Risk Management Exam 3 (9-12)

Connie has an individual medical expense policy with a $1,000 deductible. She is required to pay 20 percent of covered expenses in excess of the deductible. The insurer will pay 80 percent of expenses in excess of the deductible. If Connie has eligible medical expenses of $26,000, how much will be paid by her insurer?

$20,000

Julian, age 45, would like to determine how much life insurance to purchase using the human life value approach. He assumes his average annual earnings over the next 20 years will be $40,000. Of this amount, $20,000 is available annually for the support of his family. Julian will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount) rate. The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46. What is Julian's human life value?

$249,000

Janice purchased a living room set for $1,000 and insured this furniture on an actual cash value basis. Two years later the living room set was destroyed by a covered peril. At the time of loss, the property had depreciated in value by 25 percent. The replacement cost of the furniture at the time of loss was $1,200. Assuming no deductible, how much will Janice receive from her insurer?

$900

Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss?

$900

What is true about universal life insurance

-any withdrawal of a policy cash vale reduces the amount of the death benefit -interest is credited to a policy cash value each month -the policyowner can add to a policy cash value at any time subject to policy guidelines

What is true about employer provided group life insurance

-group life insurance is a common employee benefit -employees are given certifications of insurance as evidence of the coverage -a single contact between the employer and the insurer is issued

Requirements that must be satisfied before premiums are waived under a waiver-of-premium provisions

-the insurer must furnish proof of disability to the insurer -the insured must satisfy the definition of disability -the insured must be disabled before some specified age, such as 60 or 65

What is true about ordinary life insurance

-there is build up of cash value that can be borrowed by the policyholder -it offers policyholders the flexibility to meet a wide variety of financial objectives -premiums are level throughout the policy period

Exclusions are used in insurance policies

-to eliminate coverage not needed by typical insureds -to reduce moral hazard -to eliminate coverage perils

what is $100,000 whole life insurance policies, issued by the same company to a man age 32, would require the highest first year premium?

10-payment whole life

Ann Parks and Robert Evans jointly own a grocery store. Ann and Robert are both named insureds on the property insurance covering the store, but Ann is the first named insured. Which of the following statements is true with regard to Ann's status as the first named insured?

Ann is responsible for making sure the premium has been paid

What is a type of family that is likely to have the least need for a large amount of life insurance

a single person family

The transfer of all ownership rights in a life insurance policy ca be accomplished through a

absolute assignment

Bill is attempting to determine how much life insurance to purchase. He has two dependent children and his wife does not work outside of the home. An advisor suggested that Bill should consider Social Security benefits when doing his life insurance planning. One concern in this regard is the period after Social Security benefits to a widow terminate until they resume again. This period is called the

blackout period

Easy Pay Life Insurance Company allows a term insurance rider to be added to its whole life policies. The result is a policy that offers an increased death benefit with an affordable premium. The general name for such a policy is a(n)

blended policy

What is a cost/expense that an estate clearance fund is designed to pay?

burial expenses

The policy provision requiring the filing of proof of a loss with the insurer is

condition

Marcus is concerned that inflation will erode the purchasing power of the face value of his life insurance policy. His agent suggested that Marcus add a provision that allows him to purchase one-year term insurance equal to the percentage change in the consumer price index without having to demonstrate insurability. This provision is called a(n)

cost-of-living rider

The part of of property and liability insurance contract that contains information about the property or activity to be insured is called

declarations

Michael wants to make sure that life insurance proceeds are available to pay his outstanding mortgage balance if he dies. He purchased a type of life insurance in which the amount of coverage gradually declines, just as his outstanding mortgage balance gradually declines. This type of life insurance is called

decreasing term insurance

An elimination period is

deductible

Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on his personal property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to replacement cost." The written provision the agent was referring to is called a(n)

endorsement

Al was named the beneficiary in his mother's life insurance policy. His mother died during the contestable period. The insurer denied payment, citing a material misrepresentation on the application. Al believes the insurer should pay the claim because the misrepresentation occurred on the application, and the application is not part of the formal agreement between the insurer and the policyholder. Which provision protects the insurer by making the application part of the formal agreement between the parties to the contract?

entire contract clause

A legal reserve in life insurance is a result of

excess premiums in the early policy years being invested at compound interest.

