Risk and Insurance Exam 2

John was involved in an accident in a state that uses a pure comparative negligence rule. John was found to be 75 percent responsible for the accident and his actual damages were $20,000. How much will John be able to recover? (a) $5000 (b) $10,000 (c) $15,000 (d) $20,000

(a) $5000 Under a pure comparative negligence law, the liability award is reduced proportionately. So if John is 75 percent responsible, his recovery will be reduced by 75 percent. He will only collect $5000.

Which statement is true with regard to social insurance programs? I. Adverse selection is reduced because the programs are compulsory. II. A means (needs) test must be satisfied in order to receive social insurance benefits (a) I only (b) II only (c) both I and II (d) neither I nor II

(a) I only Only the first statement is true. Because coverage is compulsory, individuals cannot choose whether they wish to be covered. In addition, there is no individual selection of benefits. Social insurance benefits are not means (needs) tested to determine eligibility.

Which statement is true with regard to individual major medical insurance? I. The coverage provided is broad in scope. II. Major medical insurance plans emphasize first-dollar coverage by the insurer. (a) I only (b) II only (c) both I and II (d) neither I nor II

(a) I only Only the first statement is true. Major medical coverage is broad in scope. Major medical insurance does not emphasize first-dollar coverage. Indeed, there are several types of deductibles used in major medical plans.

Which statement is true with regard to the human life value approach? I. It crudely measures the economic value of a human life. II. It considers the specific needs of the family in determining the amount of life insurance to purchase. (a) I only (b) II only (c) both I and II (d) neither I nor II

(a) I only The human life value is a crude estimate of the economic value of a human life. It does not, however, consider specific family needs (e.g., mortgage payments, number of children, etc.) in determining the amount of life insurance to purchase.

Which statement(s) is(are) true with regard to the surrender cost index? I. It is based upon the assumption that the policy will be surrendered after a specified period. II. It ignores the time value of money. (a) I only (b) II only (c) both I and II (d) neither I nor II

(a) I only The surrender cost is based upon the assumption that the policy will be surrendered after a specified period and that the policy owner will receive the cash value at that time. The surrender cost index is an interest-adjusted technique because the time value of money is taken into consideration.

Which statement(s) is(are) true with regard to defenses against liability claims? I. Under contributory negligence, if you contribute to your injury, you cannot recover damages. II. Under comparative negligence, if you contribute to your injury, you cannot recover damages. (a) I only (b) II only (c) both I and II (d) neither I nor II

(a) I only Under contributory negligence, even slight guilt on the part of the claimant will prevent the claimant from recovering damages. Under comparative negligence, any fault on the part of the claimant will simply reduce the damages awarded. States have adopted comparative negligence laws due to the harshness of contributory negligence.

Mary is concerned that inflation will reduce the purchasing power of her life insurance proceeds when she dies. To provide protection against this risk, she added a rider to her policy that allows her to purchase one-year term insurance equal to the cumulative change in the consumer price index from the issue date of the policy. This provision is called a: (a) cost-of-living rider (b) guaranteed purchase option (c) waiver-of-premium provision (d) change of plan provision

(a) cost-of-living rider Mary is using a cost-of-living rider to index her life insurance proceeds. As purchasing power erodes because of inflation, an offsetting amount of term insurance is purchased.

Thomas wants to participate in the growth of the stock market through a deferred annuity; however he wants downside protection against the loss of principal and prior investment earnings if the annuity is held to term. Thomas should purchase a(n) (a) equity-indexed annuity (b) variable annuity (c) fixed annuity (d) life income (no refund) annuity

(a) equity-indexed annuity An equity-indexed annuity will accomplish the goals that Thomas has set forth. He has the downside protection of a guaranteed minimum rate of return, while he still has the potential of earning higher equity returns.

All of the following are characteristics of group major medical insurance EXCEPT: (a) first-dollar coverage (b) high maximum limits (c) broad coverage (d) coinsurance (percentage participation)

(a) first-dollar coverage Group major medical insurance does not provide first-dollar coverage. A variety of deductibles are used in major medical insurance plans.

A funding arrangement in which an insurer guarantees the interest for a number of years on a lump-sum deposit is called a(n): (a) guaranteed investment contract (GIC) (b) separate investment account (c) unit benefit formula (d) trust fund plan

(a) guaranteed investment contract (GIC) The funding alternative described is called a guaranteed investment contract (GIC).

Survivor benefits under the OASDI program most closely resemble which of the following private insurance coverages? (a) life insurance (b) life annuities (c) health insurance (d) liability insurance

(a) life insurance Survivor benefits are payable upon the death of the covered worker, just like life insurance death benefits. OASDI survivor benefits should be taken into consideration in life insurance planning.

Nathan is interested in analyzing the cost of life insurance. He wants to perform the analysis based on the assumption that the life insurance coverage will remain in force. Which of the following techniques would be most appropriate for Nathan to use? (a) net payment cost index (b) traditional net cost (c) Linton yield (d) surrender cost index

(a) net payment cost index Nathan should use the net payment cost index. Three of the choices listed provide a cost per thousand per year of life insurance. The traditional net cost method has many flaws, and the surrender cost index assumes the policy will be surrendered after a specified period. The Linton yield calculates a rate of return rather than a cost per thousand.

Under one cost control measure used in dental insurance, if the estimated cost of dental treatment exceeds a specified value, a plan of treatment is submitted to the insurer. The insurer calculates the amount that will be covered under the plan. This information is then shared with the employee who decides whether to have the procedure performed. Such a provision is called a: (a) predetermination of benefits provision (b) coordination of benefits provision (c) flexible spending account (d) relative value schedule provision

(a) predetermination of benefits provision This provision is known as a predetermination of benefits provision.

Tina's health insurance coverage includes a provision that excludes from coverage physical or mental conditions that existed prior to issuance of the policy and were not disclosed on the application. This provision is the: (a) preexisting conditions clause (b) second injury clause (c) recurrent disability clause (d) renewal provision

(a) preexisting conditions clause Such a provision is called a preexisting conditions clause.

An insurance company was found guilty of illegal sales and claims practices and ordered to pay compensatory damages to a group of plaintiffs. To "make an example" of the insurer, the court also ordered the insurer to pay an additional $10 million to deter other insurers from engaging in the same wrongful acts. The $10 million award is an example of: (a) punitive damages (b) special damages (c) collateral source payments (d) general damages

(a) punitive damages Punitive damages are awarded to punish the tortfeasor for negligent acts and to deter others from committing the same act.

In addition to caring for their young children, Lyle and Lynn Thomas also support Lyle's father and Lynn's mother. This type of family is called a: (a) sandwiched family (b) blended family (c) nuclear family (d) traditional family

(a) sandwiched family This type of family is called a sandwiched family. A middle generation is supporting both younger and older dependents.

All of the following are characteristics of variable life insurance EXCEPT: (a) the premium payments are flexible (b) the cash value is not guaranteed (c) the policy owner selects where the savings reserve is invested (d) a minimum death benefit is guaranteed, but the death benefit can be higher if the investment performance is favorable

(a) the premium payments are flexible Premium payments are fixed, not flexible, with variable life insurance. The other choices listed are characteristics of variable life insurance.

Health insurance typically includes a two-year discovery period after which the insurer can't void coverage or deny a claim because of concealment or misrepresentation by the applicant. This provision is called: (a) the time limit on certain defenses provision (b) the recurrent disability provision (c) the renewal provision (d) the reinstatement provision

(a) the time limit on certain defenses provision The time limit on certain defenses provision provides for a two-year discovery period. This provision is similar to the incontestable clause in life insurance.

All of the following are basic objectives of unemployment insurance plans EXCEPT: (a) to reduce incentives for the unemployed to return to work (b) to encourage employers to stabilize employment (c) to help unemployed workers find jobs (d) to provide cash income during involuntary unemployment

(a) to reduce incentives for the unemployed to return to work Unemployment benefits are not intended to reduce incentives to return to work. The benefits are payable during short periods of involuntary unemployment while the unemployed worker is looking for another job.

