they choose, but the NAIC has no legislative authority in any state. COBRA requires certain employers to provide previously covered individuals (including spouses and dependents) with the same health insurance coverage they received while employed after the occurrence of a qualifying event. LO LO 1.4.1

All of the following are characteristics of a principal-agent relationship except A) the agent has a duty of loyalty to the principal. B) the agent acts on behalf of the principal in engaging in business transactions. C) the agent may bind the principal in a contract with a third person. D) the agent typically has little or no independent discretion.

The answer is the agent typically has little or no independent discretion. Unlike an employee, an agent generally has a fair degree of independent discretion. An agent acts on behalf of a principal in engaging in business transactions and may bind the principal to contracts with third persons. An agent has a duty of loyalty to the principal. LO LO 1.3.1

What is adverse selection? A) Choosing an insurance company that is in poor financial shape B) The concept that a broker represents insureds, while agents represent insurance companies C) The concept that people who expect to have claims will want insurance more than people who expect to have few or no claims D) Choosing an insurance agent who does not properly service her clients

The answer is the concept that people who expect to have claims will want insurance more than people who expect to have few or no claims. Adverse selection is the concept that those who are more likely to have claims will want insurance more than someone who may have few, if any, claims. For example, a person who believes he is very likely to develop Alzheimer's disease is more likely to want long-term care insurance than someone who has no such expectation. Insurance companies want to limit the number of high-risk candidates so the pool of insureds is more representative of the population as a whole. LO LO 1.7.1

Which section of an insurance contract includes information provided by the applicant? A) The exclusions section B) The conditions section C) The declarations section D) The insuring agreement

The answer is the declarations section. The declarations section includes information provided by the applicant, and it may be transcribed from the application, or the application itself may be attached. The insuring agreement identifies what is insured, for what amount, and under what conditions. The exclusions section identifies circumstances or situations that would preclude the company from paying a claim. The conditions section states the rights and duties of the insurance company and the policy owner. LO LO 1.5.1

What is the stated amount of money the insured is required to pay on a loss before the insurer will make any payments under the policy? A) The rider B) The exclusion C) The deductible D) The endorsement

The answer is the deductible. A deductible is a stated amount of money the insured is required to pay on a loss before the insurer will make any payments under the policy. Deductibles help eliminate small claims, reduce premiums, and decrease morale hazards. Deductibles are used mainly in property, health, and automobile insurance contracts. Disability policies use an elimination period, which is a waiting period—measured in days—that must be satisfied before benefits become payable. This elimination period essentially acts as a time deductible. LO LO 1.1.1

Which of the following is the main reason there are only a few insurance companies that provide coverage for very high-value homes? A) Insuring high-value homes could be catastrophic to an insurance company. B) Most owners of very high-value homes self-insure. C) Most insurance companies couldn't afford the loss of a very high-value home. D) The law of large numbers is necessary to make losses reasonably predictable, and there aren't that many homes of very high value.

The answer is the law of large numbers in necessary to make losses reasonably predictable, and there aren't that many homes of very high value. The problem with very high-value homes is that there are not enough homogenous units for the law of large numbers to apply well enough to gain predictability. Fewer homes means fewer homogeneous exposure units over which to spread the risk, and this means that there are fewer insurers willing to consider providing coverage on very high-value properties. Given that a typical insurance company insures a vast number of homes, losses on a few high-value homes wouldn't become catastrophic to the company. LO 2.2.1

Which of the following terms best describes the probability of an insured becoming disabled? A)Disability rate B)Accident and sickness rate C)Morbidity rate D)Mortality rate

The answer is the morbidity rate. Morbidity rate is the probability of a person becoming disabled. LO 1.7.1

n the event of his death, Jim wants to provide funding for his daughter Lauren, 4, to attend four years of college, starting at age 18. The current annual cost of tuition is $25,000. Assume inflation of 6.5% and after-tax earnings of 6%. If Jim wants to have enough life insurance to assure adequate funds for Lauren when she begins college (should he die today), approximately how much insurance should he purchase for this need alone? (Round your answer to the nearest dollar.)

he answer is $107,568. The solution to this requires using the three-step process used in education funding. Step 1: 14, N; 6.5 I/YR; 25,000, +/-, PV, and solve for FV = 60,371.85 Step 2: Set for BEG mode; 4, N; 1.06 / 1.065 = .9953 - 1 = -.004695 × 100 = -0.4695, I/YR; 0, FV (to clear it out), 60,371.85, +/-, PMT, and solve for PV = 243,201.44 Step 3: 14, N; 6, I/YR; 243,201.44, FV, 0, PMT (to clear it out), and solve for PV = 107,568 LO 3.4.1

Which of the following statements regarding the accidental death benefit (ADB) rider is CORRECT? The ADB rider is no longer synonymous with the term double indemnity. For large amounts of life insurance, the maximum amount of ADB rider offered by an insurance company is usually substantially less than the face amount.

he answer is both I and II. Both statements are true of the ADB rider. LO 3.3.3

Which of the following is NOT a whole life insurance policy dividend option? A) Life income option B) Cash option C) Fifth dividend option D) Paid-up additions

he answer is life income option. Life income is a settlement option. LO 3.3.2

What of the following types of life insurance have historically been used as mortgage protection? A) Level-term life insurance B) Convertible term life insurance C) Decreasing term life insurance D) Modified premium whole life insurance

the answer is decreasing term life insurance. Decreasing term life insurance features a level premium with a decreasing death benefit and has historically been used for mortgage protection because the death benefit can be set up to track the declining principal balance on a mortgage. LO 3.2.1

Meaghan purchased a participating whole life insurance policy 15 years ago and now wishes to receive the policy's cash surrender value (CSV). She gives you the following information to assess the potential taxation of the surrender: CSV: $80,000 Dividends received: $12,500 Outstanding loan: $40,000 Premiums paid: $60,000 What is the amount of cash value that is taxable to Meaghan and what is the character of this income? A. $0 B. $32,500 capital gain C. $40,000 ordinary income D. $72,500 ordinary income

D The answer is $72,500 ordinary income. Investment in contract = premiums paid - dividends received - outstanding loans or withdrawals. $60,000 − $12,500 − $40,000 = $7,500 gain at surrender = cash surrender value − investment in contract $80,000 − $7,500 = $72,500 The amount of cash that Meaghan would receive is $40,000, or $80,000 of the CSV less the outstanding policy loan of $40,000.

Which principle(s) of the workers' compensation law apply in most states? I. The indemnity paid to the injured employee is partial, but is to be considered final. II. The costs for workers' compensation benefits are funded through payroll taxes to which employees are expected to contribute. III. The benefits payable under workers' compensation is usually a percentage of the employee's average weekly pay.

