RMIN Test 2 Quizzes
Brad owns a cash value life insurance policy. Last year, the cash value increased by $300. Brad received $100 in policyowner dividends on the policy last year. Brad was the beneficiary named in his grandmother's $50,000 life insurance policy. When she died this past year, Brad received $50,000. How much taxable income relating to life insurance must Brad report for federal income tax purposes?
$0
According the 2001 CSO mortality table, the yearly probability of dying for a 40 year-old man is .00165. The present value of $1 one year from today, assuming a 5.5 percent interest rate, is .9479. What is the net single premium per $1,000 for a one-year term insurance policy sold to a man at age 40 assuming a 5.5 percent interest rate? Assume the premium is paid at the start of the year and the death benefit is paid at the end of the year.
$1.56
David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the net payment cost per thousand per year of David's policy over the 20-year period?
$15.77
Beth purchased a $50,000 nonparticipating whole life insurance policy. The annual premium was $1,278. The cash value of the policy after 10 years will be $13,740. The future value of $1 deposited at the start of the year for 10 years, assuming 5 percent interest, is $13.207. If the premiums were invested at 5 percent interest for 10 years, the premiums would grow to $16,878.55. Assuming 5 percent interest, what is the net payment cost of this policy, per thousand per year, over the first 10 years the policy is in force?
$25.56
Kristen has an individual medical expense policy with a $1,000 calendar-year deductible, a $5,000 annual out-of-pocket limit, and a 20 percent coinsurance requirement. Kristen was hospitalized for a surgical procedure in March, her first health care treatment received during the year. The total bill was $20,000. Considering the deductible and coinsurance, how much of this amount must Kristen pay?
$4,800
David owns a commercial building with a replacement cost of $4 million. The building is insured on a replacement cost basis for $2.4 million under a fire insurance policy that has an 80 percent coinsurance clause. How much will David collect if the building sustains a covered fire loss with a replacement cost of $80,000?
$60,000
Mark owns a building that he insured for $90,000. The replacement cost of the building is $100,000. Mark's property insurance policy has an 80 percent coinsurance clause. Ignoring any deductible, if Mark's building is destroyed by a covered peril, how much will Mark receive from his insurer?
$90,000
Sam's furniture was destroyed by a fire. The furniture cost $1,200 when it was purchased, but similar new furniture now costs $1,800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss?
$900
David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the traditional net cost per thousand per year of David's policy over the 20-year period?
-$2.64
Which of the following statements about experience rating is (are) true? I. The insured's past loss experience is used to determine the premium for the next policy period. II. Its use is generally limited to small firms whose actual experience lacks credibility.
1 only
Which of the following $100,000 whole life insurance policies, issued by the same company to a man age 32, would require the highest first-year premium?
10-payment whole life
XYZ Insurance Company uses class rating to determine the rate to charge for insurance. For one type of insurance, the pure premium XYZ actuaries calculated is $75 per unit. If XYZ's expense ratio is 25 percent, what is the gross rate for this coverage?
100
Ratemakers at ABC Insurance Company calculated the pure premium to be $280 for a risk they were considering insuring. What is the gross rate for this risk, assuming a 30 percent expense ratio?
400
ABC Insurance Company's investment income ratio last year was 4.2 percent. The company's combined ratio last year was 102.6 percent. What was ABC's overall operating ratio?
98.4%
Which of the following statements about the combined ratio is true?
A combined ratio greater than 1 (or 100 percent) means an underwriting loss has occurred.
Which of the following statements about the continuation of group health insurance under the COBRA law is true?
A continuation of coverage must be made available even if an employee voluntarily terminates employment.
Dave is an agent for Easy Pay Insurance. Easy Pay insures only high-quality applicants. Dave wanted to earn more commissions, so he sold some policies to applicants he knew were below-average risks. When these policyowners started filing claims, Easy Pay tried to deny the claims stating that Dave had not acted appropriately. Which general rule of agency makes Easy Pay responsible for the claims of the higher-than-average risk policyowners?
A principal is responsible for the acts of its agents who are acting within the scope of their authority.
Ann Parks and Robert Evans jointly own a grocery store. Ann and Robert are both named insureds on the property insurance covering the store, but Ann is the first named insured. Which of the following statements is true with regard to Ann's status as the first named insured?
Ann is responsible for making sure that the premium has be
To correct abuses in the financial services industry, Congress passed an Act in 2010 that included numerous provisions to reform the financial services industry. This Act was the
Dodd-frank act
Which of the following statements about "open-perils" coverage is (are) true? I. All losses are covered except those losses specifically excluded. II. The burden of proof is on the insured to prove that a loss is covered.
