Chapter 1 Quiz

"An insurance company that is owned by its policyholders, who share in the company's profits in the form of dividends, is known as A) a reinsurance company B) a stock insurance company C) a mutual insurance company D) a reciprocal insurance company"

"a mutual insurance company Explanation A mutual insurance company is owned by its policyholders, who share in the company's profits in the form of dividends."

"A mutual insurance company is an incorporated entity owned by its A) board of directors B) agents C) corporate officers D) policyowners"

"policyowners Explanation A mutual insurance company is an incorporated entity owned by its policyowners."

"Statements that are guaranteed to be true are called A) representations B) warranties C) estoppels D) waivers"

"warranties Explanation Warranties are statements that are guaranteed to be true. Representations are statements that are believed to be true."

"An insurer that is domiciled in Ohio and does business in Alabama is considered to be A) an independent insurer B) a domestic insurer C) an alien insurer D) a foreign insurer"

"a foreign insurer Explanation An insurer doing business in a state other than where it is domiciled is considered a foreign insurer."

"Paul is a single father with 2 young daughters. He has decided to give up his 2 favorite hobbies—skydiving and race car driving—because they are risky pursuits that could lead to his premature death. This method of dealing with risk is called A) risk avoidance B) risk transference C) risk sharing D) risk retention"

"risk avoidance Explanation Paul has chosen to deal with the risk of dying prematurely by giving up his 2 favorite hobbies, race car driving and skydiving. This method of dealing with risk is called avoidance."

"A stock insurer is owned by its A) subscribers B) shareholders C) policyholders D) certificate holders"

"shareholders Explanation A stock insurer is a public or private corporation that allows shareholders to purchase stock in the company. The shareholders, as owners, elect a board of directors."

"An exclusive insurance producer who solicits insurance represents A) the Commissioner B) the insurer C) the beneficiary D) the insured"

"the insurer Explanation An insurance producer who sells insurance for an insurer represents the insurance company, not the insured, in any controversy."

"Which of the following is NOT a type of agent authority? A) Express B) Obvious C) Apparent D) Implied"

"Obvious Explanation There are 3 types of agent authority: express, implied, and apparent"

"An insurance company formed under the laws of any country other than the United States would be considered A) a foreign insurance company B) a domestic insurance company C) a nonadmitted insurance company D) an alien insurance company"

"an alien insurance company Explanation Insurance companies formed under the laws of any country other than the United States are considered alien insurers."

"All of the following are characteristics of an insurable risk EXCEPT A) assessable B) accidental C) affordable D) anomalistic"

"anomalistic Explanation Risks that can be insured are assessable (measurable), affordable, accidental, calculable, similar, and noncatastrophic."

"Funds held by an insurance producer in a fiduciary capacity A) cannot be converted to an individual's or a firm's own use B) can be used as income by the producer, since they result from sales C) must be held in the producer's personal account for at least 15 days D) are deemed producer funds if they are premiums collected to pay for insurance coverage"

"cannot be converted to an individual's or a firm's own use Explanation Money received by producers is generally held in a fiduciary capacity and, therefore, may not be misappropriated or converted to personal or company use."

"Purchasing insurance is an example of A) avoiding risk B) transferring risk C) reducing risk D) retaining risk"

"transferring risk Explanation Purchasing insurance is the most common method of transferring risk. The burden of carrying the risk and indemnifying against financial or economic loss is transferred from the individual or business entity to the insurance company through the insurance contract."

"Mark and Steve signed a contract in which Mark agreed to apply for health insurance and Steve would submit fraudulent medical claims through his physician billing service. Mark and Steve plan to share the proceeds. The contract between Mark and Steve can best be described as A) void B) incompetent C) unilateral D) aleatory"

"void Explanation Mark and Steve's contract would be considered a void contract because it lacks one of the elements specified by law for a valid contract. The contract has an illegal purpose (fraudulently submitting medical claims), and neither party to the contract can enforce it. Furthermore, no court would enforce its terms."

"An insured gives a premium to a producer with the expectation that the producer will act with the utmost good faith in forwarding it to the insurer. In this case, the producer is said to have what kind of responsibility to or relationship with the insured? A) Legally binding B) Fiduciary C) Inherent trust D) Broker trust"

"Fiduciary Explanation An insurance producer holds premiums in trust and is therefore in a position of trustee for the funds. He has certain fiduciary responsibilities to the insured and the insurer. As such, the producer does not obtain any rights of ownership in the funds."

"Which of the following statements about fraternal benefit societies is NOT correct? A) Policies are called certificates. B) The society must operate under a lodge system of government. C) Life insurance is one of the benefits of membership. D) Insurance may be sold to members as well as nonmembers."

"Insurance may be sold to members as well as nonmembers. Explanation Fraternal society insurance may be sold only to members of the society."

"A fiduciary responsibility is defined as A) a relationship of special trust and confidence when a person is entrusted with another's funds B) the responsibility the producer has to the appointing insurer C) the responsibility of the insured to pay premiums in a timely fashion D) the relationship between the broker and the insurer whose products are sold"

"a relationship of special trust and confidence when a person is entrusted with another's funds Explanation A fiduciary responsibility is a relationship of special trust and confidence in which a person is entrusted with the funds of another person. For instance, all premiums belonging to insurers and all unearned premiums belonging to insureds received by an insurance producer are held in a fiduciary capacity."

"When Harry sells his car to his brother, Nate, he transfers his auto insurance policy to him as well. Harry's insurer will A) accept this process as long as Harry receives appropriate consideration from Nate B) disallow the process because auto insurance is a personal contract C) disallow this process because auto insurance is a valued contract D) allow this process as long as Nate is insurable"

"disallow the process because auto insurance is a personal contract Explanation Auto and other property insurance policies are personal contracts, meaning they are made with a particular person and may not be transferred. Life insurance policies are valued contracts; they pay a certain value and are transferable property. Changing the owner of a life policy is called assignment."

"Insurance agents represent A) the insured B) their MGAs C) the insurer D) themselves"

"the insurer Explanation Insurance brokers represent their clients or insureds."

"Which of the following is NOT a characteristic of an insurable risk? A) Noncatastrophic B) Premeditated C) Homogenous D) Affordable"

"Premeditated Explanation The 6 characteristics of an insurable risk are that the risk must be calculable, affordable, noncatastrophic, homogeneous, accidental, and measurable."

"An agent that represents only 1 insurance company is A) a broker B) a captive agent C) a general agent D) a special agent"

"a captive agent Explanation Captive agents work exclusively with one insurance company."

"What is the definition of a fiduciary? A) A person in a position of trust and confidence who handles the affairs and funds of others B) An insurance agent who sells policies worth more than $1 million in death benefits C) An institution that handles trust accounts for the wealthy D) A person who determines policy rates at an insurance company"

"A person in a position of trust and confidence who handles the affairs and funds of others Explanation A fiduciary is a person in a position of special trust and confidence who is charged with handling or supervising the affairs or funds of another."

"Which of the following is NOT a type of agent? A) Absolute agents B) Captive agents C) General agents D) Independent agents"

"Absolute agents Explanation The different types of agents are independent agents, captive or exclusive agents, and general or managing general agents."

"Which of the following is NOT a common characteristic of an insurance contract? A) Indemnity B) Legal purpose C) Adhesion D) Utmost good faith"

"Legal purpose Explanation Legal purpose is 1 of the 4 elements of a legal contract. Adhesion, utmost good faith, and indemnity are 3 of the 7 characteristics of insurance contracts."

"Which of the following is an incorporated insurer that is owned by its policyholders and does not have capital stock or shares? A) Stock company B) Guaranty company C) Surplus lines company D) Mutual company"

"Mutual company Explanation Mutual companies are incorporated insurers that are owned by their policyholders and do not issue capital shares or stock. Many mutual companies sell participating policies, which share the insurer's divisible surplus in the form of policy dividends."

"Which of the following insurance companies are organized and incorporated under state laws but have no stockholders? A) Mutual insurers B) Stock insurers C) Lloyd's of London D) Reciprocal insurers"

"Mutual insurers Explanation Mutual insurance companies are organized and incorporated under state laws but have no stockholders. Instead, the owners are the policyholders. Like mutual insurers, reciprocal insurers are also owned by their policyowners; however, the policyowners insure the risks of the other policyowners. Stock insurers are private organizations, organized and incorporated under state laws for the purpose of making a profit for their stockholders. Lloyd's of London, on the other hand, is an association of individuals and companies that individually underwrite insurance."

"A person who always wears a seatbelt in a car is using what risk handling method? A) Retention B) Restraint C) Removal D) Reduction"

"Reduction Explanation Wearing a seatbelt is an example of risk reduction because it can lessen the likelihood or severity of injuries resulting from an auto accident."

"Which of the following statements regarding a stock insurer is NOT true? A) It is owned by shareholders. B) The operations are overseen by a board of directors. C) The policies are participating policies. D) Profits may be distributed as dividends."

"The policies are participating policies. Explanation A stock insurer is owned by its stockholders, or shareholders, who choose a board of directors to oversee the operations of the organization. If the company is profitable, it distributes dividends to its stockholders. Policies are called nonparticipating policies. Participating policies are issued by mutual insurers."

"Which of the following is the definition of risk? A) The measurement of a loss B) The uncertainty about whether a loss will occur C) An insurance term for a claim D) The transfer of insurance to a different insurer"

"The uncertainty about whether a loss will occur Explanation A risk is the possibility that a loss that is covered by insurance will happen."

"Which of the following statements regarding insurance is NOT true? A) All types of insurance are implemented through a contractual agreement between the insurance owner and the insurer. B) All types of insurance are based on the law of large numbers. C) There are no physical hazards in life and health insurance. D) All types of insurance indemnify the insured against financial loss."

"There are no physical hazards in life and health insurance. Explanation There are many types of physical hazards in life and health insurance, such as diabetes and heart and lung conditions. These can be identified through tests and medical equipment."