D The answer is I and III. Workers' compensation is funded though insurance premiums paid by the employer

Under a homeowners policy, which types of property are excluded or have limited coverage and should, therefore, be singled out for coverage under a separate policy? I. Recreational vehicles II. Boats III. Trailers IV. Furs

D The answer is I, II, III, and IV. Types of property that are excluded or have limited coverage include items such as boats, trailers, furs and jewelry, and items requiring valued coverage, such as fine arts or antiques.

Elizabeth, age 57, wants to ensure that a 7-year loan on her new BMW will be paid off in the event of her death. She wants a predictable, inexpensive premium. Which policy would best meet her need? A. A decreasing term policy B. An annual term policy C. A 5-year term policy D. A 10-year term policy

D The answer is a 10-year term policy. The 5-year term and annual term options will require renewals at a higher premium. It is unlikely she will find a 7-year decreasing term policy because those are typically 15-year or 30-year products to align with typical mortgage terms.

When purchased inside of an IRA, what type of annuity would NOT be required to comply with the required minimum distribution (RMD) regulations? A. Variable annuity contract B. Indexed annuity contract C. Fixed annuity contract D. Qualified longevity annuity contract (QLAC)

D The answer is a qualified longevity annuity contract (QLAC) . The final rules made longevity annuities accessible to 401(k) plans and other employer-sponsored individual account plans and IRAs by amending the RMD regulations so that longevity annuity payments will not need to begin prematurely in order to comply with RMD regulations.

Enrico wants to ensure his life insurance policy does not lapse in the event he is sick or injured and cannot work. Which rider should he have on his policy? A. Disability income rider B. Accidental death rider C. Return of premium rider D. Waiver of premium for disability rider

D The answer is a waiver of premium for disability rider. This is designed to specifically keep a policy in force when the insured is disabled

22. Which factor(s) should you consider before replacing a life insurance policy? A. The issuing company's A.M. Best rating and other ratings B. The appropriateness of the policy for the needs of the client C. The client's risk tolerance level D. All of these

D The answer is all of these. Also, the existing policy's relative value, any possible (or intervening) changes in the client's insurability, and the financial cost of the client starting over with a new policy also should be considered

Personal property is covered under all forms of homeowners policies. Which item is considered to be personal property as defined by the standard homeowners policy? A. A motorcycle B. A pet C. A credit card D. Borrowed property from a friend

D The answer is borrowed property from a friend. It is considered to be personal property and is covered. The other items are excluded from coverage in the standard homeowners policy without special endorsements.

Which statement correctly describes a contract of indemnity? A. Contracts of indemnity will reimburse the insured only for a small portion of the actual amount of the loss. B. Contracts of indemnity will reimburse the insured for more than the actual amount of the loss. C. Contracts of indemnity will not reimburse the insured for any amount. D. Contracts of indemnity will reimburse the insured only up to the actual amount of the loss

D The answer is contracts of indemnity will reimburse the insured only up to the actual amount of the loss. The notable exception to this rule is a life insurance contract which pays a stated death benefit or face value

Which of the following statements regarding insurance terminology is CORRECT? A. Peril is the indifference to loss that creates carelessness and increases the chance of loss due to the existence of insurance. B. A hazard is the cause of financial loss. C. Speculative risk involves the chance of loss or no loss. D. Insurance is a device used to manage risk by having a large pool of people share in the financial losses suffered by members of the pool.

D The answer is insurance is a device used to manage risk by having a large pool of people share in the financial losses suffered by members of the pool. Pure risk involves the chance of loss or no loss. A peril is the cause of financial loss. A morale hazard is the indifference to the loss that creates carelessness and increases the chance of loss due to the existence of insurance

Rosaline was the beneficiary of her father's variable life insurance policy. The policy had a face amount of $500,000, and Rosaline's father had a basis in the policy of $300,000. During her life, Rosaline's father had invested the cash value in subaccounts containing blue-chip stocks, which achieved significant capital appreciation during most of the years the policy was in effect. When her father died, Rosaline received the $500,000 death benefit in a lump sum. How much of the $500,000 death benefit must Rosaline include in her gross income? A)$200,000 B)$0 C)$500,000 D)$300,000

The answer is $0. Lump-sum death benefits received from a life insurance policy as a result of the insured's death are generally excludable from gross income. LO 3.2.2

How much homeowners insurance coverage should financial planners encourage their clients to maintain? A)80% of the actual cash value of the home B)100% of the replacement value of the home C)90% of the replacement cost of the home D)80% of the replacement cost of the home

The answer is 100% of the replacement value of the home. Unless a financial planner is a licensed property and casualty agent, the planner cannot discuss a client's coverages. However, the planner can and should encourage clients to maintain at least 100% of the replacement value of the home. Many insurance companies offer additional riders to increase that amount, and the client can discuss that with an insurance agent. LO 2.2.1

Which of the following statements concerning the need for homeowners insurance policy endorsements or additional policies is CORRECT? Policy endorsements or separate policies are available to compensate for policy shortcomings or to accommodate special needs. Examples of types of property with limited coverage under a typical homeowners policy are jewelry, silverware, and collections of coins, stamps, and firearms.

The answer is I and II. All personal property of any significance should be scheduled and valued in preparation of any future claims that may occur as because of a covered peril. Items like jewelry, silverware, collections of coins or stamps, and firearms have stringent limitations within a standard homeowners insurance policy. Endorsements or separate policies are available to accommodate shortcomings and should be added to any property whose value exceeds the normal coverage limit. LO 2.2.1

Which of the following statements regarding mutual companies and stock companies is CORRECT? Mutual companies are owned by their policyholders and offer participating policies a share in the profits of the company through the payment of policy dividends. Stock companies are owned by the stockholders and usually offer nonparticipating policies. Stock companies are owned by policyholders, while mutual companies are owned by the stockholders.

The answer is I and II. Mutual companies are owned by their policyholders and offer participating policies that share in the profits of the company through the payment of policy dividends. Conversely, stock companies are owned by the stockholders and usually offer nonparticipating policies. LO 1.8.1

Which of the following are examples of managing risk through risk retention? Having a coinsurance provision in medical insurance Increasing the amount of an automobile insurance deductible Increasing the benefit period on disability income insurance Having a waiver of premium rider on life insurance

The answer is I and II. Options I and II are both methods of retention, as coinsurance and increased deductibles leave the insured with the potential for greater out-of-pocket expenses. Increasing a benefit period and adding a waiver of premium rider are forms of risk transfer. LO 1.2.2

Which of the following statements regarding maximum possible loss and probability of loss is CORRECT? The maximum possible health care loss or claim is unlimited. The probability of experiencing long-term care costs below age 60 is high. The maximum loss to personal property is limited to its value

The answer is I and III. The probability of experiencing long-term care costs below age 60 is low. LO 1.2.1

Which of the following statements concerning liability coverage under the personal auto policy is CORRECT? The insureds under Part A: Liability Coverage include the named insured, spouse, resident relatives, and any other person using a covered auto with permission. Coverage does not include legal expenses incurred in defending the insured against a claim of liability.

