FIN 351

A. Pure Risk. Rationale Perils are the proximate or actual cause of a loss that upon occurrence could lead to financial hardship. Risk transfer is the transferring or shifting of risk of loss through insurance or warranty. Open-perils are called "all-risk" policies.

During your recent meeting with Ron, a new client, you discussed the concept of risk. You defined several terms for Ron. Which of the following terms is defined as: the possibility of loss, but no possibility of gain? A) Pure Risk. B) Perils. C) Risk Transfer. D) Open-perils.

D. Listed beneficiary. Rationale The elements of a valid contract are 1) offer and acceptance, (2) legal competency of all par- ties, (3) consideration, and (4) lawful purpose. A listed beneficiary is not a requirement of the contract.

Erin purchased a life insurance policy on her own life. Her husband Mike is the beneficiary of the policy. Which of the following is not a necessary legal element of the contract? A) Offer and acceptance. B) Legal competency of all parties. C) Consideration. D) Listed beneficiary.

C. Named-perils policy. Rationale This is an example of named-perils policy. The all-risk or open-perils policy provides protection against all losses unless they are specifically excluded under the policy. The identified-perils policy is a fictitious term.

Ginny and Max own a rental home on the Gulf Coast. They insured their property with their local insurance company. The policy provides protection against losses caused by perils that are specifically listed as covered in the policy. What type of policy do they have? A) All-risk policy. B) Open-perils policy. C) Named-perils policy. D) Identified-perils policy.

D) Avoid the risk. Rationale If the occurrence is frequent and high, you should avoid the risk.

If a risk has a high frequency of occurrence and a high severity, you should: A) Transfer the risk. B) Retain the risk. C) Reduce the risk. D) Avoid the risk.

Elimination Period

In a disability policy, the time between the disability event and the point at which benefits, under the contract, begin is known as the: Question 6 options: Wait Room Period Discount Period Elimination Period Indemnification Period

The insured had no opportunities to negotiate terms.

Insurance, as a contract, is adhesive, meaning: The insured had no opportunities to negotiate terms. The coverage is conditioned upon the payment of premiums What is paid by the insured and paid out by the insurer may not be equal amounts. Only the insurer is making a promise.

B. Leaving the car unlocked is a morale hazard. Rationale Driving with poor eyesight is a physical hazard. Leaving the car unlocked is a morale hazard. Burning the car on purpose and filing a false disability claim are both moral hazards.

Jennifer had a very bad year. She wrecked her car in January when she ran a red light (because she could not see properly having left her contacts at home) and crashed into another car completely destroying both cars. The insurance company was very nice to her and she purchased a new car with the insurance proceeds. Jennifer decided that since she had insurance, it really did not matter if she took proper care of her new car because she could always get a new one. Jennifer got in the habit of leaving her new car unlocked and it was stolen. After Jennifer bought another car she decided that she really liked the insurance adjuster and wanted to see him again, so one day she purposefully set her car on fire. In her carelessness, she also caught her hand on fire. Jennifer was depressed over her circumstances and decided she didn't want to go back to work. She filed a falsified disability claim for the loss of use of her hand (even though she could still use her hand). Which of the following statements is true? A) Driving with poor eyesight is not a hazard. B) Leaving the car unlocked is a morale hazard. C) Burning the car on purpose is a morale hazard. D) Filing a false disability claim is a morale hazard.

$855,597.84 i is the real interest rate. i' is the nominal interest rate which is given as 5% and f is the rate of inflation. On substituting the values as given the problem we get: (5%-3%)/1+3%) = 2/1.3 = 1.94% Her after tax earnings in the problem are given as : 45,000(1-0.15) = $38,250 Now her personal consumption is 25% of this, which implies her family's income is 75% of her after tax earnings, which will be: 38,250*0.75 = $28,688. Since we're given that there are 45 years to her retirement, we will now just discount her earnings back 45 years at 1.94%. The equation looks something like this: 28,688 = {1-(1+0.01940)-45}/{0.01940} When we solve it, the result is $855,903

Jenny, who is married and the mother of three, is 25 years old and expects to work until 70. She earns $45,000 per year. Jenny expects inflation to be 3% over her working life, and the appropriate risk-free discount rate is 5%. Her personal consumption is equal to 25% of her after-tax earnings, and her combined federal and state marginal tax bracket is 15%. What is the amount of life insurance necessary for Jenny using the Human Life Value method? $509,893.63 $743,672.85 $855,597.84 $900,000

D. Collision coverage. Rationale Collision coverage would pay for property damage to your own vehicle when you are at fault in an accident. Liability coverage pays for bodily injury or property damage to others. Uninsured motorist coverage pays for damage when the other party at fault is under insured or not insured. Note in this example the 3rd party is not at fault. Comprehensive coverage pays for things other than collision, for example theft.

