QBank Questions: Course 102 Ch.1

Which of the following are methods of managing risk? 1. Avoidance. 2. Retention. 3. Sharing. 4. Transfer. A) 3 and 4. B) 2, 3, and 4. C) 1 and 2. D) 1, 2, 3, and 4.

D. All of these are risk management techniques. (QB.102.U1)

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

A. An insurable interest is a right or relationship with regard to the subject matter of an insurance contract such that the insured will suffer financial loss from damage, loss, or destruction to that subject matter. (QB.102.U1)

Which of the following statements concerning insurable interest is (are) CORRECT? 1. In property insurance, insurable interest includes financial interest and sentimental interest. 2. In life insurance, insurable interest includes financial interest and sentimental interest. 3. In property insurance, insurable interest includes financial interest. A) 2 and 3. B) 1, 2, and 3. C) 3 only. D) 1 and 2.

A. Statements 2 and 3 are correct. Property insurance does not include sentimental interest as an insurable interest. The insurable interest for property insurance is established by a financial relationship between the insured and the subject matter of the insurance. (QB.102.U1)

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

B. Consideration occurs when there is an exchange of value. The insurance contract requires an exchange of value to be legally binding. For most insurance, the promise to pay the premium is usually sufficient consideration to make the contract binding; however, for life insurance, the premium must be paid before the insurance contract is binding for the insurer. The submission of a completed insurance application (offer) plus the payment of the first premium (consideration) to the insurance company will generally create a binding contract if the application would pass standard underwriting requirements. (QB.102.U1)

Which of the following statements regarding participating and nonparticipating life insurance is CORRECT? A) Participating life insurance is a policy in which no annual dividends are paid to the policyowners. B) Stock companies are owned by the stockholders and usually offer nonparticipating policies. C) If the policyowner leaves the dividends on a participating policy with the insurer, any interest earned on the dividends is tax free. D) Nonparticipating life insurance is a policy in which dividends are paid only on the excess of premium.

B. Dividends are not paid on nonparticipating life insurance policies. Dividends are generally treated as a tax-free return of premium, but any interest earned on dividends left with the insurance company is taxed as ordinary income. (QB.102.U1)

Which of the following characteristics must be present for a risk to be insurable? 1. The loss must be intentional. 2. The loss must be uncertain. 3. The loss cannot be catastrophic to society. 4. The loss must be measurable. A) 1, 2, and 3. B) 3 and 4. C) 1 and 3. D) 2 and 3.

B. Losses need to be measurable and definite as to time, place, and form. In addition, they must be monetarily measurable and be accidental to be considered insurable. The risk of loss must be uncertain, but the amount of the loss must be certain. (QB.102.U1)

Causing harm to another by failing to act in a reasonably prudent manner is: A) a lack of consideration. B) negligence. C) adhesion. D) subrogation.

B. Negligence is a legal wrong or tort that results in harm or injury to another person. The care required is that of a reasonably prudent person. (QB.102.U1)

Which of the following statements concerning risk management is (are) CORRECT? 1. The objective of risk management is to choose efficiently among the methods of handling risk to avoid a catastrophic loss. 2. Risk management addresses both insurable and uninsurable risks. 3. The classic risk management model suggests that if the probability of loss is high and the severity is high, the risk should be insured. 4. The classic risk management model suggests that if the probability of loss is low and the severity of loss is low, the risk should be retained. A) 1, 2, 3, and 4 B) 1, 2, and 4 C) 1, 2, and 3. D) 3 only

B. Only statement 3 is incorrect. If the probability and the severity of loss is high, the risk should be avoided, not insured. (QB.102.U1)

Which of the following statements regarding the principles of risk and insurance are CORRECT? 1. Risk is a condition which there is a possibility of an adverse result from the expected desired outcome. 2. A hazard is the cause of a financial loss and, in the insurance world, is the actual event for which the individual purchases insurance. 3. A peril is a condition that increases the probability that a financial loss will occur in the future. 4. Pure risk is a risk that only involves the chance of loss or no loss. A) 1 and 2 B) 1 and 4 C) 1, 2, and 3 D) 1, 2, 3, and 4

B. Risk is the condition which there is a possibility of an adverse result from the expected desired outcome. A peril is the cause of a financial loss and a hazard is a condition which increases the chance of financial loss. Pure risk is the risk that only involves the chance of loss or no loss. (QB.102.U1)

Which of the following statements concerning the law of large numbers is (are) CORRECT? A) All of these. B) As the number of exposure units increases, the accuracy of the expected loss will also increase. C) The lower the number of members in the group , the greater the probability that the actual loss will equal the expected loss. D) As the number of exposure units increase, it is increasingly more difficult for insurers to accurately determine the appropriate premium charges to make certain they can be financially stable.