The answer is I only. Under Part A, legal defense costs are paid in addition to the limit of liability. LO 2.3.1

Which of the following statements regarding insurance contracts are CORRECT? An insurance policy is conditional, in that the insurer is obligated to compensate the insured only if certain conditions are met. A warranty is merely a promise made by the insured to the insurer that is part of the insurance contract and, as such, must be adhered to by the insured. Representations are statements made by the proposed insured to the insurer in the application process. Concealment occurs when the insured is silent about a fact that is material to the risk.

The answer is I, II, III, and IV. All of the statements are correct. LO 1.6.1

Which of the following organizations rate life insurance companies? Standard and Poor's A.M. Best, Inc. Fitch Moody's

The answer is I, II, III, and IV. All of these organizations rate insurance companies. LO 1.8.1

A personal liability umbrella policy (PLUP) is written only for persons with substantial underlying liability insurance. provides additional coverage to the underlying policies. has a drop down limitation that will apply in most cases.

The answer is I, II, and III. All of these statements correctly describe a characteristic of the PLUP. LO 2.2.2

Whole life insurance nonforfeiture options allow a policyowner to surrender a whole life insurance policy and receive the net cash value (cash value less any applicable surrender charges and/or outstanding policy loans). stop paying premiums on a whole life insurance policy and exchange the net cash value for a reduced paid-up single-premium permanent life insurance policy. stop paying premiums on a whole life insurance policy and use the net cash value as a single premium to purchase a paid-up term life insurance policy with a face amount equal to the face amount of the original policy for a specified period. A)I and II B)I, II, and III C)II and III D)III only

The answer is I, II, and III. There are three common nonforfeiture options available when surrendering or discontinuing premium payments on a whole life insurance policy. Under the cash surrender value option, a policyowner can surrender the policy and receive the net cash value. By electing the reduced paid-up insurance option, a policyowner leaves the net cash value of the original life insurance policy with the company and receives a smaller amount of fully paid-up insurance of the same type. If the policyowner chooses the extended term insurance option, the net cash value is used as a net single premium to purchase a paid-up term insurance policy. LO 3.2.2

Universal life insurance gives policyowners the ability to adjust the premiums. the death benefit. the cash values. the policy expenses. A)I, II, and III B)II and III C)II, III, and IV D)I and II

The answer is I, II, and III. Universal life insurance policies allow policyowners to adjust the premiums, death benefit, and cash values. They do not allow policyowners to change the policy expenses. LO 3.2.3

Which of the following are requirements of an insurable risk? A large, homogenous exposure to loss so as to adequately make reasonable prediction of the loss Economically feasible premium Catastrophic loss Calculable chance of loss

The answer is I, II, and IV. Insurers wish to avoid all catastrophic losses. LO 1.7.1

Rebecca owns a gift shop near her home, which she also owns. She takes the bus everywhere she goes. In her spare time, she occasionally engages in activities that could possibly result in bodily injury to innocent bystanders if anything accidentally went wrong. Which of the following forms of insurance should Rebecca consider to avoid risk exposures from potential tort liability? Homeowners policy Personal auto policy Umbrella liability policy Commercial liability policy

The answer is I, III, and IV. As a businessowner, Rebecca should have a commercial liability policy for her business, most likely as a part of a businessowner's policy. As a homeowner, she should have homeowners insurance, and since she is a businessowner and potentially a target for lawsuits, a liability umbrella policy is also a good idea. Since she does not drive, she has no need for a personal auto policy. LO 2.4.2

David's son will soon turn 16 and start driving. He will be driving an older car. Knowing he must keep the car insured, David decides to eliminate collision coverage and increase the deductible on his comprehensive coverage. Which of the following methods of handling risk is David using? Risk avoidance Risk retention Risk transfer Risk reduction

The answer is II and III. Eliminating coverage for collisions and increasing his deductible are risk retention techniques, while keeping insurance is risk transfer. Requiring the son to take a safe driving course would be risk reduction and not allowing his 16-year-old to drive at all would be risk avoidance. LO 1.2.2

Steven has a dog that has been known to wander through the neighborhood. His home is covered by an HO-3 policy. If Steven's dog bites a mailman three blocks away from his home, which of the followings statements regarding Steven's homeowners insurance coverage is CORRECT? Steven will not have any coverage because the bite did not take place at his personal residence. Coverage E of Steven's policy may apply or provide coverage if he is found to be legally liable (dog bite lawsuit). Coverage F of Steven's policy may be applied to any medical bills, typically up to $1,000.

The answer is II and III. Steven will be covered if his dog bites the mailman on or off his property. Coverage E will apply only if he is found to be legally liable, and Coverage F will apply to any medical bills typically up to $1,000. Coverage F does not require Steven to be at fault to provide coverage. LO 2.2.2

The Goldens are considering the purchase of an annuity to help fund their retirement. They want an annuity that will allow them to participate in the equities market, and because of their long-term investment horizon, they are not particularly concerned about safety of principal. Which of the following annuity products meet their needs? Fixed annuity Variable annuity A)Neither I nor II B)Both I and II C)I only D)II only

The answer is II only. A variable annuity will allow the Goldens to participate in the equities market. Fixed annuities are more suited for investors who are concerned with safety of principal. LO 3.6.1

Which of the following is covered under Coverage B: Other Structures of the HO-2, HO-3, and HO-8 homeowners forms? Structures attached to the dwelling Garages and other structures that are detached from the dwelling Land Structures used for business purposes or those that are rented to anyone other than a tenant of the residence

The answer is II only. Structures attached to the dwelling are covered under Coverage A: Dwelling of the HO-2, HO-3, and HO-8 homeowners forms. Structures used for business purposes or those that are rented to anyone other than a tenant of the residence are not covered. An exception is made for the rental of a garage, which may be rented to anyone if used exclusively for garage purposes. LO 2.1.1

Which of the following are examples of risk reduction? Decreasing insurance deductibles Moving from a high-risk neighborhood Maintaining a safe rate of speed while driving Installing dead bolt locks in a residence

The answer is II, III, and IV. Options II, III, and IV are all methods of reducing risk because, while the potential for loss to the individual remains, it is lessened. Option I is a form of risk transfer because by lowering one's deductible, more risk is transferred to an insurance company. LO 1.2.2

You have a meeting with Oscar, 26, and his wife Judith, 25, this afternoon to review their risk management plan. They have two children, two cars, a home, and a boat. Oscar works at the local bank, and Judith works at an engineering firm. Which of the following statements regarding their risk management plan is CORRECT? They have a limited amount of liability exposure. They have a higher probability of becoming disabled versus experiencing premature death. Having liability insurance on their cars is more important than collision coverage. Long-term care insurance should not be a priority within their risk management plan.