I only
Which of the following statements about HMO managed care plans is (are) true? I. There is an emphasis on controlling costs. II. They provide narrow, limited, medical services to members.
I only
Which of the following statements about the licensing of insurance companies is (are) true? I. A new capital stock insurer must meet minimum capital and surplus requirements, which vary by state and line of insurance. II. The licensing requirements for insurance companies are less stringent than those imposed on most other types of firms.
I only
Which of the following statements about the needs approach for estimating the amount of life insurance to purchase is (are) true? I. It involves an analysis of various family needs which must be met if a family breadwinner dies. II. Its use is appropriate only if a person currently has no life insurance protection.
I only
Which of the following statements regarding health care expenditures in the United States is (are) true? I. As a nation, the United States spends significantly more per-person on health care than most other industrialized nations. II. Health care expenditures in the United States are high because everyone is covered by a health insurance plan.
I only
Which of the following statements about the principle of insurable interest is (are) true? I. It makes it difficult to measure the amount of an insured's loss. II. It reduces moral hazard.
II Only
Charles, age 65, owns a paid-up $250,000 whole life policy on his own life. Charles is doing some estate planning and would not like this policy to be included in his gross estate for federal estate tax purposes. Which of the following statements is (are) true regarding the tax treatment of this policy? I. Charles can avoid having the policy proceeds included in his gross estate by naming his estate the beneficiary. II. If Charles makes an absolute assignment of the policy and dies more than three years later, the policy is not counted as part of his gross estate.
II only
Fundamental purposes of the principle of indemnity include which of the following? I. To reduce physical hazards II. To prevent the insured from profiting from insurance
II only
The purchase of term insurance is justified by which of the following circumstances? I. The insured wants to save money through the policy for a specific need. II. The insured has a temporary need for life insurance protection.
II only
Which of the following is (are) characteristics of HMO managed care plans? I. Unlimited choice of physicians and hospitals II. Emphasis on controlling the cost of covered services
II only
Which of the following statements about an insurable interest in life insurance is (are) true? I. It is required of any person named as beneficiary. II. It may result from a pecuniary (financial) interest.
II only
Which of the following statements about cafeteria plans is (are) true? I. Unspent flexible spending account balances are refunded to the employee, tax-free, at year-end. II. Cafeteria plans enable employees to select benefits that meet their specific needs.
II only
Which of the following statements about consideration in an insurance contract is (are) true? I. The insured's total consideration is submission of a completed application. II. The insurer's consideration is the promise to do those things specified in the policy.
II only
Which of the following statements about disability and disability income insurance is (are) true? I. Most disability income policies replace 100 percent of gross earnings. II. The probability of being disabled before age 65 is much higher than commonly believed.
II only
Which of the following statements about individual disability income policies that use a two-part definition of total disability is (are) true? I. During the initial period of disability, the insured must be unable to perform the duties of any gainful occupation. II. After the initial period of disability, the insured must be unable to perform the duties of any occupation for which he or she is reasonably fitted by education, training, and experience.
II only
Which of the following statements about second-to-die life insurance is (are) true? I. The insurance is a form of endowment coverage. II. The premium is lower than the combined cost of purchasing a life insurance policy on each insured.
II only
Which of the following statements is (are) true about the loss ratio method of class rating? I. The pure premium is calculated, and it is loaded to cover expenses, profit, and contingencies. II. The actual loss ratio is compared to the expected loss ratio, and the rate is adjusted accordingly.
II only
Which of the following statements is (are) true concerning the automatic premium loan provision? I. Unlike other policy loans, interest is not charged on automatic premium loans. II. The basic purpose of an automatic premium loan is to prevent a life insurance policy from lapsing.
II only
Which of the following statements is (are) true regarding exclusions in life insurance contracts? I. Life insurance policies are remarkably restrictive, including numerous exclusions. II. A life insurer may exclude death attributable to certain activities or hobbies disclosed on the application.
II only
Which of the following statements is (are) true with regard to group life insurance? I. Most group life insurance is whole life coverage. II. Most group life insurance plans allow a modest amount of life insurance on the employee's spouse and dependent children.
II only
Which of the following statements regarding group long-term disability income insurance plans is (are) true? I. These plans are usually limited to occupational disabilities. II. These plans typically use a more restrictive definition of disability after an initial period of disability, such as two years.
