Life and Health ExamFX Chapter 1

Peril is most easily defined as: A. Something that increases the chance of loss B. The cause of loss insured against C. An unhealthy attitude about safety D. The chance of a loss occurring

B. The cause of loss insured against (Perils are the causes of loss insured against in an insurance policy)

Which of the following is NOT a characteristic of an insurable risk? A. The loss exposure must be large B. The loss must be catastrophic C. The loss must be due to chance D. The loss must be measurable

B. The loss must be catastrophic (In order to be characterized as pure risk, the loss must be due to chance, definite, measurable, and predictable, but not catastrophic)

Which of the following best describes rescission? A. An insurer cancels a policy after it has been issued and refunds all paid premiums. B. An insurer cancels a policy after an insured files a suspicious claim. C. An insured agrees to cancel a policy for the return of the most recent premium paid. D. An insured allows a policy to lapse.

A. An insurer cancels a policy after it has been issued and refunds all paid premiums. (When an insurer rescinds a policy after it has been issued and refunds all premiums paid, this is rescission)

With respect to the business of insurance, a hazard is: A. The basic reason for an insured to purchase insurance B. Any condition or exposure that increases the possibility of loss C. The risk taken when performing something dangerous. D. The tendency of poorer risks to seek insurance more often than better risks.

B. Any condition or exposure that increases the possibility of loss (A hazard is any condition or exposure that increases the possibility of loss occurring. Hazards are generally classified as either physical, moral or morale)

A life insurance policy has a legal purpose if both of which of the following elements exist? A. Underwriting and reciprocity B. Offer and counteroffer C. Policyowners and named beneficiaries D. Insurable interest and consent

D. Insurable interest and consent (To ensure legal purpose of a life insurance policy, it must have both insurable interest and consent)

Which of the following best describes an insurance company that has been formed under the laws of this state? A. Domestic B. Sovereign C. Alien D. Foreign

A. Domestic (A company is domestic when doing business within the state in the which it is incorporated)

All of the following actions by a persons could be described as risk avoidance EXCEPT: A. Not driving after being in an accident B Investing in the stock market C. Refusing to scuba dive D. Never flying in an airplane

B Investing in the stock market (Investing in the stock market is not an example of risk avoidance; it creates a possibility of a loss)

Which of the following produces evaluations of insurers' financial status often used by the state departments of insurance. A. SEC B. AM Best C. NAIC D. Consumer's guide

B. AM Best (AM Best & Company assigns ratings to life, property and casualty insurance companies based upon the financial stability of the insurer)

Which of the following is closest term to an authorized insurer? A. Certified B. Licensed C. Legal D. Admitted

D. Admitted (Insurers who meet the states financial requirements and are approved to transact business in the state are considered authorized or admitted into the state as a legal insurer)

In Insurance transactions, fiduciary responsibility means: A. Maintaining good credit record. B. Being liable with respect to payments of claims. C. Commingling premiums with agent's personal funds. D. Handling insurer funds in a trust capacity.

D. Handling insurer funds in a trust capacity. (An agent's fiduciary responsibility includes handling insurer funds in a trust capacity.)

An insurance producer who by contract is bound to write insurance for only one company is classified as a/an. A. Captive Agent B. Solicitor C. Broker D. Independent Producer

A. Captive Agent (A captive/exclusive agent has agreed, by contract to produce insurance business only for the insurer they are contracted with.)

Which statement regarding insurable risks is NOT correct? A An insurable risk must involve a loss that is definite as to cause, time, place and amount. B. Insureds cannot be randomly selected. C. Insurance cannot be mandatory D. The insurable risk needs to be statistically predictable

B. Insureds cannot be randomly selected. (Granting insurance must not be mandatory, selecting insureds randomly will help the insurer to have a fair proportion of good risk to poor risks. All other statements are true)

On the participating insurance policy issued by a mutual insurance company, dividends paid to policyholders are: A. Guaranteed B. Not taxable since the IRS treats them as a return of a portion of the premium paid. C. Paid at a fixed rate every year D. Taxable as ordinary income

B. Not taxable since the IRS treats them as a return of a portion of the premium paid (With participating policies, policy owners are entitled to dividends. which, in the case of mutual companies, are nontaxable because they are considered a return of excess premiums)

What documentation grants express authority to an agent? A. Fiduciary contract B. State provisions C. Agent's contract with the principal D. Agent's insurance licenseC.