B. The larger the group, the more accurately the future losses can be predicted. (QB.102.U1)

Which of the following statements best describes pure risk? A) One requirement for proving negligence (i.e., a continuous succession of events from the negligent act to the final event causing injury). B) The ability to continue employer-provided or employer-sponsored benefits after termination of employment. C) A possibility of loss that involves only 2 outcomes, loss or no loss. D) The price charged for a period of coverage provided by an insurance policy and found by multiplying the periodic rate per unit by the number of units of coverage.

C. A pure risk is a possibility of loss that involves only 2 outcomes-loss or no loss. (QB.102.U1)

Which of the following are risk exposures that may indicate a need for life insurance on a primary income earner? 1. Final expenses. 2. Debts and mortgages. 3. Education costs. 4. Support of elderly parents. A) 1 and 2. B) 2, 3, and 4. C) 1, 2, 3, and 4. D) 1 and 4.

C. All of these are risk exposures. Other risk exposures include dependents' need for income and the funding of family goals (QB.102.U1)

A drunk driver killed Jerry and severely injured his girlfriend. The court awarded his girlfriend $50 million in damages. These damages most likely represent: A) special damages. B) general damages C) punitive damages. D) loss of property damages.

C. Because of the size of the award, they most likely represent punitive damages. Punitive damages are designed to punish the negligent party. (QB.102.U1)

Implied authority is authority that is: A) reasonably expected by the public. B) specifically stated in the agent's contract. C) not expressly given by the principal but is reasonably necessary to carry out the agent's duties. D) stipulated.

C. Implied authority is the authority that an agent is not expressly given by the principal but that agents in similar circumstances normally possess and is the authority that is reasonably necessary to carry out the agent's duties. (QB.102.U1)

Which of the following definitions best describes indemnity? A) Defense against a negligence claim that bars recovery for damages if a person understands and recognizes the danger inherent in a particular activity or occupation. B) Legal doctrine that prevents a person from denying the truth of a previous representation of fact, especially when such representation has been relied on by the one to whom the statement was made. C) Legal principle that specifies an insured should not collect more than the actual cash value of a loss but should be restored to approximately the same financial position as existed before the loss. D) Common law defense blocking an injured employee from collecting workers compensation benefits if he or she sustained an injury caused in any way by the negligence of a co-worker.

C. Indemnity is the legal principle that an insured should not collect more than the actual cash value of a loss, but should be restored to approximately the same financial position as existed before the loss. (QB.102.U1)

Which of the following statements regarding insurance contracts are CORRECT? 1. 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. 2. 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. 3. Insurance contracts are unilateral contracts in that all parties linked to the contract are legally bound to perform. 4. Insurance contracts are aleatory contracts, meaning that the outcome is affected by chance and that the dollars collected by the parties are usually unequal. A) 2, 3, and 4 B) 1, 3, and 4 C) 1, 2, and 4 D) 1 and 3

C. Insurance contracts are unilateral contracts in that only one party to the contract is legally bound to perform. (QB.102.U1)

Which of the following describes the tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which, if not controlled by underwriting, results in higher-than-expected loss levels? A) Objective risk. B) None of these. C) Adverse selection. D) Physical hazard.

C. Physical hazard is a physical condition that increases the chance of loss. Objective risk represents actual risks, not perceived risks. (QB.102.U1)

Which of the following statements regarding the roles of the National Association of Insurance Commissioners (NAIC) in regulating insurance is (are) CORRECT? 1. Through the NAIC, the 50 state commissioners exchange information and ideas and coordinate regulatory activities. 2. The NAIC makes recommendations for legislation and policy. 3. The NAIC has the legal authority to force states to adopt its regulations. A) 2 only. B) 3 only. C) 1 and 2. D) 1, 2, and 3.

C. The NAIC makes recommendations for legislation and policy, but it does not have the authority to force states to adopt its regulations. (QB.102.U1)

The blackout period is the period: A) immediately following the death of the wage earner. B) during which the widow or widower and dependents receive Social Security benefits. C) during which Social Security benefits to a widow or widower with dependents are suspended. D) after the death of a wage earner when the family is adjusting to life without the individual.

C. The blackout period begins when a child reaches age 16 and ends when a surviving spouse becomes eligible for Social Security retirement benefits, as early as age 60. (QB.102.U1)

Amy purchases health insurance from Joseph, who claims to be an agent for XYZ Insurance Company. XYZ knows that Joseph uses the company logo on his stationery, even though he is not an agent for XYZ, but does nothing to stop him. XYZ must honor the terms of the insurance contract on the basis of: A) relied authority. B) implied authority. C) apparent authority. D) express authority.