II only
James purchased liability insurance with a $100,000 limit from Insurer A. When Insurer A denied a claim that James thought should be covered, he bought a second liability insurance policy with a $150,000 limit from Insurer B. Before he cancelled the policy with Insurer A, a $60,000 loss occurred. If this loss is settled on a pro rata basis, how much must each insurer pay?
Insurer A will pay $24,000 and Insurer B will pay $36,000.
Jane purchased a $50,000 liability insurance policy from Insurer A. Fearing that she did not have enough liability insurance, she purchased an additional $100,000 of liability coverage from Insurer B. As a result of a negligent act, Jane was ordered to pay $75,000 in damages. Assuming the coverage from Insurer A is primary and the coverage from Insurer B is excess, how will this claim be settled?
Insurer A will pay $50,000 and Insurer B will pay $25,000.
Kate is covered under her employer's group health plan. She is also covered as a dependent under her husband's group health plan. Under the usual coordination-of-benefits provision, how will each company respond to a claim filed by Kate?
Kate's plan is primary, and her husband's plan is excess.
Which of the following statements about individual disability income policies is true?
Many policies provide or make available a residual disability benefit for persons who are able to work but at a reduced income.
The Affordable Care Act has a provision that expands a public assistance program designed to make health coverage available to low-income individuals by increasing the maximum amount of income that can be earned and still qualify for benefits. As a result, millions of individuals are eligible for coverage under this program. This public assistance program is called
Medicaid
Which of the following statements about term insurance is true?
Most policies can be renewed for additional periods without evidence of insurability.
Why are insurance contracts said to be contracts of adhesion?
One party writes the contract, and the other party must accept the entire contract as written.
Some managed care plans use physicians, hospitals, and health care organizations that agree to make medical services available to insureds at discounted fees. Insureds are not required to use these entities, but if they do, health care costs are less than if these entities are not used. Such health care entities are called
Preferred Provider Organizations
A special coverage policy is a policy that
Provides open perils coverage
Monopoly Insurance is the only company marketing a certain line of insurance in a state. After complaints from several consumers, the State Insurance Department investigated Monopoly's rates. The regulators determined that Monopoly was taking advantage of being the only insurer offering the line by charging more than double the actuarial cost of the coverage. Which regulatory rating objective was Monopoly violating?
Rates must not be excessive.
ABC Insurance Company would like to purchase a bank. For many years, ABC was not permitted under federal law to enter into banking operations. Which of the following legislative acts eliminated the prohibition that prevented banks, insurers, and investment firms from entering into one another's markets?
The Financial Modernization Act (Gramm-Leach-Bliley Act)
Which of the following statements is true regarding return of premium term insurance?
The coverage is expensive and is not free when time value of money is considered.
What is the practical effect of an insurance policy being a conditional contract?
The insurer can refuse to a pay claim if the insured has not complied with all policy provisions.
Which of the following statements about mandatory provisions in individual health insurance policies is true?
Under the reinstatement provision, a health insurance policy that has lapsed can be put back in force.
Paul is shopping for a life insurance policy. An agent asked Paul if he would like to purchase a participating policy. What is a "participating" policy?
a policy which pays dividends
The transfer of all ownership rights in a life insurance policy can be accomplished through a(n)
absolute assignment
The loss settlement under which of the following supports the principle of indemnity?
actual cash value property insurance
All of the following statements about optional disability income benefits are true EXCEPT
adding a return of premium rider results in a lower initial premium.
Roger owns some farmland that he rents to a tenant. The tenant lives in an old farmhouse on the property and raises crops on the land. Roger is concerned about possible legal liability if the tenant injures someone. Roger requires the tenant to have liability insurance and to add himself to the liability coverage through an endorsement. Under the tenant's liability insurance, Roger is a(n)
additional insured
A life insurance company based in Canada was licensed to operate in Massachusetts. When operating in Massachusetts, the Canadian insurer would be considered a(n)
alien insurer
An insurance company chartered in another country has been licensed to operate in your state. In your state, the insurer would be considered a(n)
alien insurer
All of the following are typical characteristics of individual medical expense coverage EXCEPT
annual benefit limits.