One type of retirement plan is designed for the employees of public schools and tax-exempt organizations such as hospitals, non-profit groups, and churches. These plans are called: (a) 401(k) plans (b) 403(b) plans (c) Keogh plans (d) SIMPLE plans

(b) 403(b) plans The plans designed for employees of public schools and tax-exempt organizations such as hospitals, nonprofit groups, and churches are called Section 403(b) plans.

Which of the following statements is (are) true with respect to annuities? I. Annuities pool the risk of premature death. II. Life annuities provide an income that the annuitant cannot outlive. (a) I only (b) II only (c) both I and II (d) neither I nor II

(b) II only Only the second statement is true. Annuities do not pool the risk of premature death. Annuities pool the risk of excessive longevity. Life annuities continue to make payments for as long as the annuitant is alive.

Which statement(s) is(are) true with regard to qualified retirement plans? I. Distributions from qualified plans are not taxable. II. Investment income accumulates tax-deferred in qualified plans. (a) I only (b) II only (c) both I and II (d) neither I nor II

(b) II only Only the second statement is true. As pre-tax dollars are usually used to fund benefits, and the investment income accumulates tax-deferred, taxes must be paid on part or all of retirement plan distributions.

Which statement(s) is(are) true with regard to group insurance underwriting principles? I. A flow of people through the group is undesirable. II. Benefits should be automatically determined. (a) I only (b) II only (c) both I and II (d) neither I nor II

(b) II only Only the second statement is true. Automatic determination of benefits prevents individual selection of benefits and adverse selection. A flow of people through the group is desirable. As older employees leave the group, younger employees enter. Without such a flow through the group, the average age of members in the group would increase, and the premium charged for group insurance would also have to increase.

Which statement is true with regard to long-term care insurance? I. This coverage is not needed if you are covered under Medicare. II. Coverage is typically provided for skilled nursing care and custodial care. (a) I only (b) II only (c) both I and II (d) neither I nor II

(b) II only Only the second statement is true. Medicare only covers skilled care for a limited time per benefit period and custodial care is excluded. Private long-term care plans typically cover skilled care, intermediate nursing care, and custodial care.

Which of the following statements is (are) true with respect to a joint and survivor annuity? I. Payments begin upon the death of the first annuitant. II. Payments end upon the death of the last annuitant. (a) I only (b) II only (c) both I and II (d) neither I nor II

(b) II only Only the second statement is true. Payments do not begin upon the death of the first annuitant. Payments are made jointly to the annuitants and continue until the last annuitant has died.

Which statement(s) is(are) true with regard to short-term disability income plans? I. The maximum duration of benefits is usually three years. II. Most of these plans cover nonoccupational disability. (a) I only (b) II only (c) both I and II (d) neither I nor II

(b) II only Only the second statement is true. Short-term plans typically cover nonoccupational disability only. While some short-term plans may pay benefits for as long as two years, the majority pay benefits for a maximum period of only 26 weeks.

Which statement(s) is(are) true with regard to the Linton yield technique? I. It determines a cost per thousand dollars of life insurance per year. II. It requires dividing the premium into two components: the cost of insurance protection and savings. (a) I only (b) II only (c) both I and II (d) neither I nor II

(b) II only The Linton yield does not determine a cost per thousand per year. Rather, an average annual rate of return is calculated. The premium must be divided into the cost of protection and the savings to calculate the Linton yield.

Karen is concerned about the rate of return she will earn on a cash value life insurance policy. To analyze the rate of return, she divided each premium into two components: cost of insurance coverage and savings. Then she calculated the average annual rate of return that would be needed to transform the annual savings contributions into the guaranteed cash value at a specified time. Karen calculated the: (a) net payment cost (b) Linton yield (c) yearly rate of return using the Belth method (d) surrender cost

(b) Linton yield Karen calculated the Linton yield. The Linton yield is the average annual rate of return required to transform the savings portion of each premium payment into the guaranteed cash value at a specified time.

All of the following statements about the tax treatment of life insurance are true EXCEPT: (a) While a cash value policy is in force,the cash value accumulates tax-free. (b) Policy owners are required to pay taxes on policy owner dividends. (c) Lump-sum death benefits are received tax-free. (d) If life insurance proceeds are paid through an annuity, the portion of the annuity payment that represents interest is taxable income.

(b) Policy owners are required to pay taxes on policy owner dividends. Policy owner dividends are received tax-free by the policy owner. Such dividends are considered to be a refund of over-paid premiums. If you are stockholder in a life insurance company, dividends you receive on your shares of stock are taxable. All of the other statements are true.

Kathy would like to save for retirement. She selected a plan through which she can make a limited contribution each year. Her contribution is not tax deductible, however the investment income accumulates income tax-free, and qualified distributions from the plan are not taxed. Kathy is funding a(n): (a) variable annuity (b) Roth IRA (c) traditional IRA (d) equity-indexed annuity

(b) Roth IRA Kathy is funding a Roth IRA. After-tax contributions are used, but qualified distributions from Roth IRAs after age 59.5 are received tax-free.

All of the following are characteristics of health savings accounts (HSAs) EXCEPT: (a) Contributions to a qualified HSA are income tax deductible. (b) There is no annual contribution limit to an HSA. (c) HSAs are used in conjunction with a high-deductible health plan. (d) HSA investment income accumulates income tax-free and distributions are tax-free if used to pay qualified medical expenses.

(b) There is no annual contribution limit to an HSA. There are annual contribution limits to HSAs. The limits apply to individuals and to family coverage plans. The limits are indexed each year for inflation.

Which of the following $100,000 yearly renewable term (YRT) policies would require the LOWEST premium? (a) YRT purchased by a man age 30 (b) YRT purchased by a woman age 30 (c) YRT purchased by a man age 60 (d) YRT purchased by a woman age 60

(b) YRT purchased by a woman age 30 Yearly renewable term insurance premiums vary with the age and gender of the insured. Younger individuals pay less per-thousand for term life insurance than do older individuals. Women pay less for life insurance than men of the same age, given that women, on average, live longer than men.

All of the following are characteristics of social insurance programs EXCEPT: (a) compulsory programs (b) benefits emphasize individual equity rather than social adequacy (c) benefits are loosely related to earnings (d) benefits are prescribed by law

(b) benefits emphasize individual equity rather than social adequacy Social insurance programs emphasize social adequacy rather than individual equity.

All of the following are conditions under which negligence can be imputed to another party EXCEPT: (a) family purpose doctrine (b) collateral source rule (c) employer-employee relationships (d) vicarious liability

(b) collateral source rule The collateral source rule has nothing to do with imputing the negligent acts of one person to another person. Under the collateral source rule, the defendant cannot introduce evidence that shows the injured party has received compensation from other sources.

One tort reform proposal calls for modifying a rule under which a defendant cannot introduce evidence that shows the injured party has received other forms of compensation for the injury. This rule is called the: (a) attractive nuisance rule (b) collateral source rule (c) joint and several liability rule (d) last clear chance rule

(b) collateral source rule Under the collateral source rule, evidence of other sources of recovery cannot be introduced in court.

One insured status under OASDI requires at least six quarters of coverage out of the last 13 quarters ending with the quarter of death, disability, or entitlement to old-age benefits. This insured status is: (a) disability insured (b) currently insured (c) Medicare insured (d) fully insured

(b) currently insured The status described is "currently insured."

Tom was just diagnosed with an inoperable brain tumor. According to his doctor, Tom has less than three months to live. A life insurance premium notice just arrived. Tom purchased this whole life policy over 40 years ago. Tom does not want to pay the premium. Which nonforfeiture option should Tom exercise? (a) reduced paid-up insurance (b) extended term insurance (c) cash value (d) life income

(b) extended term insurance Given the scenario described, extended term insurance would be a logical nonforfeiture option. Under this option, the full-face amount of coverage remains in force. Given that the policy was purchased over 40 years ago, there will be enough accumulated cash value to provide term insurance coverage for far longer than Tom's three-month life expectancy.