The answer is II, III, and IV. They have unlimited liability exposure. A car accident could lead to an unlimited amount of liability depending on the circumstances, as well as the possibility of negligence occurring on their property. Statements II, III, and IV are correct. There is a higher probability of becoming disabled than of experiencing premature death, and it is much more important to have liability insurance on a vehicle than collision coverage. Liability claims may be much higher than any type of collision damage to a vehicle. Both Oscar and Judith are too young to consider long-term care insurance at this time. LO 1.2.1

Which of the following types of risk are associated with damage caused by an earthquake? Particular Dynamic Static Fundamental

The answer is III and IV. An earthquake is an example of a static risk and a fundamental risk. Fundamental risks are those that affect a large group of people. Static risks are those that result from factors other than changes in the economy. LO 1.1.1

A client is shopping for homeowners insurance. He wants a policy that will provide open-perils coverage on both the dwelling and his personal property. Which of the following policies without an endorsement will meet his needs? HO-2 HO-3 HO-5 A)III only B)II and III C)I only D)I, II, and III

The answer is III only. The only policy that provides open-perils coverage on both the dwelling and personal property without an endorsement is an HO-5 policy. Coverage under an HO-2 policy provides named-perils coverage on both the dwelling and personal property. An HO-3 policy provides open-perils coverage on the dwelling but named-perils coverage on personal property. LO 2.1.1

A client is in the process of purchasing a universal life policy. The client desires a level death benefit. Which of the following universal life death benefit options would help the client achieve this goal? A)Option C B)Option A C)None of these D)Option B

The answer is Option A. Option A pays a level death benefit. LO 3.2.3

Which of the following examples demonstrates vicarious liability? A)Adam is sentenced to three years in jail for burglary. B)Joe must pay damages for intentionally striking his neighbor during an argument. C)Alice must pay damages for negligently causing an automobile accident while she was texting. D)XYZ Paper Company must pay damages caused by the negligence of a delivery driver.

The answer is XYZ Paper Company must pay damages caused by the negligence of a delivery driver. Vicarious liability occurs when a person is liable for a tort committed by someone else, such as when an employer is responsible for damages caused by an employee. LO 2.4.2

Which of the following cannot bind coverage for insurance on behalf of an applicant? A)An independent agent B)A broker C)A career agent D)A captive agent

The answer is a broker. Brokers represent the insured, and for exam purposes, brokers cannot bind coverage since they do not represent a specific company. LO 1.3.1

Which of the following can provide property coverage for a small businessowner's business property? A)An employment practices liability policy B)A commercial general liability (CGL) policy C)A personal auto policy (PAP) D)A businessowner's policy (BOP)

The answer is a businessowner's policy (BOP). As a packaged product, a BOP provides both property and liability coverage. While a PAP provides property coverage, business use is excluded by the base policy. A CGL and an employment practices liability policy provide only liability coverage. LO 2.4.1

A policy designed to provide protection against a lawsuit or judgment in excess of the limits of basic liability insurance is A)a self-insurance policy. B)a casualty insurance policy. C)a personal liability umbrella policy (PLUP). D)an excess benefit plan.

The answer is a personal liability umbrella policy (PLUP). A PLUP covers losses in excess of the limits of basic liability insurance. Typically, coverage is available in amounts ranging from $1 million to $10 million. LO 2.2.2

Which of the following vehicles is NOT eligible to be covered under a personal auto policy (PAP)? A)A motorcycle B)An automobile owned by a corporation C)A snowmobile D)A pick-up truck

The answer is an automobile owned by the corporation. An automobile must be owned by an individual to be eligible for PAP coverage. Motorcycles and snowmobiles are considered nonstandard vehicles. Though not included under the definition of a covered auto, these can be added to a personal auto policy with an endorsement. LO 2.3.1

All of the following statements regarding torts are correct except A)an individual can only be liable for torts he personally committed. B)a tort is a private wrong that occurs when one person infringes on the rights of another. C)torts can either be intentional or unintentional. D)negligence is a type of tort.

The answer is an individual can only be liable for torts he personally committed. A person may be liable for torts committed by someone else. For example, parents may be liable for torts committed by their children, and employers may be liable for the torts committed by their employees. This type of liability is known as vicarious liability. LO 1.6.1

Which of the following statements regarding personal auto policy (PAP) Part B Medical Payments coverage is CORRECT? Part B of the PAP provides payment for the reasonable and necessary medical expenses of an insured as a result of an automobile accident. The insureds under Part B include the named insured, spouse, and any family members while they are occupying a motor vehicle, or when, as a pedestrian, they are struck by a vehicle.

The answer is both I and II. Part B: Medical Payments coverage provides payment for the reasonable and necessary medical expenses of the insured as a result of an automobile accident. Expenses must be incurred within three years of the incident, and limits are provided on a per-person, per-occurrence basis. Individuals covered by Part B include the named insured, spouse, and any family member while they are occupying a motor vehicle, or when, as a pedestrian, they are struck by a vehicle. LO 2.3.1

Which of the following statements regarding professional liability insurance is CORRECT? Professional liability insurance covers a wide variety of insurance policies for many occupations and protects against liability for failing to use the degree of skill expected of a person in a particular occupation. Professional liability insurance includes both medical malpractice insurance and errors and omissions insurance.

The answer is both I and II. Professional liability insurance covers a wide variety of insurance policies for many occupations and protects against liability for failing to use the degree of skill expected of a person in a particular occupation. Professional liability insurance includes both medical malpractice insurance and errors and omissions insurance. LO 2.4.2

Kaari has a homeowners policy. Three streets away from her house, her dog bites a mailman. What are the consequence of this event? A)There is no coverage under the policy because pets are excluded. B)Both medical payments and personal liability coverage may apply. C)Only personal liability coverage applies. D)Only medical payments coverage applies.