Life insurance policyholders may borrow the cash value from their life insurance policies. Where are life insurance policy loans shown on a life insurance company's financial statements?
as an asset
One life insurance company reserve is designed to smooth the company's reported surplus over time by absorbing fluctuations in security prices that are not attributable to changing interest rates. This reserve is called the
asset valuation reserve
The policyholders' surplus of an insurer is defined as the difference between its
assets and liabilities
Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions?
because insurance contracts are conditional
Dave and Meagan Philips borrowed $150,000 from Fifth National Bank to help fund the purchase of a new home. The home serves as collateral for the loan. Fifth National has an insurable interest in the home based on
being a secured creditor
The period during which a surviving spouse is ineligible for Social Security benefits is referred to as the
blackout period
Advantages of selecting the paid-up additions dividend option in a life insurance policy include which of the following? I. Evidence of insurability is not required to purchase additional insurance. II. The additions are purchased at net rates without a loading for expenses.
both I and II
Disadvantages of life insurance settlement options include which of the following? I. Higher yields can often be obtained elsewhere. II. Life income options have limited usefulness at younger ages.
both I and II
Reasons why a peril may be considered uninsurable and therefore excluded from insurance contracts include which of the following? I. The losses from the occurrence of the peril may be due to a predictable decline in value. II. The losses from the occurrence of the peril may be incalculable and catastrophic.
both I and II
The major reasons for insurer insolvency include which of the following? I. Inadequate pricing and loss reserves II. Rapid growth and inadequate surplus
both I and II
Under the Affordable Care Act, which of the following statements are true? I. Health insurers cannot use pre-existing conditions exclusions. II. Health insurers cannot impose annual benefit limits and lifetime benefit limits.
both I and II
Which of the following statements about a typical accidental death benefit rider is (are) true? I. Accidental injury must be the cause of death for the increased benefit to be paid. II. The accidental death must occur prior to some specified age for the increased benefit to be paid.
both I and II
Which of the following statements about policies sold to preferred risks is (are) true? I. Preferred risks are people whose mortality experience (deaths per thousand at a given age) is expected to be more favorable than average. II. Insurers require preferred risks to purchase at least a minimum amount of life insurance, such as $250,000.
both I and II
Which of the following statements about preferred provider organization (PPO) health plans is (are) true? I. A PPO plan contracts with health care providers to provide medical services to members at reduced fees. II. Plan members are given a financial incentive to use PPO providers rather than other providers.
both I and II
Which of the following statements about problems arising from the use of a coinsurance clause is (are) true? I. The amount of insurance should be periodically evaluated to avoid a coinsurance penalty because of inflation. II. An agreed value coverage option is one method used to solve the problem of values that fluctuate throughout the policy term.
both I and II
Which of the following statements about the regulation of life insurance companies is (are) true? I. The percentage of assets a life insurance company may invest in a specific type of asset (e.g., stocks or bonds) is generally limited by law. II. The purpose of limiting the accumulation of surplus is to prevent an insurer from increasing its surplus at the expense of policyowner dividends.
both I and II
Which of the following statements about the traditional net cost method of measuring the cost of life insurance is (are) true? I. The traditional net cost method does not consider the time value of money. II. The traditional net cost method can show that life insurance has a negative cost.
both I and II
Which of the following statements concerning individual medical expense insurance is (are) correct? I. Once the deductible is satisfied, no additional deductible is payable during the calendar year. II. Family deductibles are substantially higher than individual deductibles.
both I and II
Which of the following statements concerning managed care plans is true? I. Most employees are covered under some form of managed care plan. II. Managed care plans emphasize cost controls and preventative care.
both I and II
Which of the following statements concerning regulatory objectives of rate making is (are) true? I. Rates must not be unfairly discriminatory. II. Rates must be adequate.
both I and II
Which of the following statements is (are) true about the federal estate tax? I. The gross estate can be reduced by a number of deductions. II. If the person who died had any ownership interest in a life insurance policy at the time of death, the proceeds are included in the gross estate for federal estate tax purposes.
both I and II
Which of the following statements is (are) true concerning high deductible health plans? I. An employee can withdraw money tax-free from a health savings account or health reimbursement arrangement to pay covered medical costs. II. There is a cap on an employee's out-of-pocket expenses under the plan.
both I and II
Which of the following is a cost/expense that an estate clearance fund is designed to pay?
burial expenses
The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects a range of uncertainties that life insurers face including such things as bad management decisions and guaranty fund assessments. This risk is called
business risk
A systemic risk is a risk that
can be the cause of the collapse of an entire system
HMOs typically pay network physicians or medical groups a fixed annual or monthly payment for each member, regardless of the frequency or type of service provided. This payment is called a
capitation fee
A property and casualty insurer's loss reserve includes estimates for all of the following EXCEPT
claims anticipated but not yet incurred.