"Which of the following terms indicates that a life insurance contract contains the enforceable promises of only one party? A) Aleatory B) Conditional C) Unilateral D) Adhesion"

"Unilateral Explanation Insurance contracts are unilateral in that only one party—the insurer—makes any kind of enforceable promise. Insurers promise to pay benefits when a certain event occurs, such as death or disability. The applicant makes no such promise—he does not even promise to pay premiums, and the insurer cannot require that they be paid. In contrast, with a bilateral contract, each contracting party makes enforceable promises."

"A false statement of fact is known as A) an adhesion B) a concealment C) a misrepresentation D) aleatory"

"a misrepresentation Explanation False statements of facts, called misrepresentations, may provide grounds for voiding the policy if they are material. This is true even if the misrepresentation was unintentional."

"Filing a fraudulent health insurance claim is an example of A) a morale hazard B) a physical hazard C) a peril D) a moral hazard"

"a moral hazard Explanation A moral hazard is a subjective characteristic of the insured that increases the chance of loss. Careless actions or behaviors are example of morale hazards. A peril is the specific event causing a loss. A hazard is any factor that gives rise to a peril."

"An insurance company that is owned by its policyowners, who share the insurer's divisible surplus in the form of participating policy dividends, is known as A) a stock insurance company B) a reciprocal insurance company C) a reinsurance company D) a mutual insurance company"

"a mutual insurance company Explanation A mutual insurance company is an incorporated entity owned by its policyowners. Many of these companies sell participating policies that share the divisible surplus of the insurer with the policyowners in the form of policy dividends."

"An insurance company that is owned by its policyholders, who share the insurer's divisible surplus in the form of participating policy dividends, is known as A) a reinsurance company B) a stock insurance company C) a reciprocal insurance company D) a mutual insurance company"

"a mutual insurance company Explanation A mutual insurer is an incorporated insurer owned by its policyowners, who hold policies as their evidence of ownership. It is common for mutual companies to sell participating policies, in which the policyowners share the insurer's divisible surplus in the form of policy dividends."

"An insurer that issues participating policies is A) a fraternal insurer B) a stock insurer C) a policy insurer D) a mutual insurer"

"a mutual insurer Explanation Mutual insurers have participating policies because the policyowners participate in the operating results of the company."

"Dying too soon is an example of A) a moral hazard B) a speculative risk C) a physical hazard D) a peril"

"a peril Explanation A peril is the direct cause of a loss. For example, a married woman who is expecting her first child may purchase insurance to protect her spouse and child in the event that she suffers an accident or early death."

"A life insurance policy is all of the following EXCEPT A) a personal contract B) a unilateral contract C) an aleatory contract D) a conditional contract"

"a personal contract Explanation Unlike a property-casualty insurance policy, a life insurance policy is not a personal contract and the owner is not fixed. Instead, a life insurance policy is a valued contract and the owner may be changed by assignment."

"A corporation or other limited liability association that assumes and spreads the liability exposure for any of its group members is called A) a reciprocal insurer B) a mutual insurer C) a risk retention group D) a stock insurer"

"a risk retention group Explanation A risk retention group is a corporation or other limited liability association that assumes and spreads the liability exposure for any of its group members. All members of a risk retention group have an ownership interest in the group and must be in businesses that expose them to similar liabilities."

"Murt Enterprises wants to build 3 new casinos in Illinois. It is possible the necessary insurance coverages will be placed through A) an admitted carrier B) a federal insurer C) a domestic insurer D) a surplus lines company"

"a surplus lines company Explanation Surplus lines companies write insurance that standard insurance companies have declined because a risk has atypical underwriting conditions, needs more coverage than an admitted insurer will assume, or requires forms or rates that are not filed in that state."

"Specialized risks that admitted insurers are not able to cover may often be obtained through A) a residual insurer B) a competitor C) a surplus lines insurer D) the government"

"a surplus lines insurer Explanation When a risk is either too large or too specialized for an authorized insurer to underwrite, coverage can be obtained from a surplus lines insurer who is nonadmitted or does not have a certificate of authority from the state."

"An insurance company that holds a certificate of authority in a state may be known as any of the following EXCEPT A) accepted B) authorized C) admitted D) approved"

"accepted Explanation When an insurer is licensed in a state, they are considered to be admitted, authorized, or approved."

"Express authority requires an agent to A) collect premiums on a regular basis B) act in accordance with the agency agreement C) renew her license at the appropriate time D) submit all applications promptly"

"act in accordance with the agency agreement Explanation The agency agreement is the agent's contract with the insurance company. It defines the conditions under which the agent agrees to represent the company and governs the agent's activities on behalf of the company."

"In order to be insured, a group must be randomly selected to avoid A) an increase in premium B) adverse selection C) the chance of loss D) catastrophic loss"

"adverse selection Explanation Adverse selection exists when an insurer has more bad risks than good, resulting in a group of policyowners whose mortality or morbidity experience exceeds the normal or expected rates."

"The tendency of higher-risk individuals to get and keep insurance is known as A) substandard selection B) adverse selection C) misrepresentation D) excess risk"

"adverse selection Explanation The inclination of higher-risk individuals to be "first in line" to get and keep insurance is called adverse selection. One of the purposes of underwriting is to identify and rate up or decline higher-risk individuals."

"The premium for transferring a risk should be A) nominal B) standard C) affordable D) discounted"

"affordable Explanation The premium for transferring a risk should be affordable for the average customer."

"In an insurance transaction, the insurer is represented by the A) broker B) state insurance department C) public adjuster D) agent"

"agent Explanation In an insurance transaction, the agent represents the insurer. The actions of the agent bind the company to an insurance contract."

"In the direct-selling marketing system, insurance can be sold to the public through all of the following methods EXCEPT A) vending machines B) telephone solicitations C) agents D) direct mail"

"agents Explanation Direct-selling systems are the exception to the general rule that insurance is sold mainly through agents. Under these systems, the insurer deals directly with the insured, without agents, through employees of the insurer (e.g., specialized or limited lines, such as airport vending for accidental death and dismemberment protection). Direct selling may be accomplished using mail, telephone, or other means without an agent."

"A contract in which one party may receive considerably more in value than the other party is A) an aleatory contract B) a unilateral contract C) an executory contract D) a contract of indemnity"

"an aleatory contract Explanation Insurance contracts are considered to be aleatory because either party may receive considerably more in value than the other. The insured may pay premiums for years without a claim. Alternately, the insured may pay premiums for a short period of time before a loss, and then the insurance company must pay the claim, which can be much greater than the amount of premium received."

"An agent that represents only 1 insurance company is known as A) an exclusive or captive agent B) a company agent C) a general agent D) a direct agent"

"an exclusive or captive agent Explanation Insurance agents who represent just 1 insurance company are known as exclusive or captive agents. They are generally compensated by commission. These types of agents represent the insurer (the insurance company)."

"All of the following are types of hazards in life insurance EXCEPT A) physical B) moral C) direct D) morale"

"direct Explanation In life insurance there are 3 types of hazards: physical, moral, and morale."

"Insurers that deal directly with insureds without the use of agents are known as A) reciprocals B) writers independent insurers C) mass marketers D) direct response"

"direct response Explanation A large volume of insurance is sold through direct-writing companies that do not use agents, but instead employ their own salespersons."

"All of the following are types of agent authority EXCEPT A) dubious authority B) express authority C) implied authority D) apparent authority"

"dubious authority Explanation There are 3 types of authority under the law of agency: apparent, express, and implied."

"Agents that work on behalf of 1 specific insurance carrier are known as A) independent agents B) direct agents C) general agents D) exclusive or captive agents"

"exclusive or captive agents Explanation Agents that work on behalf of 1 specific insurance company are known as exclusive or captive agents. They are generally paid on a commission structure and represent the insurer, not the insured."

"The insurance concept of returning consumers to the financial status they enjoyed prior to a loss is known as A) restoration B) indemnification C) risk handling D) utmost good faith"

"indemnification Explanation Utmost good faith is an insurance contract characteristic, but indemnification means to return an individual to the financial condition she had prior to a loss. This is why insurance deals in pure risk rather than speculative risk; it is about indemnification, not profit."

"All of the following are characteristics of an insurable risk EXCEPT A) loss must not be catastrophic B) loss must be measurable C) loss must be intentional D) loss must be accidental"

"loss must be intentional Explanation The characteristics of an insurable risk are as follows: there must be a large number of homogeneous exposure units, loss must be accidental and unintentional, loss must be measurable, loss cannot be catastrophic, and the premium must be economically feasible."

"False information that will void an insurance contract is known as A) misrepresentations B) breach of warranty C) indemnifications D) material misrepresentations"

"material misrepresentations Explanation Information that is not true and that would affect an underwriter's decision to reject a risk is a material misrepresentation. These statements are grounds for voiding an insurance contract."

"All of the following are considered competent parties to enter into insurance contracts EXCEPT A) trusts B) minors C) estates D) business entities"

"minors Explanation Applicants, unless proven otherwise, are generally presumed to be competent to enter into insurance contracts, with the exception of minors, the mentally infirm, and those under the influence of alcohol or narcotics. In general, state laws hold that minors below a certain age are not capable of understanding the contract they agree to (although there are some situations in which minors may enter into contracts). Other competent parties that may enter into contracts of insurance with an insurance company include business entities, trusts, and estates."

"Certain perils, like war, are usually excluded from most insurance policies because they have the potential to adversely affect large numbers of insureds at the same time. This explains why one of the characteristics of an insurable risk is that the risk be A) noncatastrophic B) cataclysmic C) trivial D) calamitous"

"noncatastrophic Explanation Insurable risks must be noncatastrophic so insurers are able to pay for losses to the insured. If an event causes extensive damage to large numbers of insureds simultaneously, the insurer may not have the ability to pay all of the claims."

"A captive agent who has an exclusive contract with an insurer may A) represent only those consumers referred by the principal B) not represent another insurer selling an identical policy C) contract with other insurers to sell the same policy and provide the best service to consumers D) represent the customer in the sale of insurance"

"not represent another insurer selling an identical policy Explanation It is unethical for a captive agent to represent 2 or more insurers selling the same policies."