The answer is both medical payments and personal liability coverage may apply. Both of these coverages apply on and off of Kaari's property. Medical payments coverage will apply even if Kaari is not at fault, while her personal liability coverage will only apply if she is found to be negligent or legally liable. LO 2.2.2

Which of the following types of automobile insurance coverage would apply if you backed into a tree on your front lawn? A)Comprehensive B)Liability coverage C)Collision D)General provisions

The answer is collision. Collision is defined under Part D of a personal auto policy as "the upset of your covered auto or its impact with another vehicle or object." Therefore, this provision covers damages incurred in an accident involving other vehicles or when an automobile runs into a tree. LO 2.3.1

Which of the following term life insurance policies is designed to protect the insured's mortgage? A)Level term life insurance B)Decreasing term life insurance C)Reentry term life insurance D)Annual renewable term life insurance

The answer is decreasing term life insurance. Decreasing term life insurance features a level premium with a decreasing death benefit. This type of policy has been historically used as mortgage protection insurance because the decrease in policy death benefit roughly approximates the declining principal balance as mortgage payments are made by the homeowner. LO 3.2.1

The primary purpose of the conditions section of an insurance policy is to A)define the duties and rights of both parties. B)contain the statements made by the insured. C)permit the inclusion of additional coverages. D)add exclusions that eliminate coverage for certain periods.

The answer is define the duties and rights of both parties. The conditions section of an insurance policy outlines what is required of the insured and what rights the insured has under the policy. Statements of the insured are in the application riders or the policy itself and outline additional coverage provided. Exclusions are covered in the exclusion section.

All of the following are business property risks covered by packaged policies (a BOP or a CPP) except A)errors and omissions. B)commercial auto. C)accidental damage. D)crime.

The answer is errors and omissions. Errors and omissions insurance is a liability exposure sold outside of a package. The other choices are property exposures covered by a packaged policy for businessowners. LO 2.4.1

Which of the following types of risk is most suited to treatment by insurance?

The answer is low probability, high severity. Insurance (or the transference of risk) is most suited to those losses that have a low probability or frequency of occurring and potentially high severity. LO 1.2.2

Barb is the beneficiary of a $1 million life insurance policy. The insured recently died, and Barb is considering different settlement options. If her primary objective is to avoid paying any income taxes on the amounts received under the settlement option, which of the following settlement options will best meet her needs? A)Lump sum B)Fixed-period installments C)Fixed-amount installments D)Single life annuity

The answer is lump sum. Life insurance death benefits received in a lump sum are generally excluded from gross income. The payments under the other settlement options include both a taxable interest component and a tax-free principal component. LO 3.5.1

Nancy and Joe are married and in need of permanent life insurance. They anticipate their incomes substantially increasing in the next three to eight years, but right now, they are on a tight budget. Which of the following is the best form of permanent life insurance for the couple? A)Current assumption whole life B)Limited-pay whole life C)Modified premium whole life D)Decreasing term insurance

The answer is modified premium whole life. With a modified premium whole life insurance policy, premiums are lower for the initial three to five years after issue and then increase once thereafter. As such, modified whole life is simply an ordinary life policy with a unique premium payment structure that accommodates a policyowner who expects to experience an increasing salary in the near future. LO 3.5.1

The pairs and sets option of loss settlement under a homeowners policy allows the insurance company to A)sell the pair or set for its salvage value. B)pay the full replacement cost of the pair or set. C)repair or replace any part of the pair or set to its value before the loss. D)sell the damaged property as a pair or set only.

The answer is repair or replace any part of the pair or set to its value before the loss. This option allows the insurer to repair or replace any part of a set or pair, or pay the insured the difference between the actual cash value of the pair or set before and after the loss. LO 1.7.1

Which feature of most life insurance policies can be used to customize the policy to meet the client's needs? A)Beneficiaries B)Policy loans C)Dividends D)Riders

The answer is riders. Available riders often allow for customization of the policy to meet a client's needs and compete in the marketplace. The riders available vary by company and policy. Dividends and loans may be available on cash value policies, but not on term policies. All policies allow for beneficiaries to be named, so this wouldn't add customization options. LO 3.3.3

Which of the following is a risk-financing technique? A)Risk retention B)Risk reduction C)Risk avoidance D)Risk evaluation

The answer is risk retention. Risk retention (financing the risk oneself) and risk transfer (passing the cost of the risk to another, most commonly via insurance) are risk financing techniques. Risk reduction and risk avoidance are risk control techniques, and risk evaluation is neither risk financing nor control. LO 1.2.1

Augusto and Celena have an HO-3 homeowners policy on their home. The dwelling is insured for $150,000. As the result of a kitchen fire, their home suffers extensive structural and smoke damage and is made uninhabitable for nine months. They rent a hotel room while the damage is repaired, incurring expenses of $13,500. It also costs them $4,000 for meals during their hotel stay, for a total of $17,500. Which of the following statements regarding the couple's coverage under their HO-3 policy is CORRECT? A)The HO-3 policy covers only the first $15,000 of the $17,500 in expenses. B)The HO-3 policy covers the full $13,500 in rental expenses but does not cover the $4,000 for meals. C)The HO-3 policy covers the entire $17,500 in expenses. D)The HO-3 policy does not cover any of their living expenses while their house is uninhabitable.

The answer is the HO-3 policy covers the entire $17,500 in expenses. Coverage D of a homeowners policy pays living expenses, including lodging costs and meals, incurred when the house is made uninhabitable by a covered peril. Under an HO-3 policy, Coverage D is limited to 20% of the Coverage A limit on the dwelling. In Augusto and Celena's case, coverage under Coverage D is $30,000 ($150,000 × 20%), so their lodging expenses and meals are fully covered. LO 2.1.1

Enrico wants to ensure his life insurance policy does not lapse in the event he is sick or injured and cannot work. Which rider should he have on his policy? A. Disability income rider B. Accidental death rider C. Return of premium rider D. Waiver of premium for disability rider

The answer is the capital retention method as this method is intended to provide income from the interest on the amount allocated to income replacement. Capital utilization uses up the principal over time so that at some point in the future the money is all gone. Both the LIFE and multiple of salary methods are overall needs analysis metho

Tamika incurs substantial medical bills as a result of an automobile accident caused by the negligence of another driver. Tamika's insurance company pays her medical bills, and the policy requires that she assign her right to sue the other driver for the medical bills to the insurance company. Which of the following concepts specify the insurance company's right to sue the other driver for Tamika's medical bills? A)The aleatory nature of insurance contracts B)The right of subrogation C)The duty of utmost good faith D)Adverse selection

The answer is the right of subrogation. The right of subrogation means that if the insurance company pays for a loss caused by a third party, the insured must assign the right of recovery against a third party to the insurance company. LO 1.5.1

Which of the following correctly identifies the primary purpose of a buy-sell agreement funded with life insurance? A)To guarantee marketability of closely held stock B)To include policy cash values as a corporate asset C)To allow the business to purchase a deceased owner's share of the business from the estate D)To pay the deceased's estate tax liability

The answer is to allow the business to purchase a deceased owner's share of the business from the estate. The primary purpose of a buy-sell agreement funded with life insurance is to provide the cash required by the agreement to allow the surviving partner(s) to buy the deceased partner's share from his heirs or estate in the event he dies before retiring. LO 3.2.4

The main purposes of regulating the insurance industry include all of the following except A)to maintain competition. B)to minimize market failures. C)to minimize costs to consumers. D)to prevent abuse of consumers.

