INSURANCE FINAL EXAM 50 QUESTIONS

Robin's stereo was stolen. The stereo cost $3,000 when purchased. A similar new stereo now costs $2,400. Assuming the stereo was 50% depreciated, what is the actual cash value of Robin's loss?

$1,200 2,400 × .50 = 1,200 (How much she paid is irrelevant to actual cash value).

Sally has a major medical policy with a $500 annual deductible and an 80/20 coinsurance provision, with a $2,500 max out of pocket provision. Sally breaks a leg dancing and has surgery that costs $12,000. How much will she have to pay for the surgery in total?

$2,500 $12,000 - $500 = $11,500 covered loss Insured Portion $11,500 × .20 = $2,300 Max is $2,000 + $500 = $2,500

Chris has a HO-3 policy that provides $300,000 of insurance on his dwelling, which has a current replacement value $500,000. Ignoring any deductible, how much will Chris collect if he suffers a covered loss to the dwelling with a replacement value of $60,000 but an actual cash value of $30,000?

$45,000 300,000 / (.80 × 500,000) = .75 × 60,000 = 45,000

All of the following statements regarding a Health Savings Account are true except

A 10% penalty applies to non-medical expense withdrawals prior to age 65.

All of the following statements concerning annuities are correct EXCEPT A. The pure life annuity is ideal for the person who needs maximum income spread out over a lifetime and has several living dependents to whom he or she wishes to leave assets. B. A life annuity with guaranteed minimum payments ensures that the annuitant either receives a minimum number of payments, or will have lifetime income; whichever is greater. C. In an installment refund annuity, the insurer promises to continue periodic payments after the annuitant has died until the sum of all annuity rent payments equals the purchase price of the annuity. D. A joint and survivor annuity is an annuity based on the lives of two or more annuitants, usually husband and wife. Solution

A. The pure life annuity is ideal for the person who needs maximum income spread out over a lifetime and has several living dependents to whom he or she wishes to leave assets.

All of the following statements concerning whole life insurance are correct EXCEPT A. There are multiple types of whole life insurance, including ordinary life insurance and limited-payment life insurance. B. If the whole life insurance premiums are to be paid throughout the insured's lifetime, the insurance is known as ordinary life. C. Ordinary life insurance is a type of whole life insurance for which premiums are based on the assumption that they will be paid until the insured's death. D. Because the premium rate for an ordinary life contract is calculated on the assumption that premiums will be payable throughout the whole of life, the highest premium rate for any type of whole life policy is produced.

Because the premium rate for an ordinary life contract is calculated on the assumption that premiums will be payable throughout the whole of life, the highest premium rate for any type of whole life policy is produced

Which of the following statements concerning a personal auto policy's (PAP's) Part A - Liability coverage is (are) correct? I. Part A of the PAP provides bodily injury and property damage liability protection to any insured who is legally responsible for an automobile accident. II. The insurer agrees to pay defense costs until the limit of liability has been exhausted by payment of judgments or settlements.

Both I and II

Which of the following statements concerning life insurance is (are) correct? I. Term insurance is a form of life insurance in which the death proceeds are payable in the event of the insured's death during a specified period and nothing is paid if the insured survives to the end of that period. II. The mortality rate for term insurance is determined by the death rate for the attained age of the individual involved.

Both I and II

Which of the following statements concerning personal umbrella liability insurance is (are) correct? I. The personal umbrella policy is designed primarily to provide liability coverage for catastrophic legal claims or judgments. II. The personal umbrella policy requires the policy owner to carry certain underlying liability coverages of specified minimum amounts—a claim made under an umbrella policy will pay only after the limits of the underlying policy are exhausted.

Both I and II

Which of the following statements concerning universal life insurance is (are) correct? I. The policy owner has no ability to direct the investment of the policy's cash values. II. Universal life policy owners can choose the amount of premium they pay into their policies, subject to insurer minimums and maximums.

Both I and II

Which of the following statements comparing annuities to life insurance is (are) correct? I. The primary function of life insurance is to create an estate or principal sum; the primary function of an annuity is to liquidate a principal sum, regardless of how it was created. II. Both life insurance and annuities protect against loss of income-life insurance furnishes protection against loss of income arising out of premature death; an annuity provides protection against loss of income arising out of excessive longevity.

Both I and II.

Which of the following statements concerning Social Security benefits is (are) correct? I. If an individual receives benefits based on his or her spouse's record, the individual's benefits will cease upon divorce unless the individual is age 62 or older and was married at least 10 years. II. Widows and widowers, whether divorced or not, will continue to receive survivors' benefits upon remarriage if the widow or widower is age 60 or older.

Both I and II.

Which of the following statements concerning the insurance terms is (are) correct? I. Subrogation is the right, upon paying the insured the amount of a loss, to try to collect from a responsible third party. II. Indemnity is when an insured is entitled to payment only to the extent of financial loss or legal liability.

Both I and II.