Powers specifically conferred on a n agent to act on behalf of a principal are

express authority

What is a standard nonforfeiture option

extended life insurance

Jane purchases a life insurance policy on her own life and named her daughter, Cheryl, as beneficiary. Cheryl has a history of not managing money well. Jane wants the death benefit paid to Cheryl in monthly installments over 20 years. What settlement option should Jane pre-select for Cheryl?

fixed period

As an alternative to coinsurance, rate discounts can be given as the amount of insurance to value increases. This is

graded rates

The authority of an agent to perform all incidental acts necessary to fulfill the purpose of the agency agreement is called

implied authority

Jane purchased a $50,000 liability insurance policy from Insurer A. Fearing that she did not have enough liability insurance, she purchased an additional $100,000 of liability coverage from Insurer B. As a result of a negligent act, Jane was ordered to pay $75,000 in damages. Assuming the coverage from Insurer A is primary and the coverage from Insurer B is excess, how will this claim be settled?

insurer A will pay $50,000 and insurer B will pay $25,000

What is true regarding an automatic premium loan provision?

its purpose is to prevent a policy from lapsing because of nonpayment of premium

Bert purchased a life insurance policy 4 years ago. He inadvertently stated that he was 1 year younger than his actual age. If Bert dies today, how much will the insurance company pay?

less than the policy face value

What type of insurance policies can usually be assigned without the insurers consent

life insurance

A life insurance policyholder may no longer need life insurance. Such a policyholder may sell the policy to a third party for more than its cash value. The purchaser becomes the new beneficiary and is responsible for subsequent premium payments. Such a financial transaction is called

life settlement

What is an noneconomic cost associated with premature death?

loss of a parental role model

When must an insurable interest legally exist in life insurance

only at the inception of the policy

Most family heads need substantial amounts of life insurance. However, with limited income, money spent on life insurance reduces the amount of discretionary income available for other high-priority needs. What an insured person gives up when he or she purchases life insurance instead of using the premium dollars for other purposes is called the

opportunity cost of buying life insurance

Homeowners insurance policies usually cover resident relatives of the named insured who are under age 24, and who are full tie students away from home. Under the homeowners policy, these full time students are considered

other insureds

Beth purchased a participating life insurance policy 6 years ago. Her life insurance needs have increased, but she has developed a medical condition that makes it impossible for her to purchase more life insurance at affordable premiums. Which dividend option makes sense for Beth to use given her medical condition?

paid up additions

The purpose of other insurance provisions is to

preserve the principal of indemnity

Under the terms of Jenny's auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny's auto insurance policy?

straight deducible

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

subrogation

What would be a valid reason for an insurer to contest a policy after the contestable period has ended?

the applicant had someone else take the medical examination required for policy approval for her

What is true about return of premium term insurance

the coverage is expensive and is not free when time value is considered

Maria's home was damaged by an earthquake. As Maria has open-perils coverage on her home, she was surprised to learn that her loss was not covered. Which section of a property insurance policy specifies which perils, property, and types of losses are not covered?

the exclusions

What is true about decreasing term insurance policy

the face amount of the policy decreases during the policy period, and the premium remains level.

What is true about savings bank life insurance

the objective of savings bank insurance is to provide low-cost insurance to consumers by holding down expenses

What pieces of information is needed to calculate a persons human life value?

the persons cost o self maintenance

What is the practical effect of an insurance contract being a contract of adhesion

the policy is interpreted in the insured favor if the policy contains any ambiguities or uncertainties

ABC Life Insurance Company insures both smokers and nonsmokers. Beth lied on her life insurance application, checking the box for "no" in response to the question of whether she smokes cigarettes or uses other tobacco products. Even though Beth smokes 10 to 15 cigarettes each day, the policy was issued at the "preferred nonsmoker rate." Beth's lie is materiel in this case because

the policy would have been issued on different terms if the insurer knew the true facts

What about the grace period in a whole life insurance contract is true?

the purpose of the grace period is to prevent the policy from lapsing by giving the policyowner additional time to pay overdue premium.

Charles Blake told Wendy that he was an agent for Easy Pay Life Insurance Company. He presented no credentials. He asked Wendy some questions about her health and activities, and recorded the answers on scrap paper. He collected a $250 cash premium from Wendy. When Wendy did not receive a policy from Easy Pay, she contacted the company. Easy Pay said they do not have an agent named Charles Blake. Easy Pay is not responsible for Wendy's loss of $250 because

there is no presumption of an agency relationship

Fundamental purpose of the principle of identify include

to prevent the insured from profiting from insurance

Some states have a law that requires payment of the face amount of insurance to the insured if a total loss real property occurs from a peril specified in the law. This is called

valued policy laws

The practice of buying the life insurance policy of a terminally ill insured at a discount is referred to as a

viatical settlement

Becky is considering the purchase of a whole life policy on her own life. She is concerned that if she becomes disabled, paying premiums will become a burden. Which provision can Becky attach to her life insurance policy to address this concern

waiver-of-premium provision

Robin plans to open a bar in a high-crime area. She had difficulty obtaining insurance for the business. She found an insurer willing to write the coverage, but only if Robin agreed to have a security alarm system in operation at all times when the business is closed. Robin's promise to have a security alarm system operational as a condition of having the insurance coverage in force is a

warranty

Under the needs approach, when is the dependency period of a surviving spouse assumed to end?

when the youngest child reaches 18