The answer is to minimize costs to consumers. The purposes of regulation do not include minimizing costs to consumers. While that can be an indirect result of increased competition, it is not a stated purpose. The other options are the main purposes of regulation. LO 1.4.1

A client owns a whole life insurance policy in which his premiums were lower in the initial years after the policy was issued and then increased once thereafter. What type of whole life policy does the client own? A. Modified premium whole life B. Limited-pay whole life C. Ordinary (straight) life D. Single premium whole life

A The answer is modified premium whole life. Premiums are lower for the initial years of the policy and are generally increased once thereafter.

10. Which of the following is the CORRECT definition? A. Moral hazard: unethical practices designed to induce the payment of a claim. B. Morale hazard: unethical practices designed to induce the payment of a claim. C. Adverse selection: a standard underwriting approach so those that most need insurance can get it. D. Underwriting process: the process of ensuring claims are settled equitably

A The answer is moral hazard: unethical practices designed to induce the payment of a claim. A morale hazard has more to do with indifference rather than unethical behavior. Adverse selection is something insurance companies attempt to avoid so that it is not only the people likely to have a claim who purchase insurance. The underwriting process is the process of evaluating risks to determine if they are reasonable to accept and to what degree.

Mark, age 58, has a nonqualified variable annuity worth $455,000 with a cost basis of $325,000. He decides to withdraw $11,000 to pay off the balance of a credit card. What are the tax consequences of this transaction? A. Ordinary income tax and a 10% penalty on the $11,000 distribution B. Long-term capital gains tax on the $11,000, plus a 10% penalty C. Ordinary income tax on $11,000 D. Transaction considered a tax-free distribution

A The answer is ordinary income tax and a 10% penalty on the $11,000 distribution. Mark is under the age of 591⁄2, and there is no exception for paying off credit cards, so he will pay the 10% early withdrawal penalty plus ordinary income tax on the distribution.

Jacob negligently strikes Gary's car and causes considerable property damage. In turn, Gary's insurance company reimburses him for this loss. Which legal doctrine permits Gary's insurance company to sue Jacob to recoup its losses? A. The right of subrogation B. The collateral source rule C. The rescission rule D. The right of reformation

A The answer is the right of subrogation. The right of subrogation permits Gary's insurance company to sue Jacob. Reformation is a right of the insurance company to amend the contract when the contract fails to express the actual intent of the parties. This should be compared with rescission, in which the insurance contract is considered null and void from its beginning because of fraud or misrepresentation on the part of the insured.

Which factor should NOT be considered when selecting a life insurance policy? A. The risk tolerance level of the insurance sales representative B. The amount of life insurance needed C. The risk tolerance level of the proposed owner of the policy D. The duration of the need

A The answer is the risk tolerance level of the insurance sales representative. The risk tolerance of the proposed owner of the policy needs to be considered. The risk tolerance of the sales representative is not a factor that should be considered when selecting a life insurance policy

XYZ Food Company had a reckless employee who was driving a company-owned truck too fast and, as a result, hit a picket fence, knocked down several mail boxes, and crashed into an oak tree. XYZ Food Company's insurer paid several thousand dollars in damages for these losses. Which term best describes XYZ's position? A. Vicarious liability B. Comparative negligence C. Contributory negligence D. Assumption of the risk

A The answer is vicarious liability. XYZ Food Company is vicariously liable for any damages caused by their company's employees. Even though the employee caused the damage, the company is responsible for his actions when he drives a company vehicle.

Which of the following describes an insurance agent who represents only one company or one group of companies? A)Broker B)Independent agent C)Captive agent D)Surplus lines agent

A captive agent represents a single company or group of companies. Independent agents, brokers, and surplus lines agents represent several companies. LO 1.3.1

. Rex purchased a $500,000 whole life, double indemnity policy on his life on September 1 of the current year (premiums were $450 per month). On November 30 of the following year, he committed suicide. Premiums were paid as agreed up to November 1 of the following year. Assuming that his policy included a suicide clause, what amount will be paid or refunded by the insurance company? A. $0 B. $6,750 C. $500,000 D. $1 million

B The answer is $6,750. The two-year suicide clause, a common whole life policy provision, will preclude payment of the face value of the policy. Rather, only the premiums paid through the date of suicide will be returned without interest. The amount of premium returned is $6,750 (15 months × $450).

Which statement is CORRECT regarding the legal characteristics of insurance contracts? I. Insurance contracts are unilateral contracts. II. Insurance contracts are contracts of adhesion meaning that the policyowner can only accept or reject the contract and cannot modify its terms. III. Insurance contracts are aleatory contracts meaning that the outcome is affected by chance but the dollars collected by the parties must be equal.

B The answer is I and II are correct. Statement III is incorrect. Insurance contracts are aleatory contracts meaning that the outcome is affected by chance and that the dollars collected by the parties are usually unequal.

Joe and Mary, a retired married couple, have no sources of income other than the interest and dividends from investments and Social Security. At this time, Joe is considering the purchase of an immediate annuity. Joe has asked you, his financial planner, which settlement option he should select. His primary objective is to ensure that Mary is provided for subsequent to his death and that she has as much income available to her as possible. What is the best recommendation for a settlement option? A. A joint and 50% survivor annuity B. A joint and 100% survivor annuity C. A life annuity with a 20-year period certain D. A single life annuity

B The answer is a joint and 100% survivor annuity. Given Joe's objectives (particularly that of providing as much income as possible to Mary subsequent to his death), a joint and 100% survivor annuity is preferable. Although a life annuity with a period certain of 20 years could provide significant income to Mary, she could also outlive the payment period.

Comprehensive coverage pays for damages to the insured's automobile from all of these perils EXCEPT A. hail. B. collision with a tree. C. collision with a deer. D. damage from a falling tree

B The answer is collision with a tree. Collision with a tree (or any stationary object) would be covered by collision coverage under a PAP.

A client owns a life insurance policy that will provide permanent paid-up protection for the rest of her life after she has paid premiums for 20 years. What type of policy does the client own? A. Whole life B. Limited-pay whole life C. Single premium whole life D. Convertible term

B The answer is limited-pay whole life. Premiums are payable for only a limited number of years, after which the policy becomes paid up for its stated face amount.