C. The insurance company is bound by Joseph's actions under apparent authority because Amy was led to believe Joseph had authority to act for the insurance company and the insurance company had knowledge of his actions and failed to act. (QB.102.U1)

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

C. Under the McCarran-Ferguson Act of 1945, insurance is regulated primarily at the state level. The NAIC issues model insurance legislation that the individual states are free to adopt if they choose, but the NAIC has no legislative authority in any state. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires certain employers to provide previously covered individuals (including spouses and dependents) with the same health insurance coverage they received while employed after the occurrence of a qualifying event. (QB.102.U1)

Which of the following definitions best describes vicarious liability? A) Legal responsibility for criminal acts. B) Legal responsibility for extraordinarily dangerous activities. C) Legal responsibility extended to someone other than the person who caused the injury. D) Legal responsibility for acts under the negligence per se rule.

C. Vicarious liability is legal responsibility extended to someone other than the person who caused the injury. For example, parents may be liable for torts committed by their children, and employers can be liable for torts committed by their employees. (QB.102.U1)

Which of the following statements concerning the collateral source rule are CORRECT? 1. The rule states that a person who commits a tort will be liable for full damages. 2. The person who commits a tort is liable for full damages, even though the plaintiff has other sources of recovery available. 3. The collateral source rule prevents the person who committed the tort from benefiting because of fortuitous circumstances. 4. The collateral source rule prevents an insurance company from receiving a portion of the insured's right to recover from the defendant. A) 1, 2, 3, and 4. B) 2, 3, and 4. C) 1 and 2. D) 1, 2, and 3.

D. Only statement 4 is incorrect. The rule states that a person who commits a tort is not entitled to a reduction of damages simply because the injured person has other sources of recovery, such as insurance. (QB.102.U1)

Which of the following is a private wrong for which the law allows a remedy in the form of monetary damages? A) Estoppel. B) Criminal act. C) Physical hazard. D) Tort.

D. The plaintiff who is injured by a tort can sue for damages because his or her rights were violated in some way. A physical hazard increases the chance that a peril will cause a loss. (QB.102.U1)

Which of the following states that the insured should not profit from a covered loss, but should be restored to approximately the same financial position that he or she held before the occurrence of the loss? A) Principle of insurable interest. B) Collateral source rule. C) Rule of adhesion. D) Principle of indemnity.

D. The principle of indemnity has 2 purposes: to prevent the insured from profiting from insurance claims and to reduce moral hazards. (QB.102.U1)

In property insurance, an insurable interest must exist: A) at the time of the loss only. B) when the policy is issued only. C) neither at the time of issuance nor at the time of loss. D) both at the time of issuance and at the time of loss.

D. With property insurance, an insurable interest must exist both when the policy is issued and at the time of loss. (QB.102.U1)

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

A. A+ Superior is the second highest rating awarded by A.M. Best. The highest rating is A++ Superior. A rating service focuses on the financial condition of the insurance company (loss reserves and surpluses) and the reliability of its claims paying ability. The rating assigned to an insurance company may vary, depending on the rating service. With the number of insurance companies in the marketplace today, a financial planner should be advising clients to buy the products from companies that are in the highest rating tiers of each rating service. (QB.102.U1)

Personal risk exposures that can be covered by life insurance include: 1. Premature death before a debt is repaid. 2. Premature death before children's education is paid. 3. The spouse without a retirement benefit outliving the spouse who is receiving a straight life annuity pension payout. 4. Premature death prior to funding the family's financial goals. A) 1, 2, 3, and 4. B) 1 and 2. C) 1, 2, and 3. D) 2, 3, and 4.

A. All of these are personal risk exposures that can be covered by life insurance. (QB.102.U1)

Express authority is authority that is: A) specifically stated in the agent's contract. B) expected by the public. C) incidental. D) implied.

A. Express authority is expressly or specifically stated in the agent's contract. This type of authority is also referred to as stipulated authority, which means the powers are specifically stipulated in the contract. Implied authority is incidental, while apparent authority is expected by the public. (QB.102.U1)

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

A. Human life value is the family's share of the earnings of the breadwinner. The projected value of the decedent breadwinner's future earnings is discounted to its present value to determine the human life value. (QB.102.U1)

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

A. Insurance is a device used to manage risk by having a large pool of people share in the financial losses suffered by members of the pool. Pure risk involves the chance of loss or no loss. A peril is the cause of financial loss. A morale hazard is the indifference to the loss that creates carelessness and increases the chance of loss due to the existence of insurance. (QB.102.U1)

Which of the following can be classified as a general rule of agency? 1. An agent can legally bind the principal if the agent is acting within the scope of his authority. 2. An agent's authority may be express, implied, or apparent. 3. An agent must have legal (contractual) capacity to act as an agent. 4. An agent has a duty of loyalty to the principal. A) 1, 2, and 4. B) 1, 2, 3, and 4. C) 3 and 4. D) 1 and 2.