"Floods, heart attacks, theft, and choking are all examples of A) exposures B) perils C) risks D) hazards"

"perils Explanation A peril is something that causes a loss. It can be within or beyond a person's control. Death, accidents, and sickness are also examples of perils."

"All of the following are methods of handling risk EXCEPT A) avoidance B) sharing C) repetition D) transfer"

"repetition Explanation The different methods for handling risk include sharing, transfer, avoidance, reduction, and retention."

"Statements made on an application regarding the applicant's medical history or health that require a medical opinion to be confirmed are called A) representations B) interpretations C) identifications D) declarations"

"representations Explanation Representations are statements on an insurance application that the applicant represents to be true to the best of her knowledge and belief. By contrast, a warranty is guaranteed to be true."

"In an insurance transaction, an insurance producer who sells insurance policies to the public represents A) the insurer B) the public C) the insured D) the director"

"the insurer Explanation A producer who represents the insurer and is authorized to sell its insurance or annuity contracts is considered to be an agent of the insurer in an insurance transaction."

"Andrei is a newly licensed insurance agent. In any insurance transaction, his primary duty is to serve A) the state insurance department B) himself C) the applicant and insured D) the insurer"

"the insurer Explanation Licensed insurance agents legally represent the insurer in all insurance transactions and in any disputes arising between the insured or beneficiary and the insurer."

"Morris is a licensed insurance agent. His principal is A) the applicant B) the National Association of Insurance Commissioners C) the insurer D) the state insurance department"

"the insurer Explanation The insurer appoints licensed agents to act on its behalf. Therefore, Morris would be the agent of the insurance company that appointed him."

"Assume there are 4 different mortality tables. Of these, the most reliable would be the mortality table covering A) 10 million lives B) 100,000 lives C) 4 million lives D) 500,000 lives"

"10 million lives Explanation The larger the group, the more certain or reliable the amount of loss (in this case, the death or mortality rate) will be."

"A life insurance company organized in Pennsylvania, with its home office in Philadelphia, is licensed to conduct business in New York. In New York, this company is classified as A) a domestic company B) a foreign company C) a regional company D) an alien company"

"a foreign company Explanation A foreign insurance company is one that is doing business outside of the state in which it is domiciled."

"Jessica saw an advertisement in the local newspaper for a new type of health insurance policy offered by Protective Insurers, Inc. She noticed that Protective Insurers was also selling these policies through vending machines. Protective Insurers would be considered what type of insurer? A) An unauthorized insurer B) A surplus lines insurer C) A mass response writer D) A direct response writer"

"A direct response writer Explanation Protective Insurers, Inc. sells insurance through the direct-selling method, where policies are sold directly to consumers through vending machines, advertisements, or salaried sales representatives. Insurers that operate using this method are known as direct writers or direct response insurers."

"Making appropriate product recommendations based on the needs, objectives, and circumstances of a client is referred to as A) implied authority B) apparent authority C) commingling D) suitability considerations"

"suitability considerations Explanation One aspect of an agent's fiduciary duties is to provide product recommendations to clients based on how suitable the features and benefits are to meet their goals."

"Jake and Sue signed a contract in which Sue agreed to pay half of the life insurance proceeds to Jake if he murdered her estranged spouse. The contract between Jake and Sue would not be enforceable in court because A) Jake and Sue are not considered competent parties B) Jake could not legally accept the contract C) the contract lacks consideration D) the contract lacks a legal purpose"

"the contract lacks a legal purpose Explanation To be legally enforceable, a contract must have a legal purpose. This means that the goal of the contract and the reason the parties enter into the agreement must be legal. A contract wherein Jake agrees to kill Sue's spouse in exchange for half of the insurance proceeds would be unenforceable in court because the contract does not have a legal purpose."

"Licensed and appointed agents represent A) the state insurance department B) the insurer C) the National Association of Insurance Commissioners D) the applicant or insured"

"the insurer Explanation An agent is a person who has been authorized by an insurer to act as its representative to the public and offer for sale its goods and services."

"A health insurance policy does NOT go into force if A) the applicant pays the initial premium B) the applicant satisfies the conditions of the conditional receipt C) the producer completes the application D) the producer delivers the policy"

"the producer completes the application Explanation The insured must complete the application, not the producer. If the initial premium is paid at the same time the application is submitted, and the terms of the conditional receipt are met, coverage will take effect as if the policy were issued."

"Assured Insurance Company deals directly with insureds and does not have any agents. Assured is A) a mass marketer B) an independent insurer C) a reciprocal insurer D) a direct writer"

"a direct writer Explanation A direct writer deals directly with policyowners through salaried employees instead of commissioned agents."

"Which of the following statements regarding a producer's authority is NOT correct? A) An agent's apparent authority may be binding on an insurer under the law of agency. B) Advising an applicant to answer certain questions in a manner in order to pass underwriting is an example of apparent authority. C) Reviewing a prospective applicant's insurance program and recommending the purchase of a particular product is an example of implied authority. D) Soliciting and negotiating insurance contracts on the company's behalf are considered part of an agent's express authority."

"Advising an applicant to answer certain questions in a manner in order to pass underwriting is an example of apparent authority. Explanation Express authority is specific authority given to an agent. Implied authority is authority that, while not specifically granted to an agent, can be assumed to have been granted as necessary to perform the agent's routine responsibilities. Apparent authority is authority that the public can logically assume an agent will possess, whether or not she has actually received such authority from the insurer. In this case, an agent that coaches a person in completing an application to pass underwriting is committing fraud. An agent would not have any authority to do so, apparent or otherwise."

"When agents act on behalf of insurers, they are acting under which legal principle? A) Utmost good faith B) Reasonable expectations C) Agency D) Estoppel"

"Agency Explanation By legal definition, an agent is a person who works for another person or entity (known as the principal), with regard to contractual arrangements with third parties. An authorized agent has the power to bind the principal to contracts and to the rights and responsibilities of those contracts."

"Which of the following statements regarding the fiduciary duty of a producer is CORRECT? A) An insurance producer may never receive money meant for the insurer. B) Premiums may be kept in the producer's personal account. C) All premiums received by an insurance producer must be held in trust and cannot be used for personal matters. D) Up to $5,000 a month of premium money may be used for the producer's personal needs."

"All premiums received by an insurance producer must be held in trust and cannot be used for personal matters. Explanation All premiums, return premiums, or other funds received by a producer in insurance transactions are considered to be trust funds under the law. The producer operates in a fiduciary capacity and must promptly account for payment of such funds to the proper parties."

"Which of the following statements pertaining to an agent's handling of premium money is NOT correct? A) An agent may spend premium money for his personal use. B) An agent holds premium money for the insured; the money belongs to the insurer. C) An agent who violates regulations concerning handling premium money may be charged with embezzlement or mishandling funds. D) An agent must not make personal use of premium money received from policyowners."

"An agent may spend premium money for his personal use. Explanation An agent enjoys a fiduciary role with an insured. This establishes a relationship of trust. As a result, the agent must be very careful in handling money received from the insured and the company's premiums or be subject to harsh penalties."

"An agent for Zephyr Insurance Company, equipped with business cards, sample Zephyr policies, and an Zephyr rate book, informs a prospect that Zephyr has given him unlimited binding authority. The prospect assumes this is true. Which of the following terms correctly defines the agent's authority in this case? A) Implied authority B) Binding authority C) Express authority D) Apparent authority"

"Apparent authority Explanation Apparent authority is what a third party (such as a member of the public) assumes an agent has, on the basis of the actions or words of the principal. By supplying the agent with business cards, sample policies, and rate books, the insurance company has given the impression that it supports his words and actions."

"Which of the following would be considered a moral hazard in underwriting a health insurance risk? A) A family history of diabetes B) A serious heart ailment C) Excessive dieting D) A hazardous occupation"

"Excessive dieting Explanation Moral hazards are habits or lifestyles of applicants that could pose additional risk for the insurer. These hazards are evaluated carefully when underwriting health insurance policies."

"Which of the following statements regarding the disposition of fiduciary funds is CORRECT? A) Funds collected as premiums are to be kept separate from those used for personal expenses or investments. B) Since the insured knowingly gave the premiums to the agent, personal use of those funds by the agent would not be considered theft. C) As long as the agent replaces any funds he used for personal expenses, the agent has not violated the fiduciary trust. D) A licensee may invest fiduciary funds in the stock market."

"Funds collected as premiums are to be kept separate from those used for personal expenses or investments. Explanation All premiums received by an agent are funds received and held in trust in a fiduciary capacity, and an agent or licensee is prohibited from commingling personal funds with funds held in a fiduciary capacity. Any agent who takes funds held in trust for personal use would be guilty of theft. A licensee may not expose the fiduciary funds to risk by investing them in the stock market."

"Which of the following statements regarding Lloyd's associations is CORRECT? A) Insurance is provided by individual underwriters. B) Lloyd's of London is an insurance company. C) Lloyd's associations are insurance companies. D) Insurance can only be offered in London."

"Insurance is provided by individual underwriters. Explanation Lloyd's associations are made up of underwriters who are individually liable and responsible for the insurance contracts they underwrite."

"Which of the following statements regarding exposure is NOT true? A) It is measured in degrees. B) It is measured in units. C) It is the risk assumed by the insurer. D) It is used to determine insurance premiums."

"It is measured in degrees. Explanation Exposure is the degree of risk an insurance company is willing to assume and pay out in the event of a loss. Insurance premiums are calculated by multiplying the rate and the number of exposure units."

"Which of the following statements best summarizes the function of insurance? A) It protects against living too long. B) It spreads financial risk over a large group so as to minimize the loss to any one individual. C) It is a form of legalized gambling. D) It spreads financial risk over a diverse group of people who are exposed to different risks."

"It spreads financial risk over a large group so as to minimize the loss to any one individual. Explanation The function of insurance is to safeguard against financial loss by having the losses of a few paid by the contributions of many who are exposed to the same risk."

"Which of the following statements regarding fraternal benefit societies is NOT true? A) They are organized under a lodge system. B) Policies are called contracts. C) The society exists for the benefit of its members. D) Life insurance is a benefit of membership."