All of the following are dividend options EXCEPT: (a) dividend accumulations (b) fixed-period option (c) paid-up additions (d) reduction of premiums

(b) fixed-period option Fixed-period is a settlement option, not a dividend option.

Julie purchased a life insurance policy with these characteristics: the policy was nonparticipating, the maximum premium that the insurer could charge was stated in the policy, and the insurer is permitted to adjust the premium based on anticipated future experience. What type of life insurance did Julie purchase? (a) current assumption whole life (b) indeterminate-premium whole life insurance (c) variable universal life insurance (d) industrial life insurance

(b) indeterminate-premium whole life insurance Julie purchased an indeterminate-premium whole life policy. This nonparticipating policy permit the insurer to adjust premiums (within limits) based on anticipated future experience.

Income paid to an annuitant under a life annuity is comprised of all of the following EXCEPT: (a) interest earnings (b) insurer expenses (c) premiums paid (d) unliquidated funds from those who die early

(b) insurer expenses Insurer expenses are not part of life annuity payments. Annuity payments are comprised of a return of premiums paid, interest, and unliquidated funds from annuitants who die early.

A property owner owes the highest degree of care to a(n): (a) trespasser (b) invitee (c) licensee (d) an equal degree of care is owed to all of these

(b) invitee The highest degree of care is owned an invitee. In addition to warning the invitee of dangerous conditions, the owner is also required to inspect the premises and eliminate any unsafe conditions.

Agnes, age 62, purchased an immediate annuity. The annuity will provide monthly payments to Agnes for as long as she lives. If Agnes dies before receiving payments for 10 years, the balance of these payments will go to a beneficiary. Agnes purchased a(n) (a) life annuity(no refund) (b) life annuity with guaranteed payments (c) installment refund annuity (d) joint-and-survivor annuity

(b) life annuity with guaranteed payments Agnes purchased a life annuity with guaranteed payments. In this case, the insurer has promised to make at least 120 payments (10 years × 12 months).

All of the following are costs associated with premature death of the breadwinner EXCEPT: (a) loss of the family's share of the deceased breadwinner's future income (b) personal maintenance expenses of the deceased (c) are duction in the family's standard of living (d) additional expenses, such as funeral expenses and uninsured medical bills

(b) personal maintenance expenses of the deceased The personal maintenance expenses of the deceased are not a cost of premature death. Indeed, following premature death, the personal maintenance expenses of the deceased individual are no longer incurred.

Which statement is true with regard to yearly renewable term insurance? (a) premiums remain level from year to year (b) premiums increase at an increasing rate from year to year (c) the insured must demonstrate insurability to renew the coverage (d) yearly renewable term premiums are unrelated to the probability of death

(b) premiums increase at an increasing rate from year to year Yearly renewable term premiums track the probability of death. As individuals grow older, the probability of death increases at an increasing rate, hence yearly renewable term insurance premiums also increase at an increasing rate.

An important consideration in determining the amount of life insurance to purchase is the need for income during the one- or two-year period after the death of the breadwinner. This period is called the: (a) blackout period (b) readjustment period (c) accumulation period (d) dependency period

(b) readjustment period The one- or two-year period following the death of the breadwinner is known as the readjustment period.

Group basic medical expense plans usually provide all of the following benefits EXCEPT: (a) hospital expense insurance (b) supplemental major medical insurance (c) surgical expense insurance (d) physicians' visits

(b) supplemental major medical insurance Supplemental major medical is used to supplement basic medical expense plans. Medical expenses not covered under the basic plan may be eligible for reimbursement under the supplemental major medical plan.

The gross estate can be reduced by the value of property passed to a surviving spouse. This reduction is know as: (a) the unified tax credit (b) the marital deduction (c) the absolute assignment (d) the homestead exemption

(b) the marital deduction The amount transferred to the surviving spouse is called the marital deduction.

The difference between the face amount of a life insurance policy and the legal reserve of the policy is called: (a) the human life value (b) the net amount at risk (c) the level premium (d) the cash value

(b) the net amount at risk The net amount at risk is the difference between the face amount and the legal reserve.

All of the following are major characteristics of group universal life insurance EXCEPT: (a) coverage issued on a guaranteed basis up to certain limits with no evidence of insurability (b) the policy owner chooses where the cash value is invested (c) minimum guaranteed rate of return,but a higher rate maybe credited (d) policy loans and withdrawals are available

(b) the policy owner chooses where the cash value is invested As with individual universal life insurance, policyowners do not select where the cash value is invested.

The present value of the cumulative accrued pension benefits of highly compensated employees at JL Drug Company is 70 percent of the total of all accrued benefits. JL's plan therefore is described as: (a) defined contribution (b) top-heavy (c) overfunded (d) qualified

(b) top-heavy JL's plan is top-heavy because more than 60 percent of the present value of the accrued benefit is for the highly-compensated employees.

Ned purchased a life insurance policy on his own life. He was concerned that he might not be able to pay premiums if he became disabled. He added a provision to his policy that relieved him from paying premiums if he becomes totally disabled before a specified age. This provisions is called a(n): (a) guaranteed purchase option (b) waiver-of-premium provision (c) automatic premium loan provision (d) reinstatement provision

(b) waiver-of-premium provision A waiver-of-premium provision relieves the insured from the payment of premiums if he or she becomes totally disabled before a specified date.

All of the following statements about traditional IRAs are true EXCEPT: (a) No traditional IRA contributions are allowed for the tax year in which the participant attains age 70.5 (seventy and one-half) or for any later year. (b) If pre-tax contributions fund the IRA, the entire distribution is taxable. (c) Everyone is eligible to establish a traditional IRA and make fully tax-deductible contributions. (d) IRA funds can be invested in stocks, bonds, mutual funds, and certificates of deposit.

(c) Everyone is eligible to establish a traditional IRA and make fully tax-deductible contributions. There are eligibility rules for establishing a traditional IRA. Contributions may be fully, partially, or not tax deductible, depending on an individual's income and whether he or she is covered under an employer's retirement plan.

All of the following statements about profit sharing plans are true EXCEPT: (a) Profit sharing plans are a type of defined-contribution plan. (b) Profit sharing plans provide an incentive for employees to work more efficiently. (c) Profit sharing plans are exempt from the 10 percent penalty tax on early distributions. (d) Profit sharing contributions are more flexible than defined benefit plan contribution.

(c) Profit sharing plans are exempt from the 10 percent penalty tax on early distributions. Profit sharing plans are subject to the 10 percent penalty tax for distributions prior to age 59.5.

Which of the following statements is true with regard to shopping for life insurance? (a) You can use the surrender cost index to determine how much coverage to purchase. (b) The financial strength of the insurer writing the coverage is unimportant. (c) The financial ratings assigned to life insurers are sometimes unreliable and confusing. (d) You can use the needs approach to determine the cost of life insurance per thousand per year.

(c) The financial ratings assigned to life insurers are sometimes unreliable and confusing. The ratings assigned are sometimes unreliable and confusing. Some insurers that have become insolvent had favorable ratings from one or more of the rating services before the company became insolvent. Confusion may also develop because the ratings assigned are not standard among the rating services, and at least five different services assign ratings.

Rod committed suicide four months after purchasing a $100,000 life insurance policy. His insurer must pay: (a) $100,000 (b) $100,000 less the premiums paid for the coverage (c) are fund of the premiums paid (d) nothing

(c) are fund of the premiums paid If the insured commits suicide during the suicide exclusion period, the insurer is only liable for a refund of premiums paid.