Hank bought a farm that had an old barn. He noticed one day that the roof of the barn was swaying in the wind. Hank went to see his insurance agent and he insured the barn for $20,000. The agent didn't ask if the roof might collapse, and Hank didn't say anything about it. One week later there was a strong wind and the roof collapsed. Assuming the insurer can prove it, under what legal grounds could the insurer deny payment of the claim?
concealment
The cost-of-living rider typically bases increases in the policy face value on changes in the
consumer price index
Some employers offer employees a choice of health care plans which are designed to make employees more sensitive to health care costs, to provide an incentive to avoid unneeded care, and to seek low-cost health care providers. Such plans are called
consumer-directed health plans.
Dave purchased a life insurance policy. The policy is nonparticipating and the cash values are based on the insurer's present mortality, investment, and expense experience. After 2 years, the insurer will recalculate the premium based on the mortality, investment, and expense experience at that time. Dave purchased
current assumption whole life
That part of a property and liability insurance contract that contains information about the property or activity to be insured is called the
declarations
The period of time during which an employee can sign up for group insurance coverage without furnishing evidence of insurability is called a(n)
eligibility period
When using the needs approach, several "special needs" should be considered. One special need is money to cover unexpected events, such as major car repairs, dental bills, or home repairs. Money set aside for this purpose is called a(n)
emergency fund
Which of the following is a characteristic of a health maintenance organization (HMO)?
emphasis on cost containment
The Affordable Care Act requires employers with 100 or more employees to provide health insurance on the employees or pay a penalty if at least one employee receives a tax credit and coverage through the Health Insurance Marketplace. This requirement-providing insurance or paying a fine-is known as the
employer shared responsibility
The Affordable Care Act requires all new medical expense plans to provide a comprehensive set of coverages and services. This comprehensive set of coverages and services that must be provided are called
essential health benefits
Frank asked his company's employee benefits director if his group health coverage could be converted to individual coverage. The benefits director said, "Yes, you can convert to an individual policy, and the coverage is identical to your group coverage." Frank quit his job and converted to an individual policy. Six months later he filed a claim. He was dismayed to learn the conversion policy was more limited compared to the group coverage, and his claim was denied. What legal doctrine will allow Frank to bring a successful legal action against his former employer because he was financially harmed due to his reasonable reliance upon a representation of fact?
estoppel
The exclusion of flood in a homeowners policy is an example of an
excluded peril
HMO members pay nothing for medical care until care is provided, then they must pay high deductibles and large coinsurance payments.
false
insurers are totally exempt from regulation by federal agencies and laws.
false
the complexity of class rating makes it inappropriate for personal lines coverages.
false
the insurer reserves the right to subrogate against its own insureds.
false
the principal is responsible for the acts of agents only if the acts are criminal.
false
the rating system should be independent of long-run changes in economic conditions.
false
The Dodd-Frank Act created a federal body with some limited regulatory authority. For example, the organization can represent the federal government in international negotiations regarding insurance and it can preempt state law where it conflicts with negotiated international agreements. This body is called the
federal office of insurance
Jane purchased a life insurance policy on her own life and named her daughter, Cheryl, as beneficiary. Cheryl has a history of not managing money well. Jane wants the death benefit paid to Cheryl in monthly installments over 20 years. Which settlement option should Jane pre-select for Cheryl?
fixed period
An insurance company incorporated in another state has been licensed to operate in your state. In your state, the insurer would be considered a(n)
foreign insurer
As an alternative to coinsurance, rate discounts can be given as the amount of insurance to value increases. This alternative is called
graded rates
Because of the Affordable Care Act, all new medical expense plans that offer individual and group coverage must accept all individuals and employers in the state who apply for coverage. These insurers are required to continue to renew the coverage at the option of the individual or plan sponsor. Thus, under the Affordable Care Act, the renewal provision is
guaranteed issue
Ellen purchased a health insurance policy. Under the provisions of the Affordable Care Act, which of the following renewal provisions must the insurer use in the policy?
guaranteed issue
Malcolm would like to purchase life insurance. He is concerned that he might need additional life insurance in the future and that he might be uninsurable at that time. What provision can Malcolm add to his life insurance policy that will permit him to purchase additional life insurance at specified times in the future without providing evidence of insurability?
guaranteed purchase option
Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer?
guaranty fund
One provision of the Affordable Care Act provides creates in each state a transparent and competitive insurance marketplace where individuals and small firms can purchase affordable and qualified health coverage. This marketplace is called a
health insurance marketplace
An employer-funded plan with favorable tax advantages, which repays employees for medical care not covered by the employer's standard medical plan is a(n)
health reimbursement arrangement (HRA).