"Policies are called contracts. Explanation Fraternal benefit societies operate under a special state insurance code. Policies are called certificates, and members who own life insurance are called certificate holders."

"Which of the following is NOT a characteristic of fraternal benefit societies? A) Representative form of government B) Profit-making organization with capital stock C) Lodge system D) Insurance benefits to members"

"Profit-making organization with capital stock Explanation A fraternal benefit society is any incorporated or unincorporated society, order, or lodge that operates solely for the benefit of its members and their beneficiaries. The society must be nonprofit and operate on the lodge system with a representative form of government. Fraternal benefit societies usually provide insurance benefits, including death benefits; endowments; annuities; disability benefits; hospital, medical, and nursing benefits; and monument or tombstone benefits."

"Which of the following types of risk is insurable? A) Whole risks B) Pure risks C) Speculative risks D) Partial risks"

"Pure risks Explanation Only pure risks are insurable because they involve only the chance of loss; there is never a possibility of gain or profit. The risk associated with the chance of injury from an accident is an example of pure risk. There is no opportunity for gain if the event does not occur, only the opportunity for loss if it does occur. Insurance is concerned with the economic problems created by pure risks."

"Self-insurance is an example of what kind of risk treatment? A) Avoidance B) Transference C) Retention D) Reduction"

"Retention Explanation Self-insurance is a form of risk retention because the individual or business entity personally retains the risk and must accept any resulting economic loss."

"Whom do independent insurance agents represent? A) The state insurance department B) The insurer C) The insured D) Themselves"

"The insured Explanation An independent insurance agent has relationships with multiple insurance companies but represents the insured by comparing coverage and costs to provide the most appropriate insurance."

"With a life insurance contract, which of the contracting parties makes an enforceable promise? A) The applicant or owner B) The insurer C) The agent D) The beneficiary"

"The insurer Explanation A life insurance contract is unilateral in that only one party—the insurer—makes an enforceable promise (the promise to pay the policy's benefit if certain occurrences come to pass or certain conditions are met). The applicant or owner makes no enforceable promise and is not legally required to maintain the contract (by continuing to pay the premiums)."

"In an insurance transaction, whom does a licensed agent legally represent? A) The applicant B) The insurer C) The state insurance department D) The National Association of Insurance Commissioners"

"The insurer Explanation Under the law of agency, insurance agents represent the insurers that appoint them."

"A peril is A) a moral hazard B) a cause of loss C) a type of risk D) an exposure"

"a cause of loss Explanation A peril is a cause of loss, such as illness, injury, or premature death. Insurance is purchased to transfer the financial loss of a covered peril from an individual or business to an insurance company."

"With regard to insurable risks, which of the following statements is NOT correct? A) a type of risk B) a cause of loss C) a moral hazard D) an exposure"

"a cause of loss Explanation A peril is a cause of loss, such as illness, injury, or premature death. Insurance is purchased to transfer the financial loss of a covered peril from an individual or business to an insurance company."

"A life insurance company is incorporated under the laws of the state of Michigan and maintains its home office in Detroit. The company would be considered A) a domestic company B) a local company C) a foreign company D) a preferred company"

"a domestic company Explanation A domestic insurer is one that is admitted to, formed and incorporated under the laws of the state in which insurance is written"

"An individual who occupies a position of trust when handling the financial affairs of another is A) a superior B) a trustee C) a consultant D) a fiduciary"

"a fiduciary Explanation A fiduciary is an individual occupying a position of trust and confidence when handling or supervising the funds or the affairs of another. A trustee is a person appointed or required by law to execute a trust to the benefit or use of another."

"An insurance producer in a position of financial trust to both the client and the insurer is best described as A) a solicitor B) a broker C) a trustee D) a fiduciary"

"a fiduciary Explanation An insurance producer acts in a fiduciary capacity when holding premiums or money collected from a policyholder that is to be paid to an insurance company. Producers are prohibited from misappropriating or converting such funds to their own use or illegally withholding them. Producers who convert or misappropriate these funds are guilty of theft and can be punished as provided by law."

"A nonprofit organization with a representative form of government and an elected officer that sells life insurance only to its members would be considered A) a home service insurer B) a service insurer C) a fraternal benefit society D) a risk retention group"

"a fraternal benefit society Explanation To be characterized as a fraternal benefit society, the organization must have a lodge system that may include charitable work. Insurance programs are operated under a special section of the state code, and fraternals receive some income tax advantages."

"An individual who recruits agents to sell insurance within a certain geographical area is A) a broker B) a general agent C) a special agent D) a career agent"

"a general agent Explanation A general agent is responsible for hiring, training, and supervising agents to sell insurance in a certain location."

"All of the following are types of insurers EXCEPT A) mutual B) fraternal C) stock D) communal"

"communal Explanation The various types of insurers include stock and mutual insurers, fraternal benefit societies, reciprocal insurers, and risk retention groups."

"A group of individuals who agree to share each other's losses is known as A) a mixed group B) a reinsurer C) a reciprocal group D) a service organization"

"a reciprocal group Explanation A reciprocal insurer or reciprocal exchange is a group of individuals (subscribers) who agree to indemnify each other for their losses. The exchange of these agreements is made through an attorney-in-fact common to all subscribers."

"All of the following are elements of a contract EXCEPT A) legal purpose B) agreement C) acknowledgment D) competent parties"

"acknowledgment Explanation The elements of a contract are agreement, consideration, competent parties, and legal purpose."

"A commercial insurer can take all of the following forms EXCEPT A) a mutual insurance company B) an individual benefit society C) a stock insurance company D) a fraternal benefit society"

"an individual benefit society Explanation A commercial insurer is classified by its form of ownership and can be a stock insurance company, mutual insurance company, or fraternal benefit society."

"A contract based on the principle of indemnity A) does not attempt to value the insured's actual financial loss B) attempts to return the insured to his original financial position C) allows the insured to sue the insurer if the full value of the contract is not paid when a claim occurs D) pays a stated sum, regardless of the actual loss incurred"

"attempts to return the insured to his original financial position Explanation An indemnity contract pays an amount equal to the loss—it attempts to return the insured to his original financial position. In contrast, a valued contract pays a stated sum, regardless of the actual loss incurred, when the contingency insured against occurs."

"Since the obligations of the insurance company hinge on certain acts of the policyowner, the beneficiary, or both, the insurance contract is termed A) aleatory B) conditional C) bilateral D) unilateral"

"conditional Explanation Insurance is a conditional contract because the obligations of the insurance company hinge on the performance of certain acts by the owner and the beneficiary, such as the payment of premiums and furnishing proof of loss."

"Direct response marketing is A) only available to groups B) outlawed in many states C) sold through insurance agents D) conducted through ads in the mail, in magazines, and on the internet"

"conducted through ads in the mail, in magazines, and on the internet Explanation There are no agents or producers in direct response marketing. Policies are sold directly to the public, and marketing is done through the mail or by advertisements in newspapers and magazines, on the radio, on television, and on the internet."

"If an agent fails to perform an act required by a policy, the insurer A) is still required to fulfill its obligation B) may release the agent and write a new contract with the policyholder C) has 60 days to notify the policyholder of the omission D) is exempt from fulfilling its obligation to the policyholder"

"is still required to fulfill its obligation Explanation The insurer is liable for its agent's acts if the agent is licensed and has a contract with the insurer."

"A contract in which one insurer cedes all or part of a risk to another insurer is known as A) reinsurance B) assuming insurance C) a participating policy D) retro insurance"

"reinsurance Explanation In a reinsurance contract, an insurer protects itself from loss or liability arising from an original contract of insurance by insuring itself through another insurer. Reinsurance is the spreading or sharing of a risk too large for one insurer by ceding part of the risk to another company or reinsurer."

"All statements made by an applicant in an application for life insurance are considered to be A) representations B) declarations C) affirmations D) warranties"

"representations Explanation Most states require that life insurance policies contain a provision that all statements made in the application be deemed representations, not warranties. A representation is a statement made by the applicant that she believes to be true. A warranty is a statement made by the applicant that is guaranteed to be true."

"In order for any contract, including an insurance policy, to be legal it must contain all of the following elements EXCEPT A) representations B) legal purpose C) consideration D) competent parties"

"representations Explanation The 4 elements of any legal contract are competent parties, legal purpose, agreement, and consideration. Representations are statements made on an application that the applicant believes to be factual."

"Beth and Talli's California neighborhood was ravaged by wildfires last summer. As a result, they installed a sprinkler system in their home to minimize damage in the event of a fire. This method of dealing with risk is called A) risk transference B) risk reduction C) risk avoidance D) risk retention"

"risk reduction Explanation Installing a sprinkler system in a home is a method of reducing risk. Although the possibility that a home may catch fire cannot be avoided entirely, Beth and Talli can reduce the risk of loss due to fire by installing a sprinkler system."

"The premiums insurance producers receive from insureds must be kept A) in the producer's business account B) as part of the issuing insurer's general fund C) separate from any personal funds D) as part of their total book of business"

"separate from any personal funds Explanation All premiums received by an insurance producer are funds received and held in trust. Insurance producers must keep these funds separate from their own personal funds, including any business accounts the producer may have."

"All of the following are elements of an insurable risk EXCEPT A) the loss must be catastrophic B) the loss must be the result of chance C) the loss must have a determinable value D) the loss must be predictable"

"the loss must be catastrophic Explanation One of the criteria for an insurable risk is that it not be catastrophic. A principle of insurance holds that only a small portion of a given group will experience loss at any one time. Risks that would adversely affect large numbers of people or large amounts of property, such as wars, are typically not insurable. Similarly, insurers would not issue a policy for $1 trillion on a single life. That one death would create a catastrophic; loss to the company."

"A contract agreement between a ceding insurer and reinsurer to underwrite certain classes of risks is known as A) treaty reinsurance B) facultative reinsurance C) retroceding insurance D) assuming reinsurance"

"treaty reinsurance Explanation The agreement in which a reinsurer agrees to underwrite a certain class of business submitted by the ceding insurer is known as treaty reinsurance. Underwriting is done for a class or classes of risks, as opposed to on an individual basis."

