Risk Mgmt Midterm

In 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.) A. $107,568 B. $108,076 C. $100,710 D. $103,417

A. $107,568

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. $500,000 B. $100,000 C. $250,000 D. $750,000

A. $500,000

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. $99,000 C. $300,000 D. $200,000

A. $82,333

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 broker C. A career agent D. A captive agent

A. A producing general agent

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

A. Both I and II

Which of the following statements regarding the accidental death benefit (ADB) rider is CORRECT? I. The ADB rider is no longer synonymous with the term double indemnity. II. 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.

A. Both I and II

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. Comparative negligence B. The last clear chance rule C. Contributory negligence D. Assumption of risk

A. Comparative negligence

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. Disability waiver of premium B. Guaranteed insurability option C. Accidental death benefit rider D. Accelerated death benefit rider

A. Disability waiver of premium

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

A. Grace period

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

A. HO-5

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

A. Homeowners coverage on both homes, watercraft coverage, an inland marine policy, and a large umbrella policy, at a minimum

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

A. I only

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

A. I, II, III, and IV

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? I. Automobile insurance II. Errors and omissions insurance III. Homeowners insurance IV. Malpractice insurance

A. I, II, and III

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

A. I, II, and III

Under a Section 1035 exchange, which of the following policies may be exchanged on a tax-free basis? I. 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 II. One annuity contract exchanged for another annuity contract III. A life insurance policy exchanged for another life insurance policy(on the same insured), annuity, or endowment contract IV. An annuity contract exchanged for a life insurance policy

A. I, II, and III

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.

A. Medical payments coverage is applicable, and liability coverage is applicable if Samantha is held legally liable.

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. Negligence B. Attractive nuisance C. Strict liability D. Assumption of risk

A. Negligence

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

A. Paid-up additions

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. Permanent insurance policies have more variable investment choices available to them than are available in noninsurance investment vehicles. B. 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. 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.

A. Permanent insurance policies have more variable investment choices available to them than are available in noninsurance investment vehicles.

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

A. Self-insurance raises the possibility that the business will have to pay higher income taxes.

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

A. actual cash value.

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

A. nonresidents operating the owned auto with permission.

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

A. provide open-peril coverage for personal property owned, used, or worn by the insured.

All of the following are characteristics of a principal-agent relationship except A. the agent typically has little or no independent discretion. 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 has a duty of loyalty to the principal.

A. the agent typically has little or no independent discretion.

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 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. B. 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. C. "Antonio could add an accidental death and disability (AD&D) rider." D. 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.

B. 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

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

B. Cash

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

B. Elimination

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. Farm-use vehicles generally have higher premiums. C. A multicar discount is generally available for insureds who own more than one automobile. D. Young male drivers have the highest rate of automobile accidents.

B. Farm-use vehicles generally have higher premiums

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. Portfolio value B. Human life value C. Conversion value D. Net present value

B. Human life value

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

B. I, II, III, and IV

Which of the following are methods of managing risk? I. Avoidance II. Retention III. Reduction IV. Transfer

B. I, II, III, and IV

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? I. Any act committed with the intent to cause bodily injury to another II. Liability arising out of any personal activity III. Directors and officers liability IV. Workers' compensation obligations

B. I, III, and IV

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 exclusion B. The deductible C. The rider D. The endorsement

B. The deductible

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

B. jewelry.

All of the following statements concerning the methods of providing life insurance protection are correct except A. 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. B. term life insurance is a good choice for people who need permanent life insurance protection C. 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. D. 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.

B. term life insurance is a good choice for people who need permanent life insurance protection

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

C. Decreasing term life insurance

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

C. First-to-die life

For life insurance to be underwritten, an insurable interest must exist I. when the policy is first issued. II. when a loss is claimed.

C. I only

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? I. Fire is a peril. II. Leaving oily rags in a hardware store's repair shop area is a hazard. III. The handling of propane is a hazard. IV. A pure risk is one that involves only the chance of loss or no loss; in other words, there is no chance of gain.