How are surgeons and physicians commonly reimbursed under individual major medical health policies? (a) based on a fee schedule (b) at the physician or surgeon's discretion (c) based on reasonable and customary charges (d) using a flat hourly rate regardless of the service delivered

(c) based on reasonable and customary charges Surgeons and other physicians are commonly reimbursed on the basis of reasonable and customary charges which vary by insurer.

To be eligible for unemployment benefits, an unemployed worker must meet all of the following eligibility requirements EXCEPT: (a) have qualifying wages and employment during the base year (b) actively seek work (c) be unemployed because of voluntary termination (d) be able to work and available for work

(c) be unemployed because of voluntary termination Voluntary unemployment will disqualify a worker from receiving unemployment insurance benefits.

Which of the following statements is true regarding a traditional IRA? I. Contributions may be fully deductible, partially deductible, or not deductible. II. In certain circumstances, withdrawals are permitted before age 59.5 without triggering the early withdrawal penalty tax. (a) I only (b) II only (c) both I and II (d) neither I nor II

(c) both I and II Both statements are true. Depending on the eligibility status of the contributor and his or her income level, the contribution may be fully tax deductible, partially tax deductible, or not tax deductible. There are a number of situations in which distributions may be taken from traditional IRAs before age 59.5 without triggering the 10 percent penalty tax.

Which statement about second-to-die life insurance is true? I. Second-to-die life insurance is often used in estate planning. II. Second-to-die life insurance costs less than purchasing two separate policies. (a) I only (b) II only (c) both I and II (d) neither I nor II

(c) both I and II Both statements are true. Estate liquidity is often needed upon the death of the second spouse, and this type of life insurance is well-suited for this contingency. As only one death benefit is paid, the insurance costs less than purchasing two separate policies.

Which statements is(are) true with regard to health maintenance organizations (HMOs)? I. Health maintenance organizations emphasize cost containment. II. Health maintenance organization members receive comprehensive health services in exchange for a fixed, prepaid fee. (a) I only (b) II only (c) both I and II (d) neither I nor II

(c) both I and II Both statements are true. HMOs deliver comprehensive benefits to members in exchange for a fixed, prepaid fee. These organizations emphasize prevention and cost containment.

Which statement is true with regard to disability-income insurance? I. An increase in the elimination period will decrease the premium. II. Disability can be defined in a number of ways. (a) I only (b) II only (c) both I and II (d) neither I nor II

(c) both I and II Both statements are true. If you increase the elimination period, it increases the time period you must wait to receive benefits. This change is analogous to increasing the size of a deductible. There are several definitions of disability used in private disability insurance coverages.

Which statement(s) is(are) true with respect to the traditional net cost method of calculating the cost of life insurance? I. It ignores the time value of money. II. Life insurance is often shown to be free. (a) I only (b) II only (c) both I and II (d) neither I nor II

(c) both I and II Both statements are true. Insurance is often shown to be free (to have a negative cost) because the time value of money is ignored.

Which statement about universal life insurance is true? I. Universal life allows the policy owner to vary premium payments. II. Universal life allows the policy owner to earn a market-based rate of return on the cash value. (a) I only (b) II only (c) both I and II (d) neither I nor II

(c) both I and II Both statements are true. Premium payment flexibility is a characteristic of universal life insurance. This form of life insurance also permits the policyowner to earn a rate of return tied to some market-based index.

Which statement is true with regard to the incontestable clause? I. It protects the beneficiary if the insurer attempts to deny payment of the death claim more than two years after the policy was purchased. II. It allows the insurer to deny a death claim during the first two years of coverage on the basis of concealment or misrepresentation by the applicant. (a) I only (b) II only (c) both I and II (d) neither I nor II

(c) both I and II Both statements are true. The incontestable clause protects beneficiaries from nonpayment of the face value after the policy has been in force for two years. The clause also protects insurers against concealment and misrepresentation during the first two years.

Tyndall Manufacturing covers employees under a basic medical expense plan supplemented with major medical insurance. Before the major medical insurance will begin to pay, the employee is required to pay a portion of covered medical expenses in excess of the limits of the basic coverage. This type of deductible is called a(n): (a) aggregate deductible (b) franchise deductible (c) corridor deductible (d) straight deductible

(c) corridor deductible The provision described is a corridor deductible. Such a deductible is used between basic medical expense plans and supplemental major medical insurance.

Bill purchased a nonparticipating life insurance policy. The cash value was based on the insurer's present mortality, expense, and investment experience. His premium was guaranteed for an initial period, and is "redetermined" after three years. Bill purchased: (a) universal life insurance (b) variable life insurance (c) current assumption whole life insurance (d) indeterminate-premium whole life insurance

(c) current assumption whole life insurance Bill purchased current assumption whole life insurance. The premium is based on the current experience of the insurer. This policy is somewhat similar to indeterminate-premium whole life, however indeterminate-premium policies base the premium on anticipated future experience rather than actual current experience.

All of the following are settlement options EXCEPT: (a) fixed period (b) interest option (c) extended term insurance (d) life income

(c) extended term insurance Extended term insurance is a nonforfeiture option, not a settlement option.

A group of cardiac rehabilitation patients exercise together at the local fitness club. All of these patients have had at least two heart attacks or coronary bypass surgery; and none have been able to purchase health insurance because of preexisting conditions. If these patients form a group to obtain group health insurance coverage, which group insurance underwriting principle would be violated? (a) automatic determination of benefits (b) minimum participation requirements (c) insurance incidental to the group (d) flow of persons through the group

(c) insurance incidental to the group As the group would be formed for the purpose of obtaining group health insurance, clearly insurance would not be incidental to the group's existence.

Jennings Inc. just started a pension plan. The company has many long-term employees who are within 10 years of retirement. Which of the following will help Jennings provide more adequate retirement benefits to these workers? (a) early distribution penalties (b) advance funding (c) past service credits (d) minimum vesting standards

(c) past service credits If Jennings Inc. allows credit for past service to the company, additional benefits can be credited for long-term employees. Jennings can fund the past service benefits over time.

Part B of the original Medicare program covers: (a) survivor benefits (b) disability income payments (c) physician's fees and related medical services (d) inpatient hospital care

(c) physician's fees and related medical services Part B of Medicare is the voluntary component, Medical Insurance. Part B covers physician's fees and related medical services.

One provision of the Health Insurance Portability and Accountability Act requires that when employees change jobs, the new employer must give credit for previous and continuous health insurance coverage. This provision is called: (a) convertibility (b) renewability (c) portability (d) renewal provision

(c) portability Portability means that when an employee changes jobs, the new employer must give credit for previous and continuous health insurance coverage.

Union Atlantic Railroad entered into an agreement with St. Joseph's Hospital. Under the agreement, St. Joseph's Hospital discounts services provided to Union Atlantic employees, and Union Atlantic provides a financial incentive for their employees to receive care from St. Joseph's. In this relationship, St. Joseph's Hospital is a(n): (a) private health insurance company (b) Blue Cross/Blue Shield organization (c) preferred provider organization (d) health maintenance organization

(c) preferred provider organization St. Joseph's Hospital is a preferred provider for Union Atlantic. In exchange for the guaranteed demand for health care services, St. Joseph's Hospital provides care to Union Atlantic employees on a discounted basis.

Ted's health insurance lapsed because he didn't pay the premium on time. Ted wants the coverage back in force. Which policy provision explains the requirements he must satisfy to place the coverage back in force? (a) time limit on certain defenses (b) renewal provision (c) reinstatement provision (d) claims provision

(c) reinstatement provision An explanation of how to put lapsed coverage back in force is provided in the reinstatement provision.

Jenny needed surgery on her right knee. When the anesthesia wore off after the operation, she noticed surgical wrapping around both knees. When she asked the nurse why both knees were wrapped, the nurse replied that the surgeon made an incision on her left knee, discovered the mistake, and proceeded with the operation on the right knee. What modification of the law of negligence will Jenny be able to invoke to recover damages from the surgeon? (a) contributory negligence (b) privity of contract (c) res ipsa loquitur (d) absolute liability

(c) res ipsa loquitur The fact that an incision was made on her "good knee" is grounds for recovery under res ipsa loquitur. The operation was performed by a skilled surgeon who had exclusive control over the surgical procedure. Jenny did not contribute in any way to the negligent act, and such an act normally does not occur unless negligence is involved.