"When important and material facts are hidden by an insured on an application, this is known as A) a breach of contract B) concealment C) a material misrepresentation D) a misrepresentation"

"concealment Explanation When an individual knowingly fails to disclose known facts, this is known as concealment. If it is intentional and the information is material, the insurance company may void the contract."

"Daniel owns an insurance agency in a small town and represents just 1 insurer. He wears apparel with the company logo, has the company name on his vehicle, and hands out merchandise with the company's name imprinted on it. What type of authority does this represent? A) Apparent B) Express C) Assumed D) Implied"

"Apparent Explanation Apparent authority is the authority that a prudent person assumes an agent has. Based on his actions, the prospective client assumes that he has the authority to represent and transact business on the behalf of this particular insurance company. In other words, the agent's authority to represent the insurance company is ""apparent"" to the prospect. Apparent authority is from the client's perspective."

"Which of the following insurance companies is owned by its policyholders? A) Mutual life insurance company B) Reinsurer C) Stock life insurance company D) Home service insurer"

"Mutual life insurance company Explanation A mutual life insurance company is owned and controlled by its policyowners. These policyholders elect a board of trustees or directors to manage the firm. The savings and earnings of a mutual insurance company are returned to the policyowners in the form of dividends or retained as surplus to meet future obligations."

"Which of the following is NOT a type of insurance agent? A) Managing general agent B) Underwriter C) Independent agent D) Captive agent"

"Underwriter Explanation An underwriter works for the insurance company, does not sell insurance, and is not an agent. The other 3 are types of agents who sell insurance."

"All of the following are characteristics of an insurable risk EXCEPT A) measurable B) calculable C) affordable D) intentional"

"intentional Explanation If a loss is intentional, there is no risk because it is certain to occur. Therefore, a risk must be accidental for it to be covered by insurance."

"Jamir is an agent for Assured Insurance. He visits Ada, a prospect, in her home. He arrives with business cards, sample policies from Assured, and an Assured rate book. He recommends Assured policies that can meet Ada's needs for insurance. Which of the following terms describes the kind of authority that Jamir has in this situation? A) Implied B) Express C) Binding D) Apparent"

"Apparent Explanation Apparent authority arises from the reasonable assumptions that a third party, such as an insurance prospect, makes on the basis of the actions or statements of the principal. By providing its agent with business cards, sample policies, and rate books, Assured gives a prospect the impression that it supports Jamir's statements and deeds with respect to his insurance transactions."

"The fact that an insurance contract promises to pay benefits contingent on a future uncertainty (such as death or illness) makes it what type of contract? A) Conditional B) Aleatory C) Estoppel D) Adhesion"

"Conditional Explanation An insurance contract is conditional in that the insurer's promise to pay benefits is dependent on the occurrence of the risk insured against. If the loss does not materialize, no benefits are paid."

"Which of the following statements regarding exclusive agents is NOT true? A) Exclusive agents represent only 1 company. B) Exclusive agents are usually compensated by commissions. C) Exclusive agents represent the insurer. D) Exclusive agents represent the insured."

"Exclusive agents represent the insured. Explanation Exclusive agents represent the insurer (the insurance company)."

"Which of the following is NOT a characteristic of an insurable risk? A) Calculable B) Accidental C) Expensive D) Measurable"

"Expensive Explanation The 6 characteristics of an insurable risk are that the risk must be calculable, affordable, noncatastrophic, homogeneous, accidental, and measurable."

"Which of the following types of agent authority is specifically set forth in writing in the agent's contract? A) Apparent B) Express C) Implied D) Personal"

"Express Explanation Express authority is granted by a principal to its agent. The principal grants this authority through the agent's contract, which is the principal's appointment of the agent to act on its behalf."

"Which of the following types of agent authority is specifically set forth in writing in the agent's contract? A) Apparent B) Implied C) Express D) Personal"

"Express Explanation Express authority is the authority a principal gives to its agent. Express authority is granted by means of the agent's contract, which is the principal's appointment of the agent to act on its behalf."

"An insurance producer acts in what capacity when holding insurance premiums? A) Legal B) Representative C) Official D) Fiduciary"

"Fiduciary Explanation An insurance producer holds all premiums received in a fiduciary capacity. The producer must hold premiums in a separate trust account and must account for and pay the premiums to the insured or insurer that is entitled to them. An insurance producer may deposit all funds belonging to others in 1 account, as long as the separate amounts are recorded. An insurance producer who unlawfully appropriates insurance premiums for his own use commits theft."

"Denicia is appointed by an insurance company to transact insurance on its behalf. She collects her clients' premiums and has them sign paperwork. By what authority can she do so? A) Apparent B) Implied C) Fiduciary D) Express"

"Implied Explanation Implied authority is not expressly granted but is assumed to have been given in order to transact the principal's business. It is incidental to express authority because not every detail of an agent's authority can be specifically noted."

"An insurance company that is owned by its policyowners is known as A) a mutual life insurance company B) a parent company C) a stock insurance company D) a domestic company"

"a mutual life insurance company Explanation A mutual life insurance company is a corporation, but there are no stockholders. Instead, the company is owned by its policyowners, from whom its resources are derived. Its assets and income are held for the benefit of the policyowners, who, as contractual creditors, have the right to vote for directors or trustees."

"An unincorporated group of subscribers who operate through an attorney-in-fact to provide indemnity insurance for each other is called A) an unauthorized insurer B) a fraternal benefit society C) a surplus lines insurer D) a reciprocal exchange"

"a reciprocal exchange Explanation A reciprocal exchange is a type of cooperative insurance. Under this form of insurance, each policyowner is insured by all of the others. Each insured is also an insurer, because contracts are exchanged on a reciprocal basis. A reciprocal is managed by an attorney-in-fact."

"An insurer of an insurer is known as A) a service organization B) a mixed group C) a reciprocal D) a reinsurer"

"a reinsurer Explanation A reinsurer insures part of the life insurance underwritten by another life insurance company to reduce the potentially large loss of the other company."

"Which of the following activities is NOT an example of misrepresentation? A) A producer tells a prospect that the policy has received a certain level of dividends for the past 5 years. B) A producer participates in twisting. C) An insurer advertises a life insurance policy as a "retirement savings plan." D) A producer tells a prospect that the insurer has a higher A.M. Best rating than it actually has."

"A producer tells a prospect that the policy has received a certain level of dividends for the past 5 years. Explanation Misrepresentation includes using a title for a policy that misrepresents the true nature of the product, making false statements about an insurer's financial condition, and twisting, which is defined as misrepresentation to induce a policyholder to lapse, forfeit, or surrender a policy. Nothing prohibits a producer from disclosing the level of dividends from a policy if the information provided is true."

"Which characteristic of insurance contracts provides legal protection for insureds when coverages are not clearly stated in the policy? A) Utmost good faith B) Indemnity C) Conditional D) Adhesion"

"Adhesion Explanation An insurance contract is a contract of adhesion. The insurer writes the contract and the insured adheres to it as the contract has been written. Insureds are protected by the courts with regard to ambiguities in insurance contracts. In these cases, the courts will usually rule in favor of the party that did not draft the contract."

"Brian met with an insurance producer to discuss how much life insurance he would need to support his family in the event of his premature death. Both parties agreed that a $750,000 life insurance policy would be sufficient. When Brian stated that he wanted to discuss the matter with his spouse, the producer asked him to sign a general background information form before he left. However, the document was actually an application form that the producer submitted to the insurer. If the insurer then issues a contract, it will be legally unenforceable because A) Brian did not make a valid offer B) Brian is not presumed to be a competent party to the contract C) Brian did not make a valid acceptance of the contract D) the insurer did not make a valid offer"

"Brian did not make a valid offer Explanation To be legally enforceable, a contract must be made with a definite, unqualified offer by one party and the acceptance of its exact terms by the other party. Because Brian did not know that he was signing a life insurance application, he did not make a valid offer for the insurance contract."

"After comparing policies for the last 3 months, Carol has finally found a health insurance policy that she would like to purchase. When Carol submits the application with the initial premium, A) the insurance company cannot make a counteroffer B) Carol has made an offer that the insurance company can accept or reject C) Carol cannot rescind the offer once made D) the insurance company can make an offer by issuing the policy"

"Carol has made an offer that the insurance company can accept or reject Explanation When Carol submits an application along with the initial premium, she is making an offer to the insurance company. The insurer can accept the offer by issuing the policy as applied for, or it may counteroffer by issuing another policy at different premium rates or with different terms. Until the insurer accepts the offer, Carol has the right to rescind it."

"Which of the following statements regarding mutual insurers is TRUE? A) Mutual insurers issue participating policies. B) If a mutual insurer is profitable, it may issue taxable dividends to its policyholders. C) The board of directors oversees the operations of the company. D) Mutual insurers are also known as reciprocal insurers."

"Mutual insurers issue participating policies. Explanation Mutual insurers issue participating (or par) policies and are owned by policyholders. The board of directors is elected by the policyholders; however, officers oversee the company's operations. If the company is profitable, it may return excess premiums to its policyholders, which are considered a nontaxable dividend."

"Which kind of insurance company is owned by individuals who buy shares but are not entitled to receive policy dividends? A) Fraternal insurance company B) Stock insurance company C) Mutual insurance company D) Reciprocal insurance company"

"Stock insurance company Explanation Stock companies consist of stockholders, also known as shareholders, that receive stock dividends, not policy dividends. Mutual companies consist of policyholders, and if the company is profitable they may receive a policy dividend, which is actually a nontaxable return of excess premium."

"What is the difference between a stock insurer and a mutual insurer? A) Stock insurers have shareholders and mutual insurers have policyholders. B) Stock insurers have policyholders and mutual insurers have shareholders. C) Stock insurers have policyholders and mutual insurers have certificate holders. D) Stock insurers have certificate holders and mutual insurers have policyholders."

"Stock insurers have shareholders and mutual insurers have policyholders. Explanation A stock insurer is an incorporated insurer with capital that is divided into shares and owned by shareholders. A mutual insurer is owned by its customers, who are known as policyholders."

"Hachiro, age 45, purchased a life insurance policy from AllPro Insurers and named his 8-year-old son, Takeshi, as a beneficiary. Which of the following statements regarding this situation is CORRECT? A) Hachiro and Takeshi are considered parties to the insurance contract. B) Takeshi is not a competent party to the insurance contract because he is a minor. C) Hachiro, AllPro Insurers, and Takeshi are considered parties to the insurance contract. D) Takeshi is not a party to the insurance contract."

"Takeshi is not a party to the insurance contract. Explanation A beneficiary is not a party to an insurance contract. The fact that Takeshi is a minor is irrelevant in this case. Under certain conditions, even minors can enter into insurance contracts as competent parties."

"Who represents an insurance company in an insurance transaction? A) The agent B) The Commissioner C) The broker D) The consultant"

"The agent Explanation An agent is authorized in writing by an insurance company to solicit, negotiate, or effectuate insurance contracts on the company's behalf and to collect insurance premiums. A broker is paid to negotiate insurance policies and place risks for his client, the party to be insured. A consultant is paid to offer advice or to counsel the public with respect to the benefits, advantages, and disadvantages of insurance policies."

"Which of the following statements regarding insurers is CORRECT? A) A stock company that issues both participating and nonparticipating life insurance policies is classified as a full lines company. B) The primary purpose of an insurance company that is organized as a stock insurer is to earn a profit for its stockholders. C) If a life insurance company is owned by its policyowners, it is a stock company. D) Mutual insurance companies sell insurance to insurers."

"The primary purpose of an insurance company that is organized as a stock insurer is to earn a profit for its stockholders. Explanation Stock insurance companies are owned by stockholders, not policyowners. They are organized for the purpose of making a profit for their stockholders."

"The license an insurer usually needs to sell insurance in a state is called A) a certificate of authority B) a certificate of insurance C) a certificate of approval D) a certificate of qualifications"

"a certificate of authority Explanation Most states require an insurer to have a certificate of authority to underwrite and sell insurance in that state."

"With regard to insurance, consideration means A) the insurer's method of evaluating the applicant for coverage B) directly giving something of value C) a side-by-side policy comparison by the applicant D) a screening process all agents undergo prior to licensing"

"directly giving something of value Explanation The term consideration refers to an exchange of value. With insurance, the consideration given by the insured is the paid premium and the consideration given by the insurer is the promise to pay for any valid claim."

"When there is no coverage available through an authorized carrier in the state, this insurance is referred to as A) reciprocal insurance B) risk retention C) reinsurance D) excess and surplus lines"

"excess and surplus lines Explanation Excess and surplus lines is the name given to insurance when there is no coverage available through an authorized carrier in the state where the risk arises or the risk is located, or for which there is no market through the original producer. This type of business must be placed through a licensed excess or surplus lines broker."

"Jill met with an insurance agent to discuss purchasing a $500,000 term life insurance policy. If Jill signs a contract 2 weeks later while intoxicated, A) the contract will be voidable at the insurer's option B) she will not be presumed to be competent C) the contract will be considered valid D) she will be presumed to be competent since she was capable of understanding the contract during the initial meeting"

"she will not be presumed to be competent Explanation To be enforceable, a life insurance contract must be entered into by competent parties. In general, an applicant will be presumed to be competent unless proven otherwise. However, applicants who are under the influence of alcohol or drugs when signing the contract are not presumed to be competent."

"The type of risk that involves the chance of both loss and gain is A) pure risk B) impure risk C) whole risk D) speculative risk"

"speculative risk Explanation Speculative risk involves the chance of both loss and gain. For example, the placement of a bet at a racetrack is a speculative risk."

"A producer owes a fiduciary responsibility to all of the following EXCEPT A) the insured, on canceled policies B) the insurer, for premiums due C) the prospective purchaser of insurance, when the application is rejected D) the Commissioner for license fees"

"the Commissioner for license fees Explanation A producer is in a position of financial trust to the insurance buyer and the insurer. Therefore, a producer must promptly remit all premiums and other insurance proceeds to the insurer. Any money that is held on behalf of an applicant or insured, such as premiums on an application or a canceled policy, must be returned to the applicant or former insured. No such relationship exists between the producer and the Commissioner or Director of Insurance within a state."

"In insurance, A) contracts made by the agent are considered to be contracts of the producer B) contracts made by the principal are considered to be contracts of the agent C) the insurer is the principal and the producer is the agent D) the producer is the principal and the insurer is the agent"

"the insurer is the principal and the producer is the agent Explanation In insurance, the insurer is the principal and the producer is the agent. An agency relationship is created by the consent of both the agent and the principal."

"The law of large numbers states that A) the smaller the number of risks combined into 1 group, the less uncertainty there will be as to the amount of loss that will be incurred B) the larger the number of risks combined into 1 group, the smaller the loss will be to any 1 individual in that group C) the larger the number of risks combined into 1 group, the less uncertainty there will be as to the amount of loss that will be incurred D) the smaller the number of risks combined into 1 group, the larger the loss will be to any 1 individual in that group"

"the larger the number of risks combined into 1 group, the less uncertainty there will be as to the amount of loss that will be incurred Explanation The law of large numbers operates under the principle that the larger the number of similar risks combined into 1 group, the less uncertainty there will be as to the amount of loss that group will incur. Thus, an insurance company is able to determine in advance the approximate number of claims it will receive in a given period for a given risk and place its business on a nonspeculative basis."

"If an agent or producer diverts funds belonging to an insurer to her own use, she has committed the illegal act of A) embezzlement B) theft C) commingling D) fraud"

"theft Explanation An agent or producer who receives a premium holds it in a fiduciary capacity. The producer is placed in a position of trust by the insured who paid the premium and the insurer to whom the premium is owed. Therefore, a producer who diverts these funds for personal use has stolen them."

"A licensed independent life or health insurance producer may represent A) no more than 2 companies B) only 1 insurance company C) 1 or more authorized insurers D) no more than 2 authorized insurers within a 12-month period"

"1 or more authorized insurers Explanation An independent producer is one whose agency agreement allows her to represent more than one insurer. A captive producer is retained by a single insurance company to solicit, sell, renew, or negotiate insurance contracts for that specific company."

"All of the following are methods of handling risk EXCEPT A) resistance B) reduction C) retention D) sharing"

"resistance Explanation The different methods for handling risk include sharing, transfer, avoidance, reduction, and retention. Resistance is not a method for handling risk."

"A mutual insurer is owned by its A) stakeholders B) directors C) stockholders D) policyholders"

"policyholders Explanation Mutual insurers are owned by their customers, or policyholders."

"Self-insurance is A) illegal in many states B) practiced by organizations that establish reserves to protect themselves against loss C) available through the federal government D) insurance written by an insurer on itself"

"practiced by organizations that establish reserves to protect themselves against loss Explanation Self-insurance is a legitimate method of insuring loss by establishing one's own reserve of funds."

"With regard to insurance, risk can be defined as A) uncertainty regarding financial gain B) certainty regarding loss C) certainty regarding financial gain D) uncertainty regarding loss"

"uncertainty regarding loss Explanation Risk refers to the uncertainty of financial loss. Insurance replaces the uncertainty of risk with certain guarantees of financial stability."

"Which of the following statements regarding insurance company organization is CORRECT? A) Stock companies are owned by the policyholders. B) A stock company pays dividends to its policyholders. C) A policyholder in a mutual company may receive a dividend. D) Mutual companies do not declare dividends."

"A policyholder in a mutual company may receive a dividend. Explanation A stock insurance company is owned by investors, who are called stockholders. If a dividend is declared, it is given to the stockholders. A mutual insurance company has no stockholders but is owned by its policyholders. If any dividends are distributed, they are given to the policyholders, not to any outside investors."

"Which of the following statements regarding representations is CORRECT? A) Representations are statements the applicant may or may not believe to be true. B) A representation must be material for the insurer to void the contract. C) If a representation is false on a material point, the insurer may alter the contract but may not rescind it. D) A representation is guaranteed to be true."

"A representation must be material for the insurer to void the contract. Explanation A representation that is determined to be false, but not material, would not void an insurance contract."

"Which of the following is a promise in exchange for an action? A) A contract of adhesion B) An aleatory contract C) A unilateral contract D) A condition contract"

"A unilateral contract Explanation Insurance contracts are unilateral contracts because only one party—the insurer—makes any kind of enforceable promise. The insurer promises to pay benefits if and when certain events, such as death or disability occur. The insured's act of paying the premium is given in exchange for this promise. However, the insured is not obligated to make these payments and can let the policy lapse."

"Which of the following terms correctly describes a life insurance company that is organized outside the United States or its possessions? A) Foreign B) Distant C) Remote D) Alien"

"Alien Explanation An alien insurance company is one that is incorporated or organized under the laws of a foreign nation, province, or territory."

"Which of the following is an insurer? A) Any person who pays premiums B) The Commissioner of Insurance C) An insurance producer D) An insurance company"

"An insurance company Explanation An insurance company is an insurer because it alone underwrites the coverage and assumes the risk."

"Angela, a recent applicant for a $50,000 life insurance policy, failed to state on her application that she suffered a heart attack a year earlier, fearing it would affect her insurability. Which of the following terms describes Angela's action? A) Indemnification B) Conversion C) Warranty D) Concealment"

"Concealment Explanation Angela's action is a concealment because she knowingly failed to disclose pertinent, material information on the application. The test of materiality of a concealed fact is whether the insurer, had it known the fact, would have been influenced in accepting or rejecting the risk."

"Which of the following statements about Lloyd's of London is NOT correct? A) It helps its associates settle claims and disputes. B) It is an insurance carrier that underwrites insurance. C) It is an association of individuals and companies that individually underwrite insurance. D) It gathers and disseminates underwriting information."

"It is an insurance carrier that underwrites insurance. Explanation Lloyd's of London is not an insurer but an association of individuals and companies that individually underwrite insurance. It gathers and disseminates underwriting information, helps its associates settle claims and disputes, and, through its member underwriters, provides coverages that might otherwise be unavailable in certain areas. A risk retention group is a mutual company formed to insure people in the same business, occupation, or profession, such as pharmacists, dentists, or engineers."

"Which of the following statements regarding mass marketing insurance is CORRECT? A) It involves one-on-one meetings between prospects and agents. B) It takes advantage of small group situations. C) It is marketed through various forms of print, visual, and aural media. D) It is considered unethical and is illegal in some states."

"It is marketed through various forms of print, visual, and aural media. Explanation Mass marketing insurance takes advantage of large group situations, selling through direct mail, newspapers, radio, and television. It is an acceptable means of marketing insurance, though there is usually little client contact with an agent or a broker."

"Which of the following statements regarding a risk retention group is TRUE? A) Its sole purpose is to provide liability insurance to its policyholders. B) Policyholders may be from any type of industry. C) Risk retention groups are federally regulated. D) A risk retention group may provide any type of insurance."

"Its sole purpose is to provide liability insurance to its policyholders. Explanation A risk retention group is a formed to provide only liability insurance to its policyholders. The policyholders must be in the same industry, and they may operate in multiple states. The state where the group is headquartered issues the laws, rules, and regulations."

"Which of the following is NOT encompassed by agency law? A) Payments made to an agent intended for the principal are payments made to the principal. B) Knowledge of the principal is knowledge of the agent. C) A contract completed by the agent on behalf of the principal is a contract of the principal. D) The acts of an agent are the acts of the principal."

"Knowledge of the principal is knowledge of the agent. Explanation A fundamental rule of agency law states that information known to the agent is also known by the principal, as long as the agency relationship exists. Information known to the principal, however, is not presumed to be known to the agent."

"Which of the following is an incorporated insurer that does not have capital stock and has a governing body that is elected by its policyholders? A) Mutual insurer B) Stock insurer C) Reciprocal insurer D) Guaranty association"

"Mutual insurer Explanation A mutual insurer is an incorporated insurer that is owned collectively by its policyowners, who elect its directors. Mutual insurers do not have capital stock. Stock insurers, on the other hand, are incorporated insurers with capital divided into shares that are owned by stockholders, while a reciprocal insurer is an unincorporated group of persons, or subscribers, who operate through a common attorney to provide insurance for each other."

"Concerning mutual insurers, which of the following statements is CORRECT? A) In a mutual company, there are shareholders. B) In a mutual company, there are stockholders. C) Mutual companies are sometimes referred to as nonparticipating companies. D) Policyholders may participate in dividends."

"Policyholders may participate in dividends. Explanation In a mutual company, there are no stockholders. The ownership rests with the policyholders. Funds not paid out after paying claims and other operating costs are returned to the policyowners in the form of policy dividends."

"Which of the following is a distinctive feature of fraternal life insurance? A) Fraternal societies are exempt from income taxes. B) Policies are only available to men who have lived in a fraternity. C) Members must be related. D) Some policies are referred to as open contracts."

"Some policies are referred to as open contracts. Explanation Certificate holders might be assessed additional charges if premiums are not sufficient to pay claims during a given period. Policies with this feature are called open contracts. Stock and mutual insurers do not assess their policyowners."

"Who are the parties to a life insurance contract? A) The agent, the applicant, and the beneficiary B) The applicant and the beneficiary C) The agent and the applicant D) The applicant and the insuring company"

"The applicant and the insuring company Explanation The parties to a life insurance contract are the applicant and the insuring company. Neither the beneficiary nor the agent is a contracting party."

"An insurance contract is prepared by one party, the insurer, rather than through negotiation between the contracting parties. Which of the following statements explains this characteristic of insurance contracts? A) The insurance contract is an aleatory contract. B) The insurance contract is a unilateral contract. C) The insurance contract is a conditional contract. D) The insurance contract is a contract of adhesion."

"The insurance contract is a contract of adhesion. Explanation Insurance contracts are contracts of adhesion, meaning that they are prepared by one party, the insurer. They are not negotiated contracts. In effect, the applicant adheres to the terms of the contract when she accepts it."

"In an insurance transaction, licensed agents legally represent which of the following? A) Themselves B) The state insurance department C) The applicant and the insured D) The insurer"

"The insurer Explanation A licensed insurance agent legally represents the insurer in a sales transaction and in any disputes between the insured or beneficiaries and the insurer."

"Which of the following statements regarding direct-writing companies is NOT true? A) The producer owns the book of business. B) Employees are paid a salary, commission, or both to sell the company's insurance products. C) The insurer owns all of the business that is produced. D) Producers are considered employees."

"The producer owns the book of business. Explanation Direct-writing companies employ producers to sell the company's insurance products. These employees are paid a salary, commission, or both. The insurer owns the business that the producers write."

"Which of the following describes facultative reinsurance? A) The reinsurer considers each risk before allowing the transfer to be made from the ceding company. B) The reinsurer rejects most risks from the ceding company. C) The reinsurer accepts all risks of a certain type from a ceding company. D) The reinsurer accepts all risks from the ceding company."

"The reinsurer considers each risk before allowing the transfer to be made from the ceding company. Explanation A reinsurance company can accept risks in 2 different ways. The first is facultative reinsurance, whereby the reinsurer considers each risk before allowing the transfer to be completed by the ceding company. Treaty reinsurance is when a reinsurer accepts all risks of a certain type from the ceding company."

"Which of the following statements pertaining to a life insurance contract is CORRECT? A) The term unilateral refers to the legal obligations of the policyowner. B) The term aleatory indicates that the values received by each party may be unequal. C) The term conditional indicates that the insurer will pay benefits regardless of a loss. D) The term adhesion indicates that the parties to the contract have a right to expect honesty from each other."

"The term aleatory indicates that the values received by each party may be unequal. Explanation A unilateral contract in insurance refers to the insurer's legal obligations. Adhesion indicates that the contract was drafted by one party (the insurer) and must be accepted or rejected by a second party (the applicant), who cannot bargain with respect to its terms. Conditional refers to the fact that the insurer's promise to pay benefits is conditioned on the occurrence of a loss."

"Which of the following statements about fraternal benefit societies is NOT correct? A) They are exempt from the licensing requirements if they provide insurance benefits to their members only. B) They are nonprofit societies that have a representative form of government. C) They do not have capital stock. D) They operate on a lodge system."

"They are exempt from the licensing requirements if they provide insurance benefits to their members only. Explanation A fraternal benefit society is a nonprofit organization that does not have capital stock and exists solely for the benefit of its members. Fraternals must have a representative form of government and maintain a lodge system. Fraternal benefit societies that provide insurance benefits for their members must be licensed by the director and file an annual statement of their financial affairs."

"Which of the following statements about participating policies is NOT correct? A) They are issued only by stock companies. B) The annual premium rate is generally higher than that for nonparticipating policies. C) They are eligible for dividends. D) They enable the policyowner to share in the earnings of the company."

"They are issued only by stock companies. Explanation Participating policies are issued by both stock and mutual companies. They are called participating because they are eligible for dividends, thus enabling policyowners to share in the earnings of the company. For this reason, the premium cost is generally higher for participating policies than for nonparticipating policies."

"An insurance company that transacts insurance directly with consumers without the assistance of producers is called A) a public approach carrier B) a reinsurance organization C) a direct advertising carrier D) a direct response company"

"a direct response company Explanation Direct response companies sell to consumers without using producers. These companies may use their own employees to sell insurance directly to prospective buyers or do so through the mail or at airport booths"

"An insurance agent could be any of the following EXCEPT A) a direct-writing commissionable agent B) a general agent or managing general agent C) an exclusive or captive agent D) an independent agent"

"a direct-writing commissionable agent Explanation An insurance agent may be independent, exclusive, or a general agent. Direct-writing companies do not use traditional agents, but use salaried employees to sell policies by phone or email."

"A producer who receives life insurance premiums holds the money in trust as A) a fiduciary B) a broker C) a banker D) an investor"

"a fiduciary Explanation A producer is considered to be a fiduciary—that is, a person in a position of financial trust to both the insurance buyer and the insurer. As such, a producer must remit all premiums and other insurance proceeds to the insurer promptly and maintain records of all funds received in this fiduciary capacity, including premiums due to the insurer."

"Individuals who own life insurance and are called certificate holders are members of a A) a risk retention group B) a home service insurer C) a certificate holders society D) a fraternal benefit society"

"a fraternal benefit society Explanation Fraternal benefit societies are organized under a lodge system and receive some income tax advantages. Insurance programs are operated under a special section of the state's insurance code. Members who own life insurance are called certificate holders."

"All of the following are considered to be insurers EXCEPT A) an insurance company B) a fraternal organization C) an association D) a group of employees enrolled in an insurance plan"

"a group of employees enrolled in an insurance plan Explanation An insurer, also known as an insurance company, is a corporation, fraternal organization, or other association, society, or individual that engages as a principal in any kind of insurance or surety business. A group of employees enrolled in an insurance plan would not be considered an insurer."

"An agent that hires, trains, and supervises other agents within a specific geographical area is A) an independent agent B) the Commissioner's office C) a captive agent D) a managing general agent"

"a managing general agent Explanation An insurance producer represents the insurer, not the insured. A producer acts as the insurer's representative or agent by virtue of an appointment to act as such."

"An incorporated insurer whose governing body is elected by the policyowners is A) a reciprocal insurer B) a stock company C) a mutual company D) a combination insurer"

"a mutual company Explanation An incorporated insurance company that does not have permanent capital stock is a mutual insurer. The policyowners own the company and elect its governing body. A stock insurer, on the other hand, is an incorporated insurance company with its capital divided into shares of stock owned by the stockholders. A combined stock and mutual insurer is also an incorporated insurance company; its capital is divided into shares owned by the stockholders. However, both the stockholders and policyowners control the company."