C. I, II, III, and IV

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

C. I, II, and III

Which of the following statements regarding insurance contracts are CORRECT? I. 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. II. 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. III. Insurance contracts are unilateral contracts, in that all parties to the contract are legally bound to perform. IV. Insurance contracts are aleatory contracts, meaning that the outcome is affected by chance, and the dollars collected by the parties are usually unequal.

C. I, II, and IV

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

C. II and III

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

C. II, III, and IV

Several years ago, Diego purchased a $400,000 whole life insurance policy on his life. He has paid cumulative premiums over the years of $20,000 and has accumulated a cash value of $25,000. This year, he was diagnosed with a rare liver disease, and, as a result, his life expectancy is only six months. Because of his large medical costs, he is considering selling his policy to a viatical settlement company. The company has offered him $250,000 for the policy. He would also like to explore other ways to generate cash from the policy. Which of the following statements regarding Diego's situation are CORRECT? I. If Diego sells his policy to the viatical settlement company, he will be taxed on any gain from the sale if he dies more than two years later. II. If the viatical company collects the death benefit as a result of Diego's death, the proceeds will be tax free to the company. III. If Diego sold the policy to his cousin for $250,000, his cousin would be subject to ordinary income tax on a portion of the life insurance benefit when Diego dies. IV. If Diego takes a loan from the policy, some or all of the loan will be subject to ordinary income tax if the policy is classified as a modified endowment contract (MEC).

C. III and IV

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

C. IV only

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

C. IV only

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

C. If an item such as watercraft is not covered by an underlying policy, it may not be covered under the umbrella for liability issues.

Which of the following is a common property coverage that can be included in a businessowners policy (BOP)? A. Workers' compensation B. Professional liability C. Inland marine D. General liability

C. Inland marine

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. Enforcing the laws in place relative to the insurance industry C. Passing laws relative to the insurance industry D. Creating model legislation relative to the insurance industry

C. Passing laws relative to the insurance industry

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

C. The McCarran-Ferguson Act of 1945

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

C. covers domestic goods in transit.

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.

C. identifying the insurance required to cover every risk.

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. $500,000 B. $275,000 C. $225,000 D. $725,000

D. $725,000

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 benefit under a long-term care insurance policy that continues to pay a longterm care facility for a limited time if a patient must temporarily leave because of hospitalization C. A provision for the replacement of lost earnings due to less-than-total disability D. 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 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

Which of the following statements best describes a morale hazard? A. An unintentional tort in the form of an action or omission that leads to the injury of another party B. 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 C. A false and material statement made by an applicant for insurance, providing a basis for the insurer to void the contract D. 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. 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

Which of the following definitions best defines insurable interest? A. The increase in the cash value or investment fund of a permanent life insurance policy B. Any right to the economic benefits of a piece of property, such as a life insurance policy C. The process of determining when, how much, and where to insure risks D. 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

D. 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

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

D. Accepting any settlement offered by the insurer

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

D. Boiler and machinery

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. Legal form B. Legal object C. Legal capacity D. Consideration

D. Consideration

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

D. I and II

Which of the following statements regarding Coverage E and Coverage F within a standard homeowners insurance policy is CORRECT? I. 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. II. 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. III. Coverage E may cover the insured for injuries or property damage caused while playing golf.

D. I and III

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

D. I and IV

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

D. I, II, III, and IV

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

D. I, II, and III

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

D. I, III, and IV

Which of the following characteristics of inland marine coverage are explained correctly? I. Personal property floater risks are not eligible for coverage under inland marine policies. II. Many of the same items may be covered under an inland marine policy or as an endorsement to a homeowners policy. III. 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. IV. Silverware and golfing equipment may be covered under an inland marine policy.

D. II and IV

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

D. Implementing the recommendations

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

D. Life income option

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

D. No insurance coverage will have been in place from the date of the lapse to the date all reinstatement requirements are submitted.

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

D. The declarations section

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

D. The law of large numbers is necessary to make losses reasonably predictable, and there aren't that many homes of very high value.

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 utmost good faith. C. a contract of indemnity. D. a contract of adhesion.

D. a contract of adhesion.

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 limited-pay whole life policy. C. a variable life policy. D. a modified premium whole life policy.

D. a modified premium whole life policy.

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

D. the decedent's investments.