Jim's car was totaled in a wreck. He failed to yield to oncoming traffic and Jim was found to be at fault. The driver of the car he hit did not have insurance. Jim's own car insurance policy reimbursed him for the property damage to his own vehicle. What type of coverage would pay for this? A) Liability coverage. B) Uninsured motorist coverage. C) Comprehensive coverage. D) Collision coverage.

A. The human life value method estimates the present value of income generated over a person's work life expectancy and is then adjusted for the expected consumption of the survivors. Rationale The human life value method estimates the present value of income generated over a person's work life expectancy and is then adjusted for the expected consumption of the insured.

Joe wants to purchase a life insurance policy on his own life. He is interested in learning about the various approaches to determine the amount needed. Which of the following is not true regarding the three most common approaches? A) The human life value method estimates the present value of income generated over a person's work life expectancy and is then adjusted for the expected consumption of the survivors. B) The financial needs method evaluates the income replacement and lump-sum needs of the survivors after the insured dies. C) The capitalization of earnings method determines need by dividing the client's gross income by the risk less rate of return. D) In practice a financial planner would utilize all three methods and then determine the client's needs based on a combination of factors including affordability.

D. A 20-year term insurance policy. Rationale The term policy is the only policy that is not permanent and therefore, is the cheapest policy. The other three are permanent policies and will cost more for the same amount of coverage.

Josh, age 30, is a single father of one daughter, Nicole, age 11. Josh works for an advertising agency with an annual income of $40,000. Due to his messy divorce and several student loans that drain his financial resources, Josh lives paycheck to paycheck. His doctor recently discovered that he has high cholesterol and Josh is worried that his health may fail. He wants to purchase a life insurance policy to protect Nicole in the event of his untimely death (his employer does not yet offer a group plan). Assuming he wants to buy as much coverage as possible for the cheapest price, which of the following policies should he buy? A) A whole life insurance policy. B) A universal policy. C) A single premium whole life policy. D) A 20-year term insurance policy.

B. Own occupation. Rationale This is an example of own occupation. Own occupation defines disability as being unable to carry out each and every one of the duties of your own employment. Any occupation defines disability as being unable work in any occupation for which you are qualified. A hybrid policy is one that contains characteristics from both own occupation and any occupation. Specific occupation is a fictitious term.

Julie is a doctor that specializes in performing heart surgery on babies. She has a long-term disability policy that covers her in the event that she can no longer perform this type of surgery due to disability. What type of long-term disability insurance policy does she have? A) Hybrid occupation. B) Own occupation. C) Any occupation. D) Specific occupation.

C. Most, if not all clients, need health insurance. Rationale Loss frequency is the expected number of losses that will occur within a given period of time. Loss severity refers to the potential size or financial damage of a loss. Catastrophic risks are relative such that what may be catastrophic to one person may not be catastrophic to another. For example, death may seem catastrophic from a personal nature, it is not always catastrophic from a risk management perspective. While a client might emotionally feel the loss of a 95 year old grandmother, her death would not be catastrophic from a risk management perspective if she is not caring for any other individuals financially. It is rare that a client can self insure their health care therefore, in general, most if not all clients need health insurance. Perils are the proximate or actual cause of a loss that upon occurrence could lead to financial hardship.

Nathan, age 35, came into your office today. He has been a client of yours for a long time. He has neglected his insurance portfolio up until this point and wants to complete the personal risk management process. Together you determine that his insurance objective is to "insure, in the most economical way, only those risks that have the potential of causing catastrophic financial loss." You also identified all of the possible risk exposures. In evaluating these risks, which of the following is true? A) Loss severity is the expected number of losses that will occur within a given period of time. B) Death is always catastrophic. C) Most, if not all clients, need health insurance. D) Perils are the proximate or actual cause of a loss that upon occurrence always leads to financial hardship.

for individual for all victims for property damage

Policy limits: EX)100/300/25 -$100,000 amount insurer will pay for ___________ -$300,000 amount insurer will pay for ___________ -$25,000 limit insurer will pay for _________________

Physical Hazard

Slippery roads after a rainstorm are an example of a: Morale Hazard Morale Peril Physical Hazard Moral Hazard

C. PLUPs are usually sold in million dollars of coverage. Rationale PLUPs are generally inexpensive to purchase and should generally be purchased by everyone. Tom still needs a PLUP because his home and auto insurance policies are likely to be insufficient in coverage should Tom be subject to a large claim for liability.