Which of the following statements concerning the legal requirements of insurance as a contract is (are) correct? I. The agreement by which insurance is affected is a contract in which the insurer, in consideration of the payment of a specified sum by the policy owner, agrees to make good the losses suffered through the occurrence of a designated unfavorable contingency. II. To be valid and enforceable, insurance contracts must meet five general legal requirements: mutual consent, an offer by one party and an acceptance by another party; a legal purpose or object; legal competence of both parties; and performance or delivery by both parties to the agreement.

Both I and II.

Which of the following statements concerning the need for long-term care insurance is (are) correct? I. Private medical expense insurance policies (both group and individual), in some cases, provide coverage only if a person also needs medical care; however, benefits are not provided if a person is merely "old" and needs someone to care for him or her. II. Medicare is inadequate because it does not cover custodial care if that is all that is needed.

Both I and II.

Which of the following statements concerning the reduction of Social Security benefits is (are) correct? I. Besides early retirement, there are two other situations in which beneficiaries can have their benefits reduced: through the retirement earnings limitations test and through taxation of benefits. II. A person generally can continue to work even though he or she is considered "retired" under Social Security: however, those earnings obtained by a beneficiary under normal retirement age above certain limitations will reduce the benefit.

Both I and II.

All of the following statements concerning COBRA benefits are correct EXCEPT: The benefit recipient must pay the full cost of coverage plus up to 2% of the premium to cover administrative expenses (if required by the employer). Qualifying events for COBRA include death of a covered employee and reduction of the employee's hours from full-time to part-time. COBRA requires certain employers to provide previously covered persons with the same coverage received prior to discontinuation of coverage. Employers must offer coverage for 36 months if the employee is terminated, and for 18 months if the covered employee dies.

Employers must offer coverage for 36 months if the employee is terminated, and for 18 months if the covered employee dies. Solution

A Corporation has 10 equity partners, interested in a Buy Sell arrangement. They would like to fund the agreement with term life insurance, and are comparing the Cross Purchase and Entity (No stock) methods. All observations are correct except:

Fewer policies required for a Cross Purchase

Anu, age 36, owns a social media consulting firm. Her income fluctuates from year to year in an unpredictable manner. She wants to invest in an annuity on a regular basis until her retirement. Which of the following is the most suitable for her?

Flexible premium, deferred annuity

Which homeowners policy is designed for the tenants of rental property?

HO-4

Which of the following statements concerning term life insurance is (are) correct? I. Because death rates rise at an increasing rate as ages increase, the mortality cost for term insurance also rises at an increasing rate. II. Term insurance has a cash value.

I only

Which of the following statements concerning the characteristics of disability income insurance is (are) correct? I. During the elimination period, disability income benefits are not being paid. II. During the elimination period, partial disability income benefits are paid.

I only

Which of the following statements concerning the personal auto policy's (PAP's) Part C Uninsured Motorists coverage is (are) correct? I. Under Part C of the PAP, the insurer agrees to pay compensatory damages that an insured is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of bodily injury (and property damage in a few states) sustained by an insured and caused by an accident. II. The uninsured motorists coverage applies to claims for medical expenses, lost wages, and pain and suffering, punitive or exemplary damages.

I only

Which of the following statements concerning major medical plans is (are) correct? I. Major medical expense plans contain a coinsurance provision, whereby the plan will pay only a specified percentage of the covered expenses that exceed the deductible. II. Some major medical contracts limit the amount of lifetime coverage.

I only.

Which of the following statements concerning the Social Security system is (are) correct? I. Workers entitled to retirement benefits can currently take early retirement benefits as early as age 59 1/2. II. The worker who takes early retirement benefits will receive a reduced benefit because he or she will receive more monthly benefit payments, as payments commence earlier than if the worker had waited and retired at full retirement age.

II only

Which of the following statements concerning property insurance is (are) correct? I. Broad named policies cover all losses to covered property unless the loss is specifically excluded. II. Insurance policies fall into two broad categories with respect to covered perils - named perils policies and "all risks" policies.

II only Named Perils covers both Basic and Broad named perils. Open peril polices cover all loses unless specifically excluded. From the Insurance Planning textbook: Broad coverage, as its name implies, provides protection for all of the named perils covered in basic coverage, plus additional protection for named perils not covered under basic coverage.

Which of the following statements concerning the characteristics of disability income insurance is (are) correct? I. The residual benefits clause preserves the purchasing power of the insured's disability income benefits. II. In a cost of living rider, an adjustment is made for each year of benefits paid to the insured and is computed by using the same rate of change as, say, the Consumer Price Index.

II only.

All of the following statements concerning variable life insurance are correct EXCEPT: A. Variable life is a type of whole life insurance that has a fixed premium and fluctuating death benefit and cash values. B. Variable whole life policies must be regulated by the Securities and Exchange Commission (SEC). C. The owner of a variable universal life policy has the option to invest in a variety of investments. D. If the variable life policy investment experience is weak, the death benefit amount may be reduced to zero.

If the variable life policy investment experience is weak, the death benefit amount may be reduced to zero.