Because of potential harm to individuals or society, some persons may be held liable for harm or injury to others even though negligence cannot be proven. These types of torts are called: (a) intentional torts (b) negligence (c) strict (absolute) liability (d) breach of contract

(c) strict (absolute) liability Such torts involve strict (absolute) liability. Employers are held absolutely liable for injuries to their employees under workers compensation statutes. This doctrine is also applied in situations involving activities where great harm may result if there is negligence (e.g. blasting operations, crop dusting, owning dangerous animals, etc.).

Which of the following provides the most meaningful cost index (dollars and cents per thousand per year) of cash value life insurance? (a) traditional net cost (b) Linton yield (c) surrender cost index (d) human life value

(c) surrender cost index Of the methods listed, only the traditional net cost and the surrender cost provide a dollars and cents per thousand per year cost index. The traditional net cost method has numerous flaws, most notably the failure to consider the time value of money. The surrender cost is more meaningful.

Under Part A of Medicare, hospitals are reimbursed for inpatient services according to: (a) a relative-value scale (b) whatever the hospital charges for the care rendered (c) the diagnosis-related group (DRG) reimbursement (d) the usual, reasonable, and customary charges

(c) the diagnosis-related group (DRG) reimbursement Reimbursement under Part A of Medicare is determined by the diagnosis-related group (DRG) prospective reimbursement amount. Treatment is pre-classified into a number of DRGs, and the reimbursement level for each DRG is determined in advance.

All of the following should be considered when determining whether to replace a life insurance policy EXCEPT: (a) the incontest able clause (b) the cost of "getting out of" your present coverage (c) the grace period (d) tax considerations

(c) the grace period The grace period is not a consideration in the policy replacement decision as it is a standard provision in all life insurance contracts. The grace period does not influence whether a policy is a "good" policy or a "bad" policy. All of the other choices represent valid concerns when considering policy replacement.

All of the following are legal defenses to liability claims EXCEPT: (a) contributory negligence (b) assumption of the risk (c) vicarious liability (d) comparative negligence

(c) vicarious liability Vicarious liability is not a defense against a claim of liability. Vicarious liability shifts liability from one party to another party.

Which $50,000 life insurance policy, if purchased at age 32, would have the highest cash value when the insured was 50 years old? (a) whole life paid-up at age 65 (b) 10-year level term insurance (c) continuous premium whole life insurance (d) 10-payment whole life insurance

(d) 10-payment whole life insurance The 10-payment life whole life insurance policy is paid-up. All the premiums required for the 10-payment, whole life insurance policy have been paid by the time the insured is 42 years old. Paid-up policies of the same face value have a higher cash value than policies of the same face value that are not paid-up.

Bailey Company just started a qualified plan for their employees. Under the plan, Bailey provides an additional 5 percent of each employee's salary as a bonus, and each employee is given the option of receiving the bonus in cash or putting some or all of the bonus funds aside for retirement. What type of plan did Bailey initiate? (a) Keogh (HR-10) plan (b) Simplified Employee Pension (SEP) (c) SIMPLE plan (d) 401(k) plan

(d) 401(k) plan Bailey Company established a 401(k) plan. These plans give employees the option of taking the benefit in cash or deferring some or all of the benefit for retirement. If a deferral is elected, the income is not currently taxable.

Some employers make a lump-sum distribution of pension assets to workers who are terminating employment. To avoid receiving the account assets directly and having to pay taxes on the distribution, the funds may be deposited tax-free into a special account. Such an account is called a(n) (a) spousal IRA account (b) Roth IRA account (c) Section 401(k) account (d) IRA rollover account

(d) IRA rollover account Distributions made to an IRA rollover account do not result in current taxation.

Which statement is true with regard to the yearly rate of return method developed by Belth? (a) It ignores dividend payments. (b) It calculates a cost per thousand per year. (c) It ignores the increase in cash value from year to year. (d) It uses an assumed price per thousand dollars of coverage.

(d) It uses an assumed price per thousand dollars of coverage. An assumed price per thousand is used in the calculation. The cash value increase from one year to the next and dividends paid to the policy owner are considered. A rate of return, rather than a cost per thousand per year, is the result of the calculations.

Mom and Pop's Grocery is a sole proprietorship. Mom and Pop would like to establish a qualified plan to take advantage of the same tax advantages to which corporations are entitled. Mom and Pop should establish a(n): (a) 401(k) plan (b) Simplified Employee Pension (SEP) (c) Individual Retirement Account (IRA) (d) Keogh (HR-10) plan

(d) Keogh (HR-10) plan A Keogh (HR-10) plan is a qualified plan for proprietorships and partnerships.

All of the following are torts EXCEPT: (a) In a case of mistaken identity, Diane locked a customer she suspected was a shoplifter in a dressing room until the police arrived. The customer was innocent. (b) Bob punched another bar patron who made disparaging comments about Bob's wife. (c) Nicole called the high school principal "an ignorant moron" at the PTA meeting. (d) While robbing a bank, Art shot and killed a bank employee.

(d) While robbing a bank, Art shot and killed a bank employee. The first three choices involve legal wrongs for which the law allows a remedy through money damages. Armed robbery and murder are crimes. Crimes are punishable by fines, imprisonment, and in some jurisdictions, death if the offense is severe.

Christine has a paid-up $50,000 whole life policy. She would like to transfer all ownership rights in the policy to her favorite charity. Christine can accomplish the transfer through a(n): (a) change of plan provision (b) guaranteed purchase option (c) reinstatement provision (d) absolute assignment

(d) absolute assignment Christine can accomplish this transfer through an absolute assignment of all rights under the policy to the charity.

Swanson Enterprises gives each employee covered under the employee benefit plan 250 credits. With the credits, the employees can select which employee benefits they desire, and the magnitude of the benefits (up to certain limits). This type of plan is called a: (a) managed care plan (b) universal coverage plan (c) preferredproviderplan (d) cafeteria plan

(d) cafeteria plan A cafeteria plan is described. These plans allow employees to choose the benefits they desire, within limits.

Prior to passage of the workers compensation laws, employers could avoid liability to employees injured on the job by invoking common law defenses. Under one such defense, the employer asserted that because the employee helped to bring about the injury, the employer was not responsible. This common law defense is: (a) assumption of the risk (b) liability without fault (c) the fellow servant doctrine (d) contributory negligence

(d) contributory negligence Under contributory negligence, if the worker in any way contributed to his or her injury, recovery was barred.

Rochelle is preparing to do her taxes. To determine what percentage of her individual annuity income was taxable and not taxable, Rochelle divided her investment in the annuity by the total of the expected payments that she will receive through the annuity. This quotient is called the (a) percentage participation (b) break-even point (c) coinsurance percentage (d) exclusion ratio

(d) exclusion ratio Rochelle calculated the exclusion ratio. The ratio tells her what percentage of the individual annuity distribution she can exclude from taxation as it represents a return of premiums paid for the annuity. The balance (the amount not excluded) is fully taxable.

Which of the following benefit formulas is used in defined contribution plans? (a) flat dollar amount for each year of service (b) unit-benefit formula (c) flat dollar amount for all employees (d) fixed percentage of salary

(d) fixed percentage of salary A fixed percentage of salary formula is used in defined contribution plans. The other choices are all defined benefit formulas.

All of the following are elements of a negligent act EXCEPT: (a) existence of a legal duty (b) failure to perform that duty (c) damages or injury to the claimant (d) inability of the tortfeasor to pay the damages

(d) inability of the tortfeasor to pay the damages The ability of the tortfeasor to pay damage awards is independent of whether the act is negligent. The first three choices are elements of a negligent act. The fourth element is proximate cause between the failure to perform the legal duty and the injury to the claimant.