Jason, age 35, is married with children and has only a limited amount of disposable income. He needs life insurance protection but wants to keep his premium payments as low as possible for the next 20 years. He anticipates being in good health throughout this period. Assuming he remains healthy, what type of term policy would be most beneficial to Jason? A. Decreasing term insurance B. Reentry term insurance C. Annual renewable term insurance D. Modified whole life term insurance

B The answer is reentry term insurance. Given that Jason anticipates being in good health, he may benefit from purchasing a level term policy (probably for five years) with a reentry provision that allows him to requalify for lower premiums at the end of this term provided he can demonstrate satisfactory evidence of insurability.

Which of these incidents would be best described as a hazard? A. After a storm, a tree falls on your car. B. You park your car on a steep incline without setting the parking brake. C. You own a luxury automobile. D. Your car hits a light pole after skidding on ice.

B The answer is you park your car on a steep incline without setting the parking brake. Skidding on ice and hitting a light pole and damage from wind are perils (i.e., the cause of the loss that is insured against), not hazards. One could argue that owning a luxury car is a hazard, particularly if the luxury automobile is one highly desired by prospective thieves, but the mere fact that you own a particular automobile does not increase the risk of loss. Rather, the best answer is not setting the parking brake, which clearly increases the probability of the car colliding with another object

Generally, which type of annuity does NOT guarantee a specific amount of annuity payment? A. A variable annuity B. A single premium annuity C. A fixed annuity D. A nonqualified annuity

A The answer is a variable annuity. A variable annuity does not guarantee a specific annuity payment. Rather, the payment is based on the performance of the assets in which the variable annuity is invested.

Assume that you have a client who currently has a need for permanent (cash value type) life insurance but cannot afford that form of insurance. Based on the client's need, what is a reasonable recommendation? A. Convertible term life insurance B. Annual renewable term life insurance C. Reentry term life insurance D. Variable annuity

A The answer is convertible term life insurance. If there is a need for permanent insurance, your client should purchase a form of convertible term life insurance. Convertible term allows for the exchange of the policy for permanent life policy without evidence of insurability.

What is the planning situation in which a financial planner would typically use a second-to-die life insurance policy? A. Estate planning B. College education planning C. Retirement planning D. Emergency fund planning

A The answer is estate planning. A financial planner would typically use a second-to-die life insurance policy in the estate planning process to provide liquidity at the death of the surviving spouse.

Which exchange transaction is NOT a tax-free exchange under IRC Section 1035? A. Exchanging a variable annuity for a whole life insurance policy B. Exchanging a universal life insurance policy for a variable life insurance policy C. Exchanging a variable annuity for a qualified long-term care contract D. Exchanging a variable life insurance policy for a variable annuity

A The answer is exchanging a variable annuity for a whole life insurance policy. Exchanging an annuity for a life insurance policy is not a tax-free exchange under Section 1035.

A client is insured by a life insurance policy with a face amount of $250,000. The client dies during the policy's grace period with an unpaid premium of $800. What amount will the insurance company pay to the beneficiary listed on the policy? A. $0 B. $249,200 C. $250,000 D. $250,800

B The answer is $249,200. If the insured dies during the grace period, the insurance company deducts the unpaid premiums from the death benefit payable to the beneficiary; therefore, the beneficiary receives $249,200

The client is 50 years old but appears younger. She has applied for a life insurance policy that has an annual premium of $50 per $1,000 of coverage for age 50, and $30 per $1,000 of coverage for age 45. On the policy application, the client states her age as 45 and purchases a $40,000 life insurance policy, issued for someone of that age. She then dies unexpectedly one year later at her actual age of 51. What amount of death benefit will be paid to her beneficiary, assuming the insurance company discovers the misstatement of age on the application? A. $0 B. $20,000 C. $24,000 D. $40,000

C The answer is $24,000. The insurance company will adjust the face amount of the policy to reflect the amount of insurance that could have been purchased for the correct age, calculated as follows: Total premium paid annually = $30 ($30 per $1,000 of coverage) × 40 ($40,000 of coverage) = $1,200 Premium per $1,000 of insurance for insured age 50 = $50 Face amount of policy (adjusted for correct age) = ($1,200 ÷ $50) × $1,000 = $24,000

The client owns a UL insurance policy with the Option A death benefit on his own life. The death benefit is $375,000, and the current cash value is $75,000. If the client dies today, which death benefit will be paid to the beneficiary? A. $0, because the NAR exceeds the current cash value B. $300,000 C. $375,000 D. $450,000

C The answer is $375,000. The death benefit under Option A of a UL policy is the face amount of the policy. The beneficiary will not receive the cash value. The policy will pay a total death benefit of $375,000.

George has a home with a FMV of $425,000, an assessed value of $375,000, and a replacement cost value of $410,000. Which homeowners insurance coverage should you recommend to George? A. $340,000 B. $375,000 C. $410,000 D. $425,000

C The answer is $410,000. You should always recommend that a home is insured for 100% of its replacement cost value

Which statement is CORRECT regarding the roles of the National Association of Insurance Commissioners (NAIC) in regulating insurance? I. Through the NAIC, the 50 state Commissioners exchange information and ideas and coordinate regulatory activities. II. The NAIC makes recommendations for legislation and policy. III. The NAIC has the legal authority to force states to adopt its regulations.

C The answer is I and II. The NAIC makes recommendations for legislation and policy, but the organization does not have the legal authority to force states to adopt its regulations.

Which common peril is excluded from coverage in most homeowners policies? A. Power surge B. Tornado C. Power failure D. Volcanic eruption

C The answer is power failure. Damage caused to the policyowner's home by a power failure is typically excluded from coverage in most homeowners insurance policies.

Ricky, age 32, has a clean driving record. He recently purchased a car for $1,500. What is the most appropriate risk management technique for handling the collision exposure of Ricky's car? A. Avoidance B. Transfer C. Retention D. Diversification

C The answer is retention. With respect to collision coverage for the car, Ricky should opt to retain the risk. The car is only worth $1,50

Sandra has just been informed that she is the beneficiary of her grandmother's life insurance policy. She has decided to choose a settlement option for the $500,000 death benefit. Which settlement option would prevent the risk of superannuation? A. Lump sum distribution B. Fixed-period installments C. Single or straight life annuity D. Fixed-amount installments

C The answer is single or straight life annuity. The single life annuity is the only settlement option that would provide lifetime income and prevent the risk of superannuation. A lump sum distribution could be exhausted prior to death. Fixed-period installments only last for a specific period of time. Fixed-amount installments may also be exhausted prior to death.