All of the following statements concerning whole life insurance are correct EXCEPT A. Whole life insurance provides for the payment of the policy's face amount upon the death of the insured, regardless of when death occurs. B. If the whole life insurance premiums are to be paid throughout the insured's lifetime, the insurance is known as limited-payment; if the whole life insurance premiums are to be paid only during a specified period, the insurance is designed as ordinary life. C. Whole life insurance offers permanent protection with cash values, and it can be either participating or nonparticipating. D. The protection afforded by the whole life insurance contract is permanent-the term never expires, and the policy never has to be renewed or converted.

If the whole life insurance premiums are to be paid throughout the insured's lifetime, the insurance is known as limited-payment; if the whole life insurance premiums are to be paid only during a specified period, the insurance is designed as ordinary life.

Reasons an employer may prefer a Non-Qualified Retirement Plan over a Qualified Plan include the following except: More design flexibility with a Non-Qualified Plan Immediate tax deduction for employer with Non-Qualified Plan No Form 5500 reporting with a Non-Qualified plan No specific (DOL/IRS) limitations on how much executive compensation can be contributed and tax deferred each year

Immediate tax deduction for employer with Non-Qualified Plan

All of the following statements concerning the legal characteristics of insurance contracts are correct EXCEPT

It is generally held that where the terms of the policy are ambiguous, obscure, or susceptible to more than one interpretation, the construction most favorable to the insurer will prevail.

The following statements about HO-6 coverage are true EXCEPT:

It provides no coverage for improvements and alterations.

Sally, age 59 ½, was employed full time at JMG corporation. The company has 25 full time and 10 part time employees but does not offer group health insurance. The company was recently forced to down size. What should Sally do for health insurance while unemployed?

Purchase an individual major medical policy until she obtains group coverage with a new employer.

Benefits of Rabbi Trusts and Secular Trusts include all except:

Rabbi Trusts are not subject to risk of bankruptcy

Which of the following likely has the highest credit score?

Ralph has 3 credit cards, credit utilization of 20%, an installment loan, a mortgage, and a perfect payment history for 3 years.

All of the following statements concerning disability income insurance are correct EXCEPT: A. Premiums for disability income insurance coverage are a function of the insured's health, gender, age, and the level of income benefits provided by the policy. B. To qualify for disability income, one must become disabled while the policy is in force and remain so until the elimination (exclusion) period has ended. C. A policy that integrates with Social Security will reduce payable benefits by the amount of Social Security the disabled person is eligible to receive. D. The Social Security program requires the disabled person to wait 1 month before receiving benefits.

The Social Security program requires the disabled person to wait 1 month before receiving benefits. Solution

All of the following statements concerning the Social Security system are correct EXCEPT The Social Security retirement benefit is payable at normal retirement age with reduced benefits available as early as age 59 1/2, to anyone who has obtained at least a minimum amount of Social Security benefits. Disability benefit recipients must have a severe physical or mental impairment that is expected to either prevent them from performing "substantial" work for at least a year, or result in death. The family benefit is provided to certain family members of workers eligible for retirement or disability benefits. Survivors benefits apply to those family members listed for family benefits, and may also include the worker's parents if the worker was their primary means of support.

The Social Security retirement benefit is payable at normal retirement age with reduced benefits available as early as age 59 1/2, to anyone who has obtained at least a minimum amount of Social Security benefits.

Which of the following most accurately describes the criteria required for an insured to qualify for long-term care benefits for a qualified plan under the Health Insurance Portability and Accountability Act? The insured is unable to perform two of the six ADLs for 90 days. The insured has substantial cognitive impairment requiring substantial service. The insured must meet both A and B. The insured may qualify by meeting either A or B.

The insured may qualify by meeting either A or B.

All of the following statements concerning the methods of providing life insurance protection are correct EXCEPT A. An insurance company can use three approaches to provide life insurance protection; term insurance, which is temporary, or cash value insurance, which is permanent protection that builds up a reserve or savings account, or universal insurance which combines elements of both approaches. B. Term insurance is a form of life insurance in which the death proceeds are payable in the event of the insured's death during a specified period and nothing is paid if the insured survives to the end of that period. C. The net premium for term insurance is determined by the survival rate for the attained age of the individual involved. D. Because death rates rise at an increasing rate as ages increase, the net premium for term insurance also rises at an increasing rate.

The net premium for term insurance is determined by the survival rate for the attained age of the individual involved.

All of the following statements regarding a MEC are correct EXCEPT?

Withdrawals from a MEC are subject to FIFO tax treatment.

Which of the following property is covered under the personal property coverage (Coverage C) of HO- 3?

a skateboard owned by a stepchild living with the named insured.

When must an insurable interest exist for a life insurance policy?

at the inception of the policy.

When must an insurable interest exist for a property insurance policy?

both at the time of loss and at the inception of the policy.

Section II of the HO-3 policy provides coverage for which of the following:

medical payments.

False statements made by an applicant for insurance are:

misrepresentations

Claiming a theft happened when it didn't to collect insurance proceeds is an example of a

moral hazard.

A pure risk is where there is:

only the possibility of loss or no loss.

Which of the following describes adverse selection?

persons most likely to suffer losses are most likely to seek insurance.

The use of increased deductibles by the insured in insurance contracts is one example of:

risk retention

What is the effect of an insurance policy being adhesive?

the insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties.