FFPN Module 4 Insurance Basics & Property Insurance

Which one of the following statements is correct? (LO 4-3) Mutual companies are publicly traded on a stock exchange. Mutual companies offer participating and nonparticipating policies. Stock companies are owned by the policyholders. Nonparticipating policies are only sold by stock companies.

Mutual companies are publicly traded on a stock exchange. Mutual companies are private and dividends go to the policyholders (participating policies). Mutual companies offer participating and nonparticipating policies. By law mutual companies can only offer participating policies. Stock companies are owned by the policyholders. Stock companies are owned by shareholders. (ANSWER) Nonparticipating policies are only sold by stock companies. Nonparticipating policies can only be sold by stock companies, mutual companies cannot sell nonparticipating policies.

Which one of the following statements concerning umbrella insurance coverage is correct? (LO 4-6) Standard Form 734 is used for all umbrella insurance contracts.. Umbrella insurance generally comes in $1 million increments. Umbrella insurance pays out a claim first and the underlying insurance pays out any remainder amounts. Umbrella insurance covers only specific liability exposures and has many exclusions.

Standard Form 734 is used for all umbrella insurance contracts.. (ANSWER) Umbrella insurance generally comes in $1 million increments. Umbrella insurance generally comes in $1 million increments. Underlying insurance is used first, and then umbrella coverage kicks in, with little specification of liabilities covered. Comprehensive personal liability insurance is covered in Section II of the homeowners policy. Umbrella insurance pays out a claim first and the underlying insurance pays out any remainder amounts. Umbrella insurance covers only specific liability exposures and has many exclusions.

Which one of the following is not one of the basic/standard sections of an insurance policy? (LO 4-2) declarations riders and endorsements exclusions conditions

declarations Declarations are one of the basic/standard sections of an insurance policy. (ANSWER) riders and endorsements Riders and endorsements increase coverage or provide additional coverage to an existing policy; however, they are not considered to be one of the basic or standard sections of a policy. exclusions Exclusions are one of the basic/standard sections of an insurance policy. conditions Conditions are one of the basic/standard sections of an insurance policy.

The cause of a loss is called a(n) (LO 4-2) risk. peril. hazard. accident.

risk. Risk is a condition whereby it is possible that a loss may occur. (ANSWER) peril. A peril is a cause of loss. hazard. A hazard is something that increases the chance of loss. accident. An accident is something of an unintentional nature that could possibly result in a loss.

Which one of the following statements about insurance agents is correct? (LO 4-3) The insurance field has one area that deals with life and health related coverage and another that deals with property and casualty coverage, and insurance agents tend to work primarily in one area or the other. Insurance agents oftentimes sell multiple types of insurance as part of their practice, including life, health, property, and casualty. Individuals who sell insurance may be called agents or brokers, both of which mean essentially the same thing as far as the client is concerned.

(ANSWER) The insurance field has one area that deals with life and health related coverage and another that deals with property and casualty coverage, and insurance agents tend to work primarily in one area or the other. There are two different and distinct areas of insurance, and typically insurance agents will specialize and work primarily in one area. Insurance agents oftentimes sell multiple types of insurance as part of their practice, including life, health, property, and casualty. There are two different and distinct areas of insurance: life and health or property and casualty. Typically agents focus on one or the other. Individuals who sell insurance may be called agents or brokers, both of which mean essentially the same thing as far as the client is concerned. An insurance agent primarily works for the insurance company and can bind coverage, whereas a broker works for the client.

Which one of the following represents the best protection against financial loss suffered due to premature death? (LO 4-1) life insurance medical insurance disability insurance long-term care insurance

(ANSWER) life insurance Life insurance can replace the financial loss suffered by others if the insured dies prematurely. medical insurance Medical insurance limits your out-of-pocket expenses when you get sick or hurt. disability insurance Disability insurance provides a steady stream of income for a set period of time in the event of disability. long-term care insurance Long-term care insurance is used to provide quality long-term care and to preserve an inheritance many people want to pass on to their children.

Liability risk is (LO 4-1) one form of pure risk. one form of speculative risk. avoidable with good behavior. only a concern for wealthy individuals.

(ANSWER) one form of pure risk. This is just one form of pure risk. one form of speculative risk. Speculative risk can result in either a gain or a loss; liability risk has only downside risk. avoidable with good behavior. One can be doing the right thing but still get sued. Good behavior can reduce the possibility of being sued, but it cannot eliminate it. only a concern for wealthy individuals. While liability risk is more of a concern for wealthy individuals, it is also a concern for most anyone, since anyone can get sued.

The difference between an insurance agent and an insurance broker can be best described by which one of the following statements? (LO 4-3) A broker is a legal representative of one insurance company. Brokers can bind an insurance company. An agent makes the insurance company accountable to information given by the client to the agent. An agent cannot instantly insure a client, they must wait to contact an insurer.

A broker is a legal representative of one insurance company. Brokers can bind an insurance company. (ANSWER) An agent makes the insurance company accountable to information given by the client to the agent. A broker can shop around different insurance agencies. An insurance agent is bound to one particular company, can bind insurance with that company, and is accountable to information given by the client to the agent. An agent cannot instantly insure a client, they must wait to contact an insurer.

Which one of the following statements is true? (LO 4-4, 4-5) A homeowners policy would include covering any liability incurred from running a business out of the home. A personal auto policy covers liabilities resulting from any use of an auto listed on the policy. A homeowners and personal auto policy are meant to cover personal property and liability, not business property and liability.

A homeowners policy would include covering any liability incurred from running a business out of the home. A homeowners policy is a personal, not business, policy. Additional or separate insurance would be needed in order to protect against any liability resulting from running a business out of the home. A personal auto policy covers liabilities resulting from any use of an auto listed on the policy. A personal auto policy provides coverage for personal use of the auto, not business use. Thus it does not provide coverage for any use of the auto. (ANSWER) A homeowners and personal auto policy are meant to cover personal property and liability, not business property and liability. Homeowners and auto insurance are meant to cover individuals and property that is being used personally, not for business. There is other insurance available to cover business insurance needs.

Which one of the following statements concerning negligence is correct? (LO 4-1) Contributory negligence means that if an injured individual has contributed to an accident, the amount of damages will be reduced by the degree to which the injured party was at fault. Comparative negligence precludes an injured individual from collecting any damages if he or she contributed in any way to the accident. This is a definition of contributory negligence, not comparative negligence. Assumption of risk means that the injured party is entitled to damages because the other party involved has assumed any risk. An individual can still be sued for negligence even if he or she behaves responsibly and hasn't done anything wrong.

Contributory negligence means that if an injured individual has contributed to an accident, the amount of damages will be reduced by the degree to which the injured party was at fault. This is a definition of comparative negligence, not contributory negligence. Comparative negligence precludes an injured individual from collecting any damages if he or she contributed in any way to the accident. This is a definition of contributory negligence, not comparative negligence. Assumption of risk means that the injured party is entitled to damages because the other party involved has assumed any risk. This is incorrect, under assumption of risk, the individual understands the danger of a particular activity and is barred from collecting damages in the event of an injury. (ANSWER) An individual can still be sued for negligence even if he or she behaves responsibly and hasn't done anything wrong. This is a correct statement. Unfortunately, one can still be held liable for negligence even if he or she has not done anything wrong. Behaving responsibly does not guarantee or protect someone from getting sued for negligence.

Which one of the following statements is correct? (LO 4-2) Insurance contracts are bilateral contracts. The concept of indemnity is based on the idea that when one suffers a loss they should profit from it above being made whole again. In order to avoid a coinsurance penalty the insured must have coverage for at least 80% of their home's replacement cost. Coverage for personal property on a homeowners policy is typically the same amount as coverage for the dwelling.

Insurance contracts are bilateral contracts. Insurance contracts are considered to be unilateral since the insured cannot be forced to pay the premiums. Of course if the insured doesn't pay the premiums, then the policy will lapse and no longer be in force. The concept of indemnity is based on the idea that when one suffers a loss they should profit from it above being made whole again. The concept of indemnity is based on the idea that when one suffers a loss they should be made whole again, but not profit from it. (ANSWER) In order to avoid a coinsurance penalty the insured must have coverage for at least 80% of their home's replacement cost. This is the correct amount of coverage in order to avoid the coinsurance penalty. Coverage for personal property on a homeowners policy is typically the same amount as coverage for the dwelling. Personal property coverage on a homeowners policy is typically expressed as a percentage of the amount on the dwelling itself, such as 50%.

Which one of the following is a correct statement about insurable interest? (LO 4-2) The owner of a life insurance policy must have an insurable interest in the insured at the time of death. Insurable interest is not a factor after purchase of personal property. Without the requirement of insurable interest, policy owners could unfairly profit from insured casualties. A beneficiary must show proof of insurable interest to collect the death proceeds on a life insurance policy.

The owner of a life insurance policy must have an insurable interest in the insured at the time of death. The owner of a life insurance policy must have an insurable interest in the insured at the time of purchase of the contract. An insurable interest indicates the policy owner will suffer a loss as a result of the insured casualty or death. Insurable interest is not a factor after purchase of personal property. There must be an insurable interest in personal property at the time of a claim. An insurable interest indicates the policy owner will suffer a loss as a result of the insured casualty or death. (ANSWER) Without the requirement of insurable interest, policy owners could unfairly profit from insured casualties. Without the requirement of insurable interest, policy owners could profit unfairly from casualty losses or the death of others where they have no insurable interest whatsoever. An insurable interest indicates the policy owner will suffer a loss as a result of the insured casualty or death. A beneficiary must show proof of insurable interest to collect the death proceeds on a life insurance policy. A beneficiary does not need to show proof of insurable interest to collect the death proceeds on a life insurance contract. An insurable interest indicates the policy owner will suffer a loss as a result of the insured casualty or death.

Which one of the following statements about auto insurance is correct? (LO 4-5) The state-mandated liability limits for auto insurance are appropriate for most drivers. Most states require liability insurance, but they do not require collision insurance. It is a good idea to consider uninsured motorist coverage in case your insurance lapses and you are involved in an accident..

The state-mandated liability limits for auto insurance are appropriate for most drivers. The state-mandated limits are often quite low, such as $25,000 or $50,000. Coverage levels should be higher in order to be sufficient. (ANSWER) Most states require liability insurance, but they do not require collision insurance. States require liability insurance only, they do not require coverage for collisions. It is a good idea to consider uninsured motorist coverage in case your insurance lapses and you are involved in an accident.. Uninsured motorist coverage provides coverage in the event one is in an accident with someone who does not have auto insurance. Without this coverage the driver with insurance would have to sue the uninsured driver, which can be a costly and drawn-out process that will not necessarily be successful, especially if the uninsured driver has little or no assets.

Which one of the following is not one of the primary factors in determining the cost of automobile insurance in any given state? (LO 4-5) age and sex of driver gas mileage of vehicle type of vehicle use of vehicle

age and sex of driver (ANSWER) gas mileage of vehicle Age and sex of the driver, use of the vehicle, type of vehicle, and the driver's record are the primary factors in determining automobile insurance. Gas mileage of the vehicle is not a factor. type of vehicle use of vehicle

Which one of the following is not one of the rules of risk management? (LO 4-1) don't risk more than you can afford to lose the law of large numbers consider the odds don't risk a lot for a little

don't risk more than you can afford to lose "Don't risk more than you can afford to lose" is one of the rules of risk management. (ANSWER) the law of large numbers The law of large numbers is a requirement for an insurable risk, and is not a rule of risk management. consider the odds "Consider the odds" is one of the rules of risk management. don't risk a lot for a little "Don't risk a lot for a little" is one of the rules of risk management.

Which one of the following perils is not covered under a typical homeowners insurance policy? (LO 4-6) fire flood vandalism volcanic eruption

fire Fire is covered, but flooding is not. There is separate flood insurance available for this peril. (ANSWER) flood Separate coverage must be purchased for flood insurance. vandalism Vandalism is covered, but flooding is not. There is separate flood insurance available for this peril. volcanic eruption Volcanic eruption is covered, but flooding is not. There is separate flood insurance available for this peril.

Someone who has a position of selecting or rejecting risks for insurance coverage is known as a(n) (LO 4-3) insurer. agent. underwriter. broker.

insurer. An insurer has the responsibility to perform according to the insurance contract held by the insured. agent. An agent is the legal representative of the insurance company. (ANSWER) underwriter. The term "underwriter" is used to describe someone who selects and rejects risks. broker. A broker is a representative of the buyer of insurance and cannot legally bind an insurance company.

The process of deciding how much and what kind of insurance to buy is called (LO 4-1) life insurance planning. financial planning. risk management. insurance management.

life insurance planning. Life insurance is just one type of insurance; the process of deciding how much and what kind of insurance to buy is called insurance management. financial planning. Financial planning involves insurance management as well as other processes, such as investment management, tax planning, and estate planning. risk management. Deciding how to deal with insurable and uninsurable risk is called risk management. Risk management is more comprehensive than insurance management. (ANSWER) insurance management. The process of deciding what kind of insurance to buy is called insurance management. Risk management is broader than insurance management by itself.

A risk management plan can (LO 4-1) prevent catastrophic losses of property from occurring. prevent a negligence lawsuit. prevent judgments awarded against the insured. protect against possible large losses.

prevent catastrophic losses of property from occurring. Risk management cannot prevent losses from occurring. prevent a negligence lawsuit. Risk management cannot prevent you from being sued for negligence. prevent judgments awarded against the insured. Risk management cannot prevent having a judgment awarded against you. (ANSWER) protect against possible large losses. Risk management cannot prevent losses from occurring, but a risk management plan can protect against possible large losses.

Under a personal auto policy, which one of the following is not one of the insured's duties after an accident? (LO 4-5) providing the insurer with authorization to examine medical records and any other pertinent records cooperating with any investigation contacting the police after any accident submitting any required proof of loss

providing the insurer with authorization to examine medical records and any other pertinent records Providing the insurer access to pertinent records is one of the insured's duties. cooperating with any investigation The insured must cooperate with the insurer after an accident. (ANSWER) contacting the police after any accident Contacting the police is not a requirement, unless it is a hit-and-run accident or theft. submitting any required proof of loss Submitting any required proof of loss is a requirement.

Comprehensive personal liability insurance (umbrella policies) was designed to (LO 4-6) replace automobile liability insurance. provide protection for otherwise uninsurable risks. provide workers' compensation in event of injury. provide personal catastrophic liability protection.

replace automobile liability insurance. The insured will still have a base amount of liability coverage with their auto policy. The umbrella policy adds more coverage, it does not replace the basic coverage already in place. provide protection for otherwise uninsurable risks. There is no protection for otherwise uninsurable risks. An umbrella policy may provide coverage for certain risks that are not covered in an auto or homeowners policy, but since these risks are covered they are insurable. provide workers' compensation in event of injury. Normal exclusions from an umbrella policy include workers' compensation—there are separate workers' compensation policies available. A comprehensive personal liability policy is a personal policy that it is not meant to cover workers. (ANSWER) provide personal catastrophic liability protection. The umbrella liability policy was designed to provide personal catastrophe liability protection.

Katie and Dan are buying their first home. Which one of the following risks will be facilitated when they obtain homeowners insurance? (LO 4-1) risk avoidance risk reduction risk retention risk transfer

risk avoidance Risk transfer is facilitated through obtaining insurance. Risk avoidance is finding a way around facing a risk. For example, if you don't want to get hurt while skydiving, don't skydive. risk reduction Risk transfer is largely facilitated through obtaining insurance. Risk reduction involves either decreasing the chance that a loss will occur or doing something so that if a loss does occur, its severity is not as great. risk retention Risk transfer is largely facilitated through obtaining insurance. Risk retention is keeping the risk for yourself. If a loss occurs, you suffer the loss in the form of physical injury, property damage, or legal liability. (ANSWER) risk transfer Risk transfer is largely facilitated through obtaining insurance.

Choosing to live in a well-lit, gated community is an example of (LO 4-1) risk transfer. risk reduction. risk retention. risk avoidance.

risk transfer. Risk transfer is the purchase of insurance. Living in a well-lit, gated community is an example of risk reduction. (ANSWER) risk reduction. This is a good example of risk reduction. risk retention. Risk retention is not insuring. Living in a well-lit, gated community is an example of risk reduction. risk avoidance. Risk avoidance is not getting an apartment at all. Living in a well-lit, gated community is an example of risk reduction.

Which one of the following would be an example of a peril? (LO 4-2) running a red light theft of jewelry a swimming pool a vicious dog

running a red light Running a red light is a hazard and can lead to an accident, which would be a peril. (ANSWER) theft of jewelry A peril is a specific cause of loss. Theft would therefore be a peril. a swimming pool A swimming pool is a hazard. If one were to drown in a swimming pool, drowning would be the peril. a vicious dog A vicious dog is a hazard. Being bitten by the dog would be the peril.

"Other than collision" coverage under a personal auto policy (PAP) would cover which one of the following events? (LO 4-5) running an auto into a tree. a tree falling on a parked car in a storm. a fender bender with a parked car.

running an auto into a tree. Running an auto into a tree would be covered under collision since a driver is operating the vehicle and driving into the tree. (ANSWER) a tree falling on a parked car in a storm. This would have to be covered under "other than collision," not "collision." Falling objects such as trees and hail would be examples of situations that would need other than collision coverage. a fender bender with a parked car. A fender bender with a parked car would be covered under collision since a driver is operating the vehicle and hitting another car.

Which one of the following is a true statement of the differences between agents and brokers? (LO 4-3) stock companies only use agents and mutual companies only use brokers a broker is a legal representative of the insurance company an agent represents the buyer most brokers cannot bind coverage with an insurance company

stock companies only use agents and mutual companies only use brokers a broker is a legal representative of the insurance company an agent represents the buyer (ANSWER) most brokers cannot bind coverage with an insurance company Most stock and mutual companies use agents or brokers or both. An agent is a legal representative of the insurance company and can bind insurance with that company, while a broker represents the buyer and cannot usually bind coverage with an insurance company.

Which one of the following is an example of a type of speculative risk? (LO 4-1) swimming pool stock market investment home located in a flood plain

swimming pool A swimming pool creates a liability that is a type of pure risk. Pure risk is when only a loss or no loss can occur, such as property or liability risk. There is no upside to pure risk. Speculative risk can result in either a loss or a gain, such as investing in the stock market. They are two distinct and different kinds of risk. (ANSWER) stock market investment Investing in the stock market is a type of speculative risk—there is the opportunity for either a gain or a loss. home located in a flood plain A home located in a flood plain is a type of pure risk. Pure risk is when only a loss or no loss can occur.

The major problem with standard homeowners and automobile liability insurance is (LO 4-5, 4-6) the lack of availability. narrow geographic coverage. inadequate liability coverage limits. cost-prohibitive deductibles.

the lack of availability. Both are readily available. narrow geographic coverage. Both are available across the United States. (ANSWER) inadequate liability coverage limits. The main problem with both homeowners and automobile liability insurance is the relatively low upper limits of liability coverage. cost-prohibitive deductibles. The insured has the ability to adjust deductibles to a reasonable level.

Which one of the following is not a requirement for an insurable risk from the insurance company's perspective? (LO 4-2) the law of large numbers must apply the loss must be catastrophic the loss must be accidental the loss must be measurable

the law of large numbers must apply This is one of the requirements for an insurable risk. (ANSWER) the loss must be catastrophic The loss cannot be catastrophic (for the insurance company) in order for it to be an insurable risk. the loss must be accidental This is one of the requirements for an insurable risk. the loss must be measurable This is one of the requirements for an insurable risk.

Which one of the following would not be considered an insured as described in a personal automobile policy? (LO 4-5) your teenage son who is a senior in high school your neighbor borrowing your vehicle, with your permission, to take her driving test the teenager down the street uses your car with permission while babysitting your children your estranged son who lives in another state

your teenage son who is a senior in high school Any family member living in your household is covered as an insured person. your neighbor borrowing your vehicle, with your permission, to take her driving test The neighbor is covered because she has your permission to use your auto. the teenager down the street uses your car with permission while babysitting your children The teenager is acting according to your wishes and has your permission, and would also covered as an insured party. (ANSWER) your estranged son who lives in another state Two reasons: He does not live in your household (this is the most significant reason) and, if estranged, we can make the assumption that he does not have your permission to drive your automobile.