C. Agent's contract with the principal (The principal grants authority to an agent through the agent's contract)

Which of the following insurance options would be considered a risk-sharing arrangement? A. Reciprocal B. Stock C. Mutual D. Surplus lines

A. Reciprocal (When insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers)

Because an agent is using stationery with the logo of an insurance company, applicants for insurance assume that the agent is authorized to transact on behalf of that insurer. What type of agent authority does this describe? A. Assumed B. Apparent C. Express D. Implied

B. Apparent (Apparent authority, also know as perceived authority, is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created)

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated? A. Adhesion B. Consideration C. Good Faith D. Representation

B. Consideration (The binding force is any contract is consideration. Consideration on the part of the insured is the payment of premiums and the health representations made in the application. Consideration on the part of the insurer is the promise to pay in the event of loss)

Adverse selection is a concept best described as: A. Only offering coverage to good risks B. Risks with higher probability of loss seeking insurance more often than other risks. C. Underwriters slanting the odds in favor of the company D. Poor choices of applicants to be covered.

B. Risks with higher probability of loss seeking insurance more often than other risks. (Adverse selection means that there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risk who present lower probability. Underwriters must guard against this)

Events or conditions that increase the chances of an insured loss occurring are referred to as: A. Hazards B. Exposures C. Ridks D. Perils

A. Hazards (Hazards are conditions or situations that increase the probability of an insured loss occurring)

What term best describes the act of withholding material information that would be crucial to an underwriting decision: A. Concealment B. Withholding C. Leading D. Breach of Warranty

A. Concealment (Concealment occurs when a person withholds a material fact that is crucial to making decision. In insurance, this involves withholding information that would be important for making underwriting decisions)

Which of the following entities is not an insurer but an organization formed to provide insurance benefits for members of an affiliated lodge or religious organization? A. Stock company B. Reciprocal association C. Fraternal benefit society D. Mutual company

C. Fraternal benefit society (Fraternal insurers operate on the basis of a lodge or charitable organization, but they may also sell formal insurance plans for the benefit of their members. Reciprocal insurers are also associates that provide insurance for their members, but they are formed only for the purpose of providing insurance)

The reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against is known as: A. Hazard B. Risk C. Loss D. Exposure

C. Loss (Loss is the reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against)

An agent sells insurance over the phone. One of his applicants is heavily drunk when she applies for and then almost instantly receives her policy. Which of the following is true? A. The policy is legal; only mental retardation and psychiatric illness qualify as limiting factors. B. The policy is not legal if it can be proven that the applicant was drink during the application process. C. The contract is legal, since the agent, acting on behalf of the insurer, granted her the policy. D. The policy is legal; it would only be illegal if the agent had been drunk.

B. The policy is not legal if it can be proven that the applicant was drink during the application process. (When an insurer and insured enter into a contract, both parties must be of legal age and mentally competent. Being heavily drunk impairs mental competency; therefore, if it can be proven that the applicant was drunk during the application and acceptance process, her policy would not be legal)

Events in which a person has both the chance of winning or losing are classified as: A. Insurable B. Pure Risk C. Retained risk D. Speculative Risk

D. Speculative Risk (Speculative risk involves the chance of gain or loss and is not insurable

What is the definition of a unilateral contract? A. If one party makes a condition , the other party can counteroffer. B. One-sided: only one party makes an enforceable promise C. Two or more parties go into a contract understanding there may be an unequal exchange of value D. One author: the company wrote the contract; the insured must accept it as written.

B. One-sided: only one party makes an enforceable promise (An insurance contract is unilateral in that only one of the parties to the contract is legally bound to do anything)

Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. What contract characteristic does this describe? A. Conditional B. Personal C. Adhesion D. Unilateral

C. Adhesion (A contract of adhesion is prepared by only the insurer; the insured's only option is to accept or reject the policy as it is written)

Which of the following best describes the concept that the insured pays a small amount of premium for a large amount of risk on the part of the insurance company? A. Subrogation B. Warranty C. Aleatory D. Adheasion

C. Aleatory (An insurance contract is an aleatory contract in that it requires a relatively small amount of premium for a large risk)