Lewis Company adjusts retirement benefits to consider Social Security retirement benefits. As Social Security slants benefits in favor of the less highly compensated workers, this adjustment reduces benefits for lower-paid employees and increases benefits for the highly-compensated employees. Because the Lewis Company plan makes this adjustment, it can be described as: (a) indexed (b) discriminatory (c) top-heavy (d) integrated

(d) integrated Private pension plans can be integrated with Social Security. Low-income workers have their benefits reduced through integration, while high-income workers benefit from integration.

One form of life insurance has a reduced premium for the first three to five years, with the premium increased after this initial period. This type of whole life insurance is called: (a) variable life insurance. (b) indeterminate-premium whole life insurance. (c) current assumption whole life insurance. (d) modified life insurance

(d) modified life insurance The type of life insurance described is called modified life insurance.

Which statement(s) is(are) true with regard to minimum vesting for qualified defined benefit plans? I. Under cliff vesting, workers must be fully vested after three years. II. Under the graded vesting rule, the worker must be 60 percent vested after three years, and then vested an additional 10 percent for each of the next four years. (a) I only (b) II only (c) both I and II (d) neither I nor II

(d) neither I nor II Neither statement is correct. Cliff vesting uses a five-year cut-off rather than three years. Under the graded vesting standard, employees must be 20 percent vested after three years, with an additional 20 percent vested per year for the next four years.

Which statement is true with regard to the options available in life insurance contracts? I. All life insurance policies provide dividend options. II. All life insurance policies provide nonforfeiture options. (a) I only (b) II only (c) both I and II (d) neither I nor II

(d) neither I nor II Neither statement is true. Only participating (dividend-paying) life insurance policies have dividend options. Only cash value life insurance policies provide nonforfeiture options.

All of the following are characteristics of major medical insurance EXCEPT: (a) coinsurance (percentage participation) (b) deductibles (c) highlimits (d) no exclusions

(d) no exclusions Major medical insurance policies contain a number of common exclusions. Major medical plans typically have the other characteristics listed (coinsurance, deductibles, and high limits).

Susan's health insurance coverage cannot be canceled, is guaranteed renewable to age 65, and under no circumstances can her premium be increased. What type of renewal provision is found in Susan's health insurance coverage? (a) renewable at the insurer's option (b) conditionally renewable (c) guaranteed renewable (d) noncancellable

(d) noncancellable Susan's health insurance policy contains the most favorable and most expensive renewal provision. This type of renewal provision is called "noncancellable."

All of the following benefits are available through workers compensation EXCEPT: (a) disability income (b) medical benefits (c) rehabilitation (d) retirement income

(d) retirement income Workers compensation coverage does not provide retirement income benefits.

In the past, federal, state, and local governments could not be sued unless they agreed to the suit. Upon what doctrine was this freedom from litigation based? (a) philosophy of entitlement (b) joint and several liability rule (c) assumption of the risk doctrine (d) sovereign immunity

(d) sovereign immunity This freedom from litigation was based on sovereign immunity. This doctrine has been modified over the years.

Barb purchased a whole life policy on her son, Tom, twelve years ago. She named herself the beneficiary. Tom, now age 19, would like to take out a policy loan to help fund the purchase of a sports car. Barb does not believe that Tom has the right to take out a policy loan. Which contractual provision supports Barb's position? (a) the assignment clause (b) the incontestable clause (c) the reinstatement clause (d) the ownership clause

(d) the ownership clause The ownership clause vests the right to make decisions about the policy with the policy owner. The policy owner, not the insured, decides whether a policy loan will be made.

The best life insurance for you to purchase is: (a) the policy with the highest surrender cost index (b) the policy that pays the highest dividends (c) the policy that has the highest Linton yield (d) the policy that best fits your needs

(d) the policy that best fits your needs The best policy for you to purchase is the policy that best fits your needs.

All of the following are major problems with the health care system in the United States EXCEPT: (a) rising health care expenditures (b) waste and inefficiency (c) uneven quality of medical care (d) too many people covered under the present system

(d) too many people covered under the present system Lack of coverage, rather than "too many people covered," is a major problem. Millions of Americans have no health insurance coverage.

All of the following are characteristics of long-term care insurance EXCEPT: (a) benefit triggers used to determine eligibility for benefits (b) inflation protection (c) elimination (waiting) periods (d) unlimited benefits

(d) unlimited benefits Benefits are limited under most long-term care policies. There are daily limits, such as $100 or $120 per day; and a limit placed on benefits paid over the insured's lifetime, such as $250,000 or $500,000.

(T or F) A blended family is one in which a son or daughter with children is also supporting an aged parent or parents.

F A blended family is one in which a divorced or widowed spouse with children remarries, and the new spouse also has children.

(T or F) All ownership rights in a policy are transferred through a collateral assignment.

F A collateral assignment is a limited form of assignment designed to provide security for a loan. The assignee's rights are limited to the outstanding loan value.

(T or F) A licensee is someone who is invited on to the premises for the benefit of the occupant.

F A licensee is someone who enters or remains on the premises with the occupant's expressed or implied permission. An invitee is someone invited to come on to the premises for the benefit of the occupant.

(T or F) Income from individual annuities is received tax-free by the annuitant at retirement.

F A portion of the distribution, the amount which is attributable to a return of premiums paid, is received tax-free. The balance, which is investment income, is fully taxable. After the basis in the annuity has been recovered, the entire distribution becomes taxable income.

(T or F) A top-heavy plan is one that is over-funded.

F A top-heavy plan is a plan in which over 60 percent of the present value of the accrued benefits are for the highly-compensated employees. Additional restrictions apply to top-heavy plans.

(T or F) Alternative dispute resolution involves formal jury trials.

F Alternative dispute resolution attempts to avoid costly legal proceedings, such as jury trials. Parties to the action may agree to arbitration or mediation of the conflict.

(T or F) The guaranteed renewable renewal provision provides the greatest security to a health insurance purchaser.

F Although the coverage is guaranteed renewable, the insurer can increase premiums for the entire underwriting class. The noncancellable renewal provision provides coverage that is guaranteed renewable until a specified age and also specifies that the premium cannot be increased.

(T or F) For most workers, a pension benefit based on career average earnings is more beneficial than a pension benefit based on final pay.

F As an employee's salary tends to increase over his or her working years, an average that considers final pay only is more beneficial than an average based on career earnings. A benefit based on career earnings would average-in early years when compensation was lower.

(T or F) Belth's yearly rate of return method can only be used for participating life insurance policies.

F Belth's yearly rate of return method can be used for participating and nonparticipating policies. If a nonparticipating policy is analyzed, a value of zero is assigned for the dividend term.

(T or F) Blue Cross and Blue Shield plans typically reimburse their members for medical services after their members have reimbursed the care provider.

F Blue Cross and Blue Shield plans are prepayment plans. The plans directly reimburses the care provider.

(T or F) When shopping for cash value life insurance, you can simply compare premiums to determine which policy is best.

F Comparing premiums will not tell you which policy is best. You must also consider what you receive in exchange for the premiums. For example, is the coverage participating and what is the guaranteed cash value after a specified period? There are factors besides cost that should also be considered, such as the financial strength of the insurer.

(T or F) Coverage ceases after the last premium is paid on a limited-payment whole life policy.

F Coverage remains in force for all of life. For example, if someone purchases a 20-payment whole life insurance policy at age 30, the coverage remains in force past age 50, when the last premium payment is due.

(T or F) If you are covered under the OASDI program and under workers compensation, there is no need to purchase private disability income insurance.

F Coverage under workers compensation and the OASDI program should not discourage you from purchasing private disability income insurance. To collect under workers compensation, the illness or injury must be work-related. Nonoccupational illness and injury are not covered. Coverage under the OASDI program is problematic because you must have a "disability insured" status, satisfy the harsh definition of disability, and serve a five-month waiting period in order to receive benefits.