A. Statement 3 is not a general rule of agency. A principal must have contractual capacity, but an agent does not need to have contractual capacity to act as an agent. (QB.102.U1)

Which of the following are types of personal risk? 1. Risk of premature death. 2. Risk of disability 3. Risk of unemployment. 4. Risk of earthquake. A) 1, 2, and 3. B) 1, 2, 3, and 4. C) 2 and 3. D) 1 and 2.

A. Statements 1, 2, and 3 are correct. Risk of premature death, disability, and unemployment directly affect an individual. Personal risks are defined as risks that affect only individuals, such as the possibility of loss of income or assets because of the inability to earn income (e.g., premature death, dependent old age, sickness, disability, unemployment). The risk of an earthquake is a type of fundamental risk. (QB.102.U1)

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

B. A deductible is a stated amount of money the insured is required to pay on a loss before the insurer will make any payments under the policy. Deductibles help eliminate small claims, reduce premiums, and decrease morale hazards. Deductibles are used mainly in property, health, and automobile insurance contracts. Disability policies use an elimination period, which is a waiting period, measured in days, which must be satisfied before benefits become payable. This elimination period essentially acts as a time deductible. (QB.102.U1)

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

C. A contract of adhesion is a contract which a potential client can only "accept or reject" and cannot modify its terms or provisions. (QB.102.U1)

Which of the following is an example of a moral hazard? A) A homeowner carelessly burns leaves on a windy day, resulting in fire damage to his house. B) A car is damaged by a hailstorm. C) A driver deliberately slams on his brakes, causing the driver behind him to rear-end his car. D) A person falls and breaks his hip.

C. A moral hazard occurs when dishonesty causes a loss or causes the amount of the loss to be overstated on a claim. Intentionally causing a loss is an example of a moral hazard. (QB.102.U1)

A unilateral contract is one in which: A) one party cannot transfer the contract to another. B) there is no legal enforcement. C) only one party makes a legally enforceable promise. D) both parties make legally enforceable promises.

C. In a unilateral contract, only one party makes a legally enforceable promise. An insurance policy is a unilateral contract because only the insurer makes a legally enforceable promise to perform. (QB.102.U1)

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

D. A morale hazard is a condition of carelessness or indifference as to whether a loss occurs and/or as to the size of a loss if one does occur. (QB.102.U1)

John is driving on the expressway, when the motorist in front of him suddenly slows down. The motorist has no operable taillights, and John hits him from the rear. The failure of the motorist to have working taillights would preclude the motorist from collecting damages from John under the law of: A) intentional negligence. B) imputed negligence. C) comparative negligence. D) contributory negligence.

D. If contributory negligence is established, the motorist most likely cannot collect damages from John. Comparative negligence, a more lenient doctrine than contributory negligence, is used to apportion financial responsibility based on the degree of fault. (QB.102.U1)

The principle of _________ states that a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts. A) Indemnity. B) Vicarious liability. C) Subrogation. D) Utmost good faith.

D. Insurance contracts are contracts of utmost good faith. (QB.102.U1)

Which of the following statements describing insurance terms are CORRECT? 1. A misrepresentation is carelessness or indifference on the part of an individual as to whether a loss occurs and/or as to the size of a loss if one does occur. 2. A morale hazard is a false and material statement made by an applicant for insurance, providing a basis for the insurer to make the contract voidable. 3. Special damages are damages designed to compensate the injured person for measurable losses. 4. General damages compensate the injured person for intangible losses, such as pain and suffering, that cannot be measured in dollars. A) 1, 2, 3, and 4 B)1 and 2 C) 1, 2, and 3 D) 3 and 4

D. Neither statement 1 nor 2 is correct. Statement 1 is incorrect because it describes a morale hazard. Statement 2 is incorrect because it describes a misrepresentation. (QB.102.U1)

The right of an insurer to recover damages from a third person for a loss covered by insurance is known as: A) subordination. B) insurable interest. C) indemnity. D) subrogation.

D. Subrogation laws state that an insurer which has paid an insured for a loss is entitled to recover any loss payments from a negligent third party. The insured must relinquish any right to collect damages from the negligent party to the extent of the amount paid by the insurance company. (QB.102.U1)