To calculate a human life value, it is necessary to deduct certain costs from a person's average annual earnings. These costs include
income taxes
Which of the following statements is true regarding disability income insurance?
increasing the elimination period reduces the premium for disability income insurance.
Gwen purchased an interesting life insurance policy. A minimum interest rate is guaranteed on the cash value, but additional interest may be credited based on the investment performance of a group of common stocks. There is also a cap on the additional interest credited to the policy. Based on this information, what type of life insurance did Gwen purchase?
indexed universal life insurance
All of the following statements about employer-provided group life insurance are true EXCEPT
individual evidence of insurability, through a medical exam, is usually required.
The Affordable Care Act requires that most U.S. citizens and legal residents have qualifying health insurance or pay a financial penalty. This provision of the Affordable Care Act is known as the
individual mandate
Med Profs is a group of 18 doctors. These doctors work out of their own offices and treat patients on a fee-for-service basis. In addition, Med Profs doctors also agree to treat HMO members at reduced fees. The type of HMO that uses organizations like Med Profs is called a(n)
individual practice association plan.
The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects whether the insurer will have enough surplus if claims are higher than expected. This risk is called
insurance risk
A score derived from an individual's credit history and other factors that is used by many auto and homeowners insurers for underwriting and rating purposes is called a(n)
insurance score
The assets of a property and liability insurance company are primarily
investments such as stocks and bonds.
Under the Affordable Care Act, if a health insurer does not meet the minimum loss ratio requirement, the insurer must
issue rebates to the people the insurer covered.
In determining insurance limits and deductibles, an important concept is that insurance should be used to pay big losses rather than small losses. The objective is to insure big losses that could cause financial ruin and to exclude small losses that can be budgeted out of current income. This concept is called the
large-loss principle
Mark owns a bar. The bar has a back room where Mark has some slot machines. Mark lets some of his patrons play the machines, and Mark keeps any profits. This type of gambling is illegal where Mark lives. Mark wanted to purchase insurance in case his slot machines were confiscated by the police. Such an insurance contract would not be enforceable. Which requirement needed to form a valid insurance contract is missing?
legal purpose
Bert purchased a life insurance policy 4 years ago. He inadvertently stated that he was 1 year younger than his actual age. If Bert dies today, how much will the insurance company pay?
less than the policy face value
Deductibles are not used in which of the following type of insurance?
life insurance
Nathan was hired as an actuary with ABC Insurance. Nathan was asked to calculate the annual premium for a new product and to explain his calculations to ABC's director of ratemaking. Nathan calculated the pure premium and presented this value as the final premium. After Nathan's presentation, the director of ratemaking said, "You left out something very important. If we sell coverage at the pure premium rate, we'll be out of business soon." What did Nathan overlook in his calculations?
loading for expenses
High deductible group health insurance plans have all of the following characteristics EXCEPT
low coverage limits.
Property insurance policies contain declarations, conditions, definitions, exclusions, and an insuring agreement. However, some policy terms, such as subrogation, cancellation, other insurance, and assignment do not fall into these categories. The part of an insurance contract in which these provisions can be found is the
miscellaneous provisions
When Ben applied for life insurance, he was asked on the application if he smoked or used tobacco products. Ben answered "No." In reality, Ben smokes two packs of cigarettes a day. The policy was issued at the "preferred, nonsmoker rate." If Ben dies 6 months after the policy is issued, upon what grounds will the insurer be able to legally deny the claim?
misrepresentation
All of the following statements about individual disability income policies are true EXCEPT
most disability income insurance policies contain an elimination period of 10 or fewer days.
Which of the following statements about group insurance underwriting principles is (are) true? I. If a plan is contributory, 100 percent of the eligible employees must be covered. II. Ideally, there should be a flow of older people into the group and younger people out of the group.
neither I or II
Which of the following statements about premium taxes is (are) true? I. They are levied by the federal government as a result of the McCarran-Ferguson Act. II. Their primary purpose is to provide funds for insurance regulation.
neither I or II
Which of the following statements about yearly renewable term insurance is (are) true? I. It requires evidence of insurability for renewal. II. It is most appropriate when an insured needs lifetime protection.
neither I or II
Which of the following statements is (are) true concerning settlement options? I. A straight life annuity provides the lowest amount of periodic income of all the life income options. II. Fixed-period and fixed-amount are life income options.