"An insurance company that is owned by its policyowners, who share the insurer's divisible surplus in the form of participating policy dividends, is known as A) a reciprocal insurance company B) a stock insurance company C) a reinsurance company D) a mutual insurance company"

"a mutual insurance company Explanation A mutual insurance company is an incorporated entity owned by its policyowners. It does not have capital stock, charges a fixed premium, and must maintain the same reserves as a stock company. It is common for mutual companies to sell participating policies in which the policyowners share the insurer's divisible surplus in the form of policy dividends."

"The financial strength rating of an insurance company is similar to A) a financial statement B) a stock offering C) a prospectus D) a report card"

"a report card Explanation The financial strength rating of a company is like a report card because it is the "grade" an independent rating firm has given based on the financial wellness of the company."

"Miguel works for a mutual insurance company that was formed to handle the insurance needs of lawyers. The type of company that Miguel works for is called A) a reinsurer B) a fraternal benefit society C) a risk retention group D) a reciprocal insurer"

"a risk retention group Explanation A risk retention group is a mutual insurance company formed to insure people in the same business, occupation, or profession, such as pharmacists, dentists, lawyers, or engineers. Risk retention groups tend to handle commercial liability exposures. Reinsurers, in contrast, insure other insurers, while the policyholders themselves insure the risks of other policyholders in a reciprocal insurer. Fraternal benefit societies are noted for their social, charitable, and benevolent activities and have memberships based on religious, national, or ethnic affiliations."

"An incorporated insurer whose capital is divided into shares and owned by its stockholders is A) a foreign insurer B) a reciprocal insurer C) a mutual insurer D) a stock insurer"

"a stock insurer Explanation A stock insurer is an incorporated insurer whose capital is divided into shares and owned by its stockholders."

"In an insurance contract, only one party is legally bound to perform under the contract. This describes A) an aleatory contract B) a conditional contract C) a unilateral contract D) an adhesive contract"

"a unilateral contract Explanation Insurance contracts are unilateral contracts because only one party promises to do something. The insurance company promises to pay covered claims (as long as the premium has been paid and the policy is in force); however, the insured does not promise to pay the premiums."

"In legal terms, the voluntary relinquishment of a known right is called A) a withdrawal B) a waiver C) a warranty D) a concealment"

"a waiver Explanation A waiver is a voluntary relinquishment of a known right. If an insurer waives a legal right under an insurance policy, it cannot deny a future claim based on a violation of that right. This is known as estoppel, and the insurer is estopped from denying the claim."

"The inclination of higher-risk individuals to be "first in line" to get and keep insurance is called A) misrepresentation. B) excess risk. C) adverse selection. D) substandard selection."

"adverse selection. Explanation The inclination of higher-risk individuals to be "first in line" to get and keep insurance is called adverse selection. One of the purposes of underwriting is to identify and rate up or decline higher-risk individuals."

"Susan is the receptionist at an insurance agency. She is currently studying for her life insurance license. One day at lunchtime, Carla comes in the office to pay her auto insurance premium. Susan talks to her about the importance of life insurance, and Carla immediately completes an application and gives Susan a check for the premium. Carla leaves the agency believing she is covered by life insurance. Susan has acted with A) illegal authority B) implied authority C) apparent authority D) express authority"

"apparent authority Explanation Carla was led to believe that Susan had the authority to issue the policy because she accepted the application and premium. Even though Susan does not have the authority to write the contract, the insurance company may be legally bound to provide coverage."

"All of the following are distribution systems EXCEPT A) direct response B) claims handling C) independent agencies D) direct writing"

"claims handling Explanation Insurance is distributed through many different channels, including direct response, direct writing, independent agencies, and exclusive agencies. Claims handling is a function of the insurance company."

"The intentional failure to disclose known facts on an insurance application is called A) twisting B) misrepresentation C) adhesion D) concealment"

"concealment Explanation Concealment occurs when the applicant intentionally fails to disclose known facts that could influence the issuance of the policy. This may give the insurer grounds for voiding the policy."

"Nancy is an agent for Assured Life and Health Insurance Company and convinces Sook, a young newlywed, to buy a policy. Sook and her spouse have recently moved to the city and found new jobs. Nancy wants to help them get settled. She may help them in all of the following ways EXCEPT A) depositing the initial premium in her own account B) delivering the policy C) collecting the initial premium D) explaining the coverage"

"depositing the initial premium in her own account Explanation Depositing client funds in an agent's personal account, which is called commingling, violates fiduciary responsibility"

"When an agent's duties are specifically spelled out in the contract with the insurance company, this is an example of A) apparent authority B) legal authority C) express authority D) implied authority"

"express authority Explanation Express authority is granted to an agent in the contract and explicitly details the duties and responsibilities to the insurance company."

"The authority that an insurer gives to its agents by means of the agent's contract is known as A) express authority B) implied authority C) general authority D) fiduciary responsibility"

"express authority Explanation Express authority is what the insurer intends to, and in fact does, give to its agent through means of the agency agreement. This authority explicitly appoints the agent to act on behalf of the insurer."

"Bonita's written contract with the insurance company she represents specifically addresses issues such as her duties in collecting premium payments. This is an example of A) express authority B) ambiguous authority C) implied authority D) apparent authority"

"express authority Explanation The written contract or agreement between an agent and the insurer that is explicit about responsibilities, rights, and powers is known as express authority."

"When a reinsurer considers each risk as a single transaction before assuming it, this is called A) discretionary reinsurance B) treaty reinsurance C) facultative reinsurance D) transactional reinsurance"

"facultative reinsurance Explanation Facultative reinsurance is an agreement in which the reinsurer accepts and underwrites risks on a case-by-case basis. The reinsurer does not have to accept and reinsure all risks within a defined class."

"All of the following are examples of social (governmental) insurance EXCEPT A) Medicaid B) fraternals C) workers' compensation D) Medicare"

"fraternals Explanation Social insurance is provided by or required by a governmental entity, either federal or state. As such, Social Security, including Medicare and Medicaid, and state insurance programs, such as workers' compensation, are included. Fraternal insurers are commercial insurers with no governmental connection."

"The parties to an insurance contract must act in utmost good faith, which means that both the agent and the applicant A) work together to find insurance for the lowest possible price B) make no attempt to deceive each other C) always arrive on time for meetings D) agree to transact insurance business"

"make no attempt to deceive each other Explanation Both the policyowner and the insurer must know all material facts and relevant information. There can be no attempt by either party to conceal, disguise, or deceive. A consumer purchases a policy largely on the basis of what the insurer and its agent claim are its features, benefits, and advantages. An insurer issues a policy primarily on the basis of what the applicant reveals in the application"

"Independent rating agencies evaluate all of the following factors of an insurer to assess their financial strength EXCEPT A) number of agents B) loss experience C) investments D) operating expenses"

"number of agents Explanation While not all firms rate the same companies or use the same criteria, the main indicators of financial strength are the insurer's loss experience, reserves, investment performance, management, and operating expenses."

"Unincorporated groups of people that agree to insure each other's losses under a contract are known as A) reciprocal insurers B) mutual insurers C) stock insurers D) fraternal insurers"

"reciprocal insurers Explanation Reciprocal insurers are unincorporated groups of people called subscribers. Subscribers pay premiums into individual accounts, and if there is a loss, they are assessed an amount to pay the claim. Such groups are run by an attorney-in-fact, who is often overseen by an advisory board made up of subscribers."

"A contract in which one insurer cedes all or part of a risk to another is known as A) a participating policy B) retro insurance C) reinsurance D) assuming insurance"

"reinsurance Explanation Reinsurance is the act of one insurer selling part of a policy to another insurer. The original insurer, or primary insurer, is called the ceding company, and the second insurer is called the assuming company. Many insurers reinsure some of their larger risks because they do not want to be exposed to the exceptional losses they would incur if they had to pay claims on those policies."

"Statements made by an applicant in completing a life insurance application are considered to be A) oaths B) guarantees C) representations D) warranties"

"representations Explanation Statements made by an applicant for insurance that he represents as being substantially true to the best of his knowledge and belief are representations. Even an untrue representation, unless it is material or fraudulent, will not prevent the policyholder from recovering for losses under the policy."

"According to insurance law, an insurance agent is a person who A) receives a fee as an independent contractor to investigate and negotiate the settlement of claims arising under insurance contracts B) solicits, negotiates, procures or effects insurance or annuity contracts on behalf of an insurer C) is compensated as an independent contractor to procure insurance on behalf of another person, but not on behalf of an insurer or agent D) receives a fee to advise insurance applicants on the merits and disadvantages of insurance policies"

"solicits, negotiates, procures or effects insurance or annuity contracts on behalf of an insurer Explanation An insurance agent is an individual or business entity that solicits, negotiates, procures, or effects insurance or annuity contracts on behalf of an insurer."

"With life, accident, and health insurance, an insured's oral misrepresentation or false warranty will NOT void a policy unless A) the insured has more than 1 policy with the same company B) the insured agrees to drop the policy C) there was intent to deceive or it materially affects the insurer's decision to accept the risk D) the policy has been in force less than 1 year"

"there was intent to deceive or it materially affects the insurer's decision to accept the risk Explanation An insured's oral misrepresentation or false warranty cannot be used to void a policy, but misrepresentations made in writing (as on the application) can be grounds for voiding a contract in accordance with the terms of the policy's contestability clause. Even then, a misrepresentation or false warranty will not void a policy unless the applicant actually intended to deceive or it materially affected the company's decision to accept the risk."

"To avoid adverse selection, insurers determine many different factors and rely on an extensive amount of information before issuing a policy. This process is called A) underwriting B) accrediting C) evaluating D) undersigning"

"underwriting Explanation Insurers use many different sources of information when evaluating a risk, using a process known as underwriting."

"When negotiating a contract of insurance, the parties make no attempt to conceal or disguise important facts or deceive each other. The contact is said to be one of A) offer and acceptance B) value C) sharing D) utmost good faith"

"utmost good faith Explanation Insurance is a contract of utmost good faith. Both the policyowner and the insurer must know all material facts and relevant information. There can be no attempt by either party to conceal, disguise, or deceive. A consumer purchases a policy based largely on what the insurer and its agent claim are its features, benefits, and advantages."