(T or F) Disability income insurance usually replaces all of a disabled person's lost income.

F Disability-income insurance typically replaces less than all of the disabled person's lost income. Most insurers limit the amount of income replaced to no more than 60 to 80 percent of the person's gross earnings. Replacing less than the full amount of lost income reduces moral hazard and provides an incentive to recover and to return to work.

(T or F) Consumer experts agree that dread disease policies are a wise purchase.

F Dread disease policies (e.g., cancer insurance) are not recommended by consumer experts. These policies are narrow, providing benefits only if you have the "correct" illness.

(T or F) During the funding period, a variable annuity purchaser is credited with annuity units.

F During the funding period, the variable annuity purchaser is credited with accumulation units, not annuity units.

(T or F) Each family head needs exactly fives times his or her annual salary in life insurance.

F Each family head needs an amount of life insurance necessary to provide financial security to his or her family in case of premature death. For some families, that amount is significant. Other families may need little, if any, life insurance.

(T or F) Unemployment benefits are uniform from state to state.

F Each state has its own formula for determining unemployment benefit levels. Some states are very strict with regard to benefit payments, while other states provide significantly higher benefits.

(T or F) Employees are required to use the employer's preferred provider organization (PPO).

F Employees are not required to use the preferred provider. However, employees are given a financial incentive to do so, often through reduced deductibles or greater employer cost-sharing if the preferred provider is used.

(T or F) Employer-sponsored group insurance plans typically cover part-time workers.

F Group insurance plans normally restrict eligibility to full-time workers.

(T or F) An employee has a better idea what his or her retirement benefit will be prior to retirement under a defined contribution plan than under a defined benefit plan.

F If the retirement benefit is defined (e.g., $300 per month or 40 percent of final pay), the employee has a better idea of what his or her retirement benefit will be than if the contribution is defined (e.g., the employer contributes $250 per month to a retirement plan).

(T or F) There is no limit on the duration of monthly benefits payable through state unemployment insurance programs.

F In almost all jurisdictions, the maximum duration of regular benefits is limited to 26 weeks. During periods of high unemployment, many workers exhaust their regular benefits. A permanent federal-state program of extended benefits is available provided benefits for up to 13 additional weeks. So there is an overall limit of 39 weeks of benefits (regular plus extended) in most states.

(T or F) Industrial life insurance is group term coverage sold to industrial workers.

F Industrial life insurance is individual, cash value, life insurance. The coverage is sold in low face amounts, with the premiums collected at the insured's home.

(T or F) A key advantage of variable annuities is that insurers marketing these products do not charge any fees.

F Insurers marketing variable annuities charge a variety of fees and expenses, including management fees, administrative fees, surrender charges, and expense charges.

(T or F) Qualified distributions from traditional IRAs are received income tax-free after age 59.5.

F It pre-tax dollars are used to fund traditional IRAs, distributions from traditional IRAs at retirement are fully taxable. If any after-tax contributions were used to fund the traditional IRA, the portion of the distribution attributable to the after-tax contribution is received tax-free.

(T or F) Failure to pay a life insurance premium by the due date automatically results in a policy lapse.

F Life insurance policies include a grace period provision which extends coverage beyond the premium due date if the premium has not been paid.

(T or F) OASDI benefits are susceptible to loss of purchasing power because they are not adjusted for inflation.

F OASDI benefits are indexed to prevent the erosion of purchasing power. Benefits are increased by the percentage change in the consumer price index (CPI) from the third quarter of the previous year to the third quarter of the present year, with the increased starting the following January.

(T or F) Employees must pay taxes on the amount they elect to defer in a 401(k) plan in the year the deferral is elected.

F One of the advantages of 401(k) plans is that employees do not pay taxes on the amount they defer until the funds are distributed.

(T or F) Evidence of insurability must be demonstrated to purchase additional life insurance under a guaranteed purchase option.

F One of the beneficial aspects of this option is that additional life insurance can be purchased without having to demonstrate insurability.

(T or F) Premature death is defined as death before reaching life expectancy.

F Premature death can be defined as death of the family head with outstanding, unfulfilled, financial obligations.

(T or F) Reduced paid-up insurance is a dividend option.

F Reduced paid-up insurance is a nonforfeiture option.

(T or F) Residual disability refers to whether a second disability is considered a continuation of a prior disability or considered a new disability.

F Residual disability refers to a reduction in earnings because of the accident or sickness once the worker is able to return to the work force.

(T or F) Roth IRA contributions are tax deductible regardless of a person's income and whether or not he or she is covered by an employer-sponsored retirement account.

F Roth IRA contributions are never tax deductible. Roth IRA contributions are made with after-tax dollars, but the distributions at retirement are received tax-free.

(T or F) Flexible spending accounts provide no tax advantages to cafeteria plan participants.

F Since flexible spending accounts are funded through before-tax reductions in workers' pay, taxes paid are reduced, and spendable income is increased.

(T or F) A liberal definition of disability is used in determining whether an individual is eligible for Social Security disability-income benefits.

F Social Security uses a harsh definition of disability. To be eligible, the worker must have "a physical or mental condition that prevents him or her from doing any substantial gainful work and is expected to last (or has lasted) at least 12 months or is expected to result in death."

(T or F) Social insurance benefits are means-tested.

F Social insurance benefits are not means-tested. There is a statutory right to benefits.

(T or F) General damages are awarded for losses that can be determined and documented, such as loss of work earnings and the cost of medical care.

F Special damages are awarded for losses that can be determined and documented, such as lost work earnings and the cost of medical care. General damages are awarded for losses that cannot be itemized, such as pain and disfigurement.

(T or F) Corporate officers and board members are immune from liability claims under provisions of the Sarbanes-Oxley Act.

F The Sabanes-Oxley Act was passed in response to corrupt business practices. Corporate officers and directors can be held responsible for fraud and other illegal business practices under the Act.

(T or F) Group accidental death and dismemberment insurance will pay the principal sum regardless of the cause of death.

F The death benefit will only be paid if the cause of death is an accident.

(T or F) The difference between the face amount of a life insurance policy and the legal reserve is the cash value.

F The difference between the face amount of a life insurance policy and the legal reserve is called the net amount at risk.

(T or F) Interest is not required on life insurance policy loans.

F The funds borrowed legally belong to the insurer. When premium rates were determined, it was assumed the insurer would have these funds to invest. Thus interest is required on life insurance policy loans to compensate the insurer for lost investment income.

(T or F) The future value ordinary annuity factor is used to calculate the future value of the premiums when the interest-adjusted methods are employed.

F The future value ordinary annuity factor assumes the premiums are paid at the end of the period. Life insurance premiums, like rent payments, are paid at the start of the period. The future value annuity due factor must be used to properly value the cash flows.

(T or F) The blackout period is the one- or two-year period following the death of the breadwinner.

F The one- or two-year period following the death of the breadwinner is called the readjustment period.

(T or F) For a cash value life insurance policy in force long enough to have a cash value, the surrender cost per thousand per year will always be greater than the net payment cost per thousand per year.

F The surrender cost index per thousand per year will always be less than the net payment cost per thousand per year for policies with a cash value. Under the surrender cost method, the cash value is subtracted from the net premiums and the resulting difference is converted to an annual cost. Under the net payment cost method, the net premiums are converted to an annual cost. Note that under the net payment cost method, the cash value is not subtracted from the net premiums.

(T or F) The person who was injured as a result of a negligent act is called the tortfeasor.

F The tortfeasor is the person who caused the harm. In a legal proceeding, a plaintiff (also called the claimant) would bring legal action against the tortfeasor (also called the defendant).

(T or F) A single, uniform, definition of disability is used in all disability income policies.

F There are variations in the definition of disability. That is why it is important to review the definition of disability before you purchase coverage.