The client owns a UL insurance policy with the Option B death benefit. The net amount at risk (NAR) is $275,000, and the current cash value is $75,000. What is the amount of death benefit that will be paid if the client died today? A. $0, because the NAR exceeds the current cash value B. $75,000 C. $275,000 D. $350,000

D The answer is $350,000. The death benefit under Option B of a UL policy is the NAR plus the cash value. The client's policy will pay a total death benefit of $350,000; ($275,000 + $75,000).

Which settlement option(s) in a life insurance policy are available upon the death of the insured? Remember, life insurance settlement options are the same as annuity payout options. I. Interest only II. Life income with period certain III. Cash surrender value (CSV) IV. Joint and last survivor A. IV only B. I and II C. I, II, and III D. I, II, and IV

D The answer is I, II, and IV. CSV is a nonforfeiture option. When the insured dies, the cash value in a whole life policy is retained by the insurance company

Which factor(s) should be considered while reviewing a universal life (UL) insurance policy for a client? A. The mortality charge specified in the policy B. The mortality charge being assessed to the policy C. The interest rate being credited to the policy D. All of these

D The answer is all of these. The listed items are potential costs in a UL policy and should be considered by the planner.

Which of the following items are covered, but are subject to a specific dollar limit, under the personal property provision of a homeowners policy? Furs Jewelry Coin collections A)II and III B)I and III C)I and II D)I, II, and III

The answer I, II, and III. All of these items have dollar limits under the standard homeowners policy. To increase this limit to an agreed-upon value, items need to be scheduled or endorsed. LO 3.3.1

Trisha is a financial planner for XYZ Company. She is scheduled to meet with Tim and Jodi this afternoon for a follow-up meeting. In their first meeting, Trisha established and defined the client-planner relationship and gathered the information to fulfill the engagement. She learned that Tim and Jodi have three young children and no life insurance coverage. Trisha also discovered that they owe a substantial amount on their current mortgage. Moreover, Tim's family has a history of diabetes and heart disease. What is the next planning action for Trisha? A. She should communicate her recommendations to the clients. B. She should recommend that the clients purchase a convertible term life insurance policy for the appropriate face amount because of Tim's family history. C. She should analyze and evaluate the clients' current financial status before developing and communicating any recommendations. D. She should recommend a decreasing term life insurance policy for both Tim and Jodi to make sure the mortgage is taken care of in the unlikely event one of them should die prematurely.

C The answer is that she should analyze and evaluate the clients' current financial status before developing and communicating any recommendations. Tim and Jodi should purchase a convertible term life insurance policy to help protect their children's financial future or a decreasing term life insurance policy to cover the mortgage; however, Trisha has not completed the necessary step to reach the point of recommending financial solutions. At this point, Trisha needs to analyze and evaluate the clients' current financial status.

Which item is always covered by a personal liability umbrella policy (PLUP)? A. General liability B. Business liability C. Watercraft liability D. Aircraft liability

A The answer is general liability. The policy may or may not cover watercraft or aircraft liability, but it never covers business liability (a separate commercial liability policy is required).

Jane owns an equity-indexed annuity (EIA) with a participation rate of 90%. This year, the underlying equity index increases by 10%. What is the interest that will be credited to her annuity? A. 9% B. 10% C. 11% D. 19%

A The answer is 9%. Because Jane's participation rate is 90%, she will be credited with an interest rate equal to 90% of the increase in the underlying index or 9%; (90% × 10% = 9%)

16. Assume you have a client who owns a modified premium whole life insurance policy and has recently taken a large loan against the cash value. She is aware that the death benefit payable to her husband, who is the sole beneficiary of the policy, will be reduced by the amount of the loan and asks you whether she can preserve at least a portion of the original death benefit. The policy is a participating policy. What is the best option for the client to choose? A. Fifth dividend option B. Reduced paid-up insurance option C. Cash dividend option D. Have dividends applied to reduce the premium

A The answer is fifth dividend option. The fifth dividend option would permit her to purchase one-year term insurance equal to the net cash value of the policy and add it to the policy's death benefit. In this way, she could recoup at least a portion of the otherwise reduced death benefit.

Which peril is NOT a named peril in an HO2, HO4, or HO6 policy? A. Flood B. Volcanic eruption C. Falling object D. Theft

A The answer is flood. Flood is not a named peril in a homeowners insurance policy. Homeowners within flood hazard areas are generally required to purchase flood insurance as a condition of obtaining a mortgage.

What is the type of authority that an insurance company does not expressly give to agents, but agents normally possess because it is reasonably necessary for them to carry out their duties? A. Implied authority B. Apparent authority C. Express authority D. Ultimate authority

A The answer is implied authority. Express authority is typically in writing. Apparent authority involves an agent waiving a provision in a contract and the insurance company knowing about it but doing nothing to prevent the agent from doing so

11. Which of the following is not considered a rating agency? A. The NAIC B. Standard & Poor's C. Moody's D. A.M. Best

A The answer is the NAIC. The NAIC compiles a watch list, but does not rate insurance companies. Moody's, Standard & Poor's, and A.M. Best are all rating agencies.

Edward recently built a house with a replacement cost of $200,000 and an actual cash value (ACV) of $150,000. He purchased insurance on the house providing Coverage A protection of $150,000. The roof of Edward's house has been damaged by fire. The determination has been made that the roof was 25% depreciated and that the cost for full replacement will be $20,000. What amount will the insurance company pay for the loss? A. $18,750 B. $18,750 less the deductible C. $20,000 D. $20,000 less the deductible

B The answer is $18,750 less the deductible. He did not carry insurance equal to at least 80% of the replacement cost of the dwelling. Specifically, the applicable computation is: $150,000 (0.80 × $200,000) =$150,000 /$160,000 0.9375; $20,000 * 0.9375 = $18,750 less the deductible

Which of the following homeowners policies is designed for the owners of condominium units and cooperative apartments? A)HO-2 B)HO-6 C)HO-8 D)HO-4

The answer is HO-6. HO-6: Unit Owner Form (for Condominium Owners) covers the personal property of the insured for the same named perils listed in a HO-2 policy, except HO-6 insurance is for people residing in a condominium or cooperative apartment. This type of policy also provides liability protection. LO 2.1.1

Open-perils coverage in a homeowners policy includes coverage for A)only the perils named in the policy. B)windstorm and hail only. C)only the perils occurring outside the home's physical structure. D)all perils except those specifically excluded in the policy.

The answer is all perils except those specifically excluded in the policy. Open-perils coverage provides protection from all perils except those specifically outlined as exclusions in the policy. LO 2.2.1