neither I or II
An Econodeath Insurance Company actuary calculated the present value of the expected death claim the company will pay if it sells whole life insurance to a 30-year-old woman. This value is called the
net single premium
Under one type of rate regulation, insurers do not have to register their rates with state regulatory authorities. However, insurers may be required to furnish rate schedules and supporting data to state officials. A fundamental assumption underlying this type of rating law is that market forces will determine the price and availability of insurance, rather than discretionary acts of regulators. This type of rate regulation is called
no filing required
Individual medical expense insurance sold in the Health Insurance Marketplace is characterized by which of the following?
no lifetime benefit limits
A strip-mall includes eight identical-sized retail units. All of the units were built at the same time and each has an identical sprinkler system. Unit number two is a dry cleaning business. Unit number three is a bar and grill. Unit number four is a dress shop. The owners of these three units are all insured by the same insurance company, but the property insurance premiums vary significantly. Which of the following rating factors best explains the difference in premiums?
occupancy
Which of the following is considered a nonadmitted asset for an insurer?
office furniture
Chris applied for life insurance and paid the first premium on Monday. She was given an insurability premium receipt which specified that coverage was effective on the date of the application or the date of the medical exam, whichever is later. She took the medical exam the following Thursday. She was found to be in perfect health. On which day was her coverage effective?
on Thursday when she passed the medical exam
When must an insurable interest legally exist in life insurance?
only at the inception of the policy
At what point in time must an insured meet the coinsurance requirement in a property insurance policy in order to avoid having to pay a portion of the loss?
only at the time of the loss
When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?
only at the time of the loss
An insurance policy provision that specifies how a property loss will be settled if more than one property insurance policy covers the loss is the
other insurance provision
Which of the following is a common dividend option found in a participating life insurance policy?
paid-up additions
Barb was injured in an auto accident. She was totally disabled and collected disability income benefits for 8 months. She would like to return to work on a part-time basis to see if her recovery is complete. During this period, her insurer will pay reduced disability income benefits. This type of disability is called
partial disability
A pharmaceutical company employs a young chemist who is responsible for three new patents last year and for the development of the company's two best-selling drugs. The company purchased a large life insurance policy on the chemist. In this case, the insurable interest requirement was met because of a(n)
pecuniary interest.
Which of the following items would appear in the income section of an insurance company's income and expense statement?
premiums
The purpose of other-insurance provisions is to
preserve the principle of indemnity
The purpose of the Financial Analysis Solvency Tracking (FAST) system employed by the NAIC is to
prioritize insurance companies for additional regulatory action.
New employees at Jarvis Company cannot participate in the group term life insurance plan until they have worked at the company for three months. This initial period before a new employee can participate is called a(n)
probationary period
The difference between the present value of future benefits payable under a life insurance policy and the present value of net premiums for the policy is the policy's
prospective reserve
In schedule rating, each building is individually rated on several factors. One factor refers to the quality of the city's water supply and fire department, and the risk control devices installed in the building. This factor is called
protection
A shortcoming of state regulation of insurance according to Congressional committees and the General Accounting Office is that state regulation
provides inadequate consumer protection.
Jessica is an agent for LMN Life Insurance Company. She met with Brad, who was interested in purchasing life insurance. Jessica explained the various uses of life insurance, including income for Brad's wife during the 1- or 2-year period following Brad's death. This period is known as the
readjustment period
Grace is a life insurance agent. She is attempting to sell a large life insurance policy, but the prospective purchaser is having second thoughts. To persuade the prospective purchaser, Grace said, "I will earn a $1,000 commission if you buy this policy. I'll give you $500 of my commission if you buy the policy." In most states, what illegal sales practice will Grace be guilty of if she splits her commission with the purchaser?
rebating
Lionel purchased a $200,000 ordinary life insurance policy when he was 25 years old and had significant life insurance needs. Now Lionel is 50. His mortgage is almost paid-off and his children have left home and are financially independent. Lionel no longer wants to pay premiums, but he would like to have some permanent life insurance in force. Which nonforfeiture option could Lionel employ to meet these objectives?
reduced paid-up insurance
Prior to passage of the Affordable Care Act, insurers could go back to the date a health insurance policy became effective and render the policy void due to a clerical error. This practice, which is prohibited under the Affordable Care Act except in cases of fraud or intentional misrepresentation of a material fact, is called
rescission.