(T or F) Since all life insurance companies are determining rates for the same risk, death, there is little variation in cost among similar life insurance contracts.

F There are wide variations in the cost of coverage. It is worthwhile to shop for a good policy because buying the wrong policy can cost you thousand of dollars over time, and it may be expensive to obtain coverage under a new policy.

(T or F) The last clear chance rule bars recovery by the plaintiff.

F Under the last clear chance rule, a plaintiff who is endangered by his or her own negligence can still recover damages if the defendant had a last clear chance to avoid the accident and failed to do so.

(T or F) Under the level premium method of providing life insurance protection, premiums paid during the early years are lower than what is needed to pay death claims.

F Under the level premium method, premiums paid in early years are greater than what is needed to pay death claims. This over-payment in early policy years is used to help pay death claims in later policy years while holding the premium level.

(T or F) Unemployment insurance programs are designed to provide benefits in the case of long-term voluntary unemployment.

F Unemployment insurance programs are designed to provide benefits in case of short-term involuntary unemployment.

(T or F) The interest-adjusted methods ignore the timing and magnitude of dividend payments.

F When an interest-adjusted method is used, the future value of each dividend payment is calculated, assuming a specified interest rate. Thus the timing and magnitude of dividend payments are considered.

(T or F) Under the Medicare Prescription Drug Plan, beneficiaries pay a monthly premium in exchange for first-dollar, comprehensive, coverage of prescription drugs.

F While beneficiaries pay a monthly premium for prescription drug coverage, the benefits are neither "first dollar" nor "comprehensive." There is an annual deductible the insured must satisfy. In 2009, after the deductible, the insured must pay a portion of the cost of benefits until the insured is out-ofpocket for $2700. Then the insured must pay 100 percent of the next increment until the insured has paid a total of $4350. After that, the insured must pay only a small copayment fee for the remainder of the year.

(T or F) It is impossible for an insurer to make a profit by selling a refund annuity.

F While it is true that the insurer will pay out an amount that is at least equal to the premiums paid for the annuity, the issue is timing. The repayment of all of the money paid for the annuity may take many years. At the same time, however, the insurer will be investing the funds and earning investment income on the premiums.

(T or F) Although workers compensation covers work-related injuries, occupational diseases are excluded from coverage.

F Workers compensation covers both work-related illnesses and work-related injuries.

(T or F) Group disability income insurance is not needed if the employer provides workers' compensation coverage.

F Workers' compensation provides benefits for work-related illnesses and injuries only. Disability income insurance is needed for nonoccupational illness and injuries.

(T or F) A change-of-plan provision permits the policy owner to exchange his/her present policy for a different life insurance contract.

T

(T or F) A government unit can be held liable if it is negligent in the performance of a proprietary function.

T

(T or F) A life insurance policy that pays dividends to the policy owner is known as a participating life insurance policy.

T

(T or F) A property owner owes a higher degree of care to children than to adults.

T

(T or F) A self-employed 401(k) plan combines a profit sharing plan with an individual 401(k) plan.

T

(T or F) Although it is a mandated social insurance coverage, most states permit employers to privately insure or self-insure their workers compensation exposure.

T

(T or F) Although the United States spends a significant percentage of gross domestic product on health care, not everyone has health insurance coverage.

T

(T or F) Although the normal retirement age in most plans is 65, many workers retire before the normal retirement age.

T

(T or F) Annuities can be funded through a single premium or through multiple premiums.

T

(T or F) Cash value life insurance contracts include nonforfeiture options.

T

(T or F) Contributions to health savings accounts (HSAs) are tax deductible.

T

(T or F) Early distributions from qualified plans are subject to a 10 percent penalty tax.

T

(T or F) Equity-indexed annuities provide downside protection against the loss of investment income if the annuity is held to term.

T

(T or F) Evidence of insurability is usually not required in group insurance plans.

T

(T or F) Financial dependency is a major justification for the purchase of life insurance.

T

(T or F) For those born today, the full retirement age under Social Security is 67 and the early retirement age is 62.

T

(T or F) Group major medical insurance is characterized by high limits, deductibles, and coinsurance (percentage participation).

T

(T or F) High deductible health plans are used in conjunction with health savings accounts.

T

(T or F) High deductible health savings account plans limit annual out-of-pocket expenses.

T

(T or F) If a policy loan has not been repaid by the time the insured dies, the amount paid to the beneficiary is reduced by the amount of the debt.

T

(T or F) If the insured has any incidents of ownership in a life insurance policy when he or she dies, the entire proceeds are included in his or her gross estate for federal estate tax purposes.

T

(T or F) In a noncontributory group term insurance plan, the employer pays the entire cost of life insurance coverage.

T

(T or F) In come cases, qualified distributions from Roth IRAs can be made before age 59.5.

T

(T or F) It is wise to shop around when purchasing life insurance.

T

(T or F) Long-term care insurance is expensive.

T

(T or F) Low-load life insurance is characterized by low marketing expenses.

T

(T or F) Major medical insurance policies typically cover the daily cost of a semi-private hospital room.

T

(T or F) Many medical malpractice suits are due to medical errors by health care providers.

T

(T or F) Monthly payments under the OASDI program are based upon an individual's primary insurance amount (PIA), which in turn is based upon the individual's average indexed monthly earnings (AIME).

T

(T or F) Most group life insurance in force is term insurance.

T

(T or F) Most spouses who do not work outside of the home can make a fully deductible contribution to a traditional IRA even through their spouse is covered under a retirement plan at work.

T

(T or F) Most states require a qualified unemployed worker to serve a one-week waiting period before collecting unemployment benefits.

T

(T or F) One current problem with the tort liability system in the United States is long delays.

T

(T or F) Preferred risks have a lower-than-average probability of death.

T

(T or F) Profit sharing plans provide greater funding flexibility than other types of qualified plans provide.

T

(T or F) Qualified distributions from Roth IRAs are received income tax-free after age 59.5.

T

(T or F) Settlement options are available on all life insurance contracts.

T

(T or F) The OASDI program faces a long-range actuarial deficit.

T

(T or F) The amount that can be contributed each year to a defined contribution plan is limited.

T

(T or F) The cost comparison techniques should be used to compare similar plans of insurance.

T

(T or F) The dependency period refers to the period until the youngest child reaches age 18.

T

(T or F) The economic loss from long-term total disability can be greater than the economic loss that results from premature death.

T

(T or F) The financial strength of the company issuing the life insurance contract should be taken into consideration by a prospective purchaser.

T

(T or F) The fundamental purpose of a life annuity is to provide an income that cannot be outlived.

T

(T or F) The purpose of the suicide clause is to reduce adverse selection against the insurer.

T

(T or F) Under a common accident provision in major medical insurance, only one deductible must be paid if two family members are injured in the same accident.

T

(T or F) Under a defined contribution health plan, the employer makes a fixed contribution toward an employee's health coverage, but the employee selects the plan to which the premiums apply.

T

(T or F) Under a unit-credit formula, both earnings and years of service are considered.

T

(T or F) Under a waiver-of-premium provision, if the insured becomes totally disabled before a stated age, all premiums coming due during the period of disability are waived.

T

(T or F) Under an individual practice association (IPA) health maintenance organization (HMO), physicians treat both HMO members and patients who are not members of the HMO.

T

(T or F) Under present law, all employees eligible for coverage who are at least age 21 and who have completed one year of service must be allowed to participate in a qualified retirement plan.

T

(T or F) Under the doctrine of respondeat superior, an employer may be held liable for negligent acts of employees who are acting on the employer's behalf.

T

(T or F) Under the joint and several liability rule, a defendant who is only slightly responsible may be required to pay the full amount of damages.

T

(T or F) Without a flow of younger workers into the group and older workers out of the group, group insurance premiums will increase.

T

(T or F) Yearly renewable term insurance premiums increase at an increasing rate as the insured grows older.

T