Maggie purchased a life insurance policy. She was concerned that if she became disabled, she would no longer be able to pay the premiums. Her agent added an amendment of the policy stating that if she became disabled, future premium payments would be waived. Such an amendment to a life insurance policy is called a
rider
Which of the following is a method used to help ensure the solvency of insurers?
risk-based capital structure
Tom and Nancy Boyle provide financial support for their two children. In addition, they provide financial support for Tom's aged father and Nancy's aged mother. The Boyle family can be described as a
sandwiched family
To protect policyholders, state laws place limitations on a life insurance company's investments. The assets backing interest-sensitive products, such as variable life insurance and variable annuities, are not subject to these restrictions. Assets backing interest-sensitive products are placed in a special account called the life insurer's
separate account
One long-term care insurance benefit trigger considers whether the insured needs supervision to protect against threats to health or safety due to memory loss or disorientation. This benefit trigger is referred to as
severe cognitive impairment trigger.
Connors Company self-funds the medical expense benefits that it provides to its employees. Connors Company has a contract with a commercial health insurance company providing that the health insurance company will pay all claims in excess of $250,000. The arrangement with the health insurance company is called
stop-loss insurance
The deductible used for automobile collision losses is an example of a(n)
straight deductible
Under the terms of Jenny's auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny's auto insurance policy?
straight deductible
Lynn calculated the future value of the first twenty premiums she will pay under her nonparticipating whole life insurance policy. Then she subtracted the cash value after 20 years. Next, she divided this value by the future value annuity due factor for 20 years to arrive at an annual cost of insurance. Finally, she divided the annual cost by the number of thousands of dollars of life insurance purchased to arrive at the cost per thousand per year. Lynn calculated the
surrender cost per thousand per year.
One provision of the Dodd-Frank Act was creation of the Financial Stability Oversight Council. This council is charged with identifying nonbank financial companies that could increase the risk of collapse of the entire financial system. This risk is called
systematic risk
Under one method of estimating a loss reserve, the reserve is based on life expectancy, duration of disability, and similar factors. This method of estimating loss reserves is called the
tabular value method
The Affordable Care Act includes a provision designed to help small employers make health insurance coverage available to their employees. This provision allows small employers to reduce their federal income tax by a percentage of the employer's contribution to health insurance for employees. This subsidy, in the form of reduction of income taxes, is called a
tax credit
The policy reserve at the end of any given policy year is called the
terminal reserve
Under which of the following rules is actual cash value determined by taking into consideration all relevant factors an expert would use to determine the value of the property?
the broad evidence rule
Maria's home was damaged by an earthquake. As Maria has open-perils coverage on her home, she was surprised to learn that her loss was not covered. Which section of a property insurance policy specifies which perils, property, and types of losses are not covered?
the exclusions
All of the following statements about ordinary life insurance are true EXCEPT
the face amount of the policy is paid if the insured lives to age 65.
The gross premium is defined as
the net premium plus the loading allowance
To level a net single premium (NSP), the NSP is divided by
the present value of a life annuity due of $1 for the premium payment period.
The net single premium for a life insurance policy is
the present value of the future death benefit.
Marshall is interested in determining the cost per thousand of his life insurance policy. Which of the following will provide Marshall the most meaningful measure of the cost per thousand dollars per year of his life insurance?
the surrender cost index
All of the following are reasons why employers self-insure medical expense plans EXCEPT
to provide mandated state benefits.
Which of the following is authority given to the Federal Insurance Office created by the Dodd-Frank Act?
to represent the federal government in international discussions of insurance regulation
Exclusions are used in insurance policies for all of the following reasons EXCEPT
to waive policy conditions
An employee must be actively at work on the day the employee's group insurance becomes effective.
true
In property insurance, the offer and acceptance are usually in writing but may be oral.
true
Losses are settled without a deduction for depreciation.
true
The actual experience of a large group is a factor in determining the premium that is charged.
true
The insurer must be notified of any assignment or the death proceeds will be paid to the named beneficiary.
true
The premium for the current period is determined by the loss experience during the current period.
true
the amount of disability income benefits typically is equal to some percentage of a worker's normal earnings.
true
Kim purchased a one-year property insurance policy. She agreed to pay half the premium when she bought the coverage, and the other half six months later. If Kim fails to pay the second premium, the insurer cannot sue her for the premium because insurance contracts are
unilateral contracts
Ann is considering the purchase of a life insurance policy with these characteristics: flexible premium payments, the insurance and savings components are separate, the interest rate credited to the cash value is tied to a changing market interest rate but a minimum interest rate is guaranteed, and a monthly administrative fee is charged. Ann is considering buying
universal life insurance
The practice of buying the life insurance policy of a terminally ill insured at a discount is referred to as a
viatical settlement