Tom is interested in purchasing a personal liability umbrella policy (PLUP). He has asked you to educate him on this type of policy. Which of the following is true? A) PLUPs are very expensive. B) Most people do not need a PLUP. C) PLUPs are usually sold in million dollars of coverage. D) Since Tom owns a home and a car with no other assets other than clothing, dishes, etc., he does not need a PLUP.

Risks can be insured even if they are not measurable or determinable

Which of the following is NOT true of insurable risks? Risks can be insured even if they are not measurable or determinable A large number of similar exposures must exist The loss must not pose a catastrophic risk for the insurer Insured losses must be accidental

D. An automobile accident due to negligence. Rationale The losses should be accidental, measurable and determinable, not catastrophic with a large number of homogeneous exposure units that allow for forecasting of losses. An automobile accident due to negligence would be insurable. Intentionally burning down your house is not accidental. Gambling losses are not accidental. War is often catastrophic.

Which of the following is most likely to be an insurable risk? A) Intentionally burning down your house. B) War. C) Gambling losses. D) An automobile accident due to negligence.

The Dependency Method

Which of the following is not a valid method for determining life insurance needs? Question 4 options: The Financial Needs Method The Human Life Value Method The Dependency Method The Capitalization of Earnings Method

B. The readjustment period typically lasts for one to two years following the death of the breadwinner. Rationale Most clients do not want their dependents suffering a decrease in their standard of living. Final expenses and debts are a key feature of this method because they may be substantial and are often due close to death. The so-called blackout period is the period of time between when Social Security survivor benefits stop and retirement benefits begin.

Which of the following is true regarding the financial needs method used to determine life insurance needs? A) Most clients are fine with their dependents suffering a decrease in their standard of living. B) The readjustment period typically lasts for one to two years following the death of the breadwinner. C) Final expenses and debts are not a key feature of this method because they are generally limited in amount and often not due for a long time after death. D) The so-called blackout period is the period of time between the insured's death and when the insurance death benefit is actually paid out.

Transfer/share risk

Which of the following measures is appropriate for a risk that has a low frequency of occurrence and a high severity? Avoid Risk Transfer/share risk Reduce risk Retain risk

1 only: Term life insurance is considered "pure insurance." CORRECT OPTION 2: Term life insurance premiums are significantly LESS expensive than premiums for permanent policies.

Which of the following statements is/are correct? 1. Term life insurance is considered "pure insurance." 2. Term life insurance premiums are significantly more expensive than premiums for permanent policies. 1 only 2 only Both 1 and 2 Neither 1 nor 2

Neither 1 nor 2 -Loss severity refers to the potential size or financial damage of a loss. -Loss Frequency is the expected number of losses that will occur within a given period of time.

Which of the following statements is/are correct? 1. Loss frequency refers to the potential size or financial damage of a loss. 2. Loss severity is the expected number of losses that will occur within a given period of time. Question 1 options: 1 only 2 only Both 1 and 2 Neither 1 nor 2

B. Injuring a passenger in your vehicle during an auto accident that was your fault. Rationale Injury to another is considered a liability risk. The other three examples are personal risks.

Which of the following would not be considered a personal risk? A) Becoming disabled due to a car accident. B) Injuring a passenger in your vehicle during an auto accident that was your fault. C) Dying at age 42 given a normal life expectancy of age 80. D) Being diagnosed with a curable form of cancer.

Part D

Which part of the personal automobile policy (PAP) addresses Coverage for damage to your vehicle? Part A Part B Part C Part D

Part A

Which part of the personal automobile policy (PAP) addresses Liability Coverage? Part A Part B Part C Part D

Part B

Which part of the personal automobile policy (PAP) addresses Medical Payments Coverage? Part A Part B Part C Part D

Part C

Which part of the personal automobile policy (PAP) addresses uninsured or under insured motorists? Part A Part B Part C Part D

A. The selling of Don's Jet Ski is an example of risk reduction. Rationale The selling of the Jet Ski is an example of risk avoidance (risk avoidance is the avoidance of an activity so that a financial loss cannot be incurred). Risk reduction is the implementation of activities that will result in the reduction of the frequency and / or severity of the loss. Not purchasing life insurance is an example of risk retention (the state of being exposed to a risk and personally retaining the potential for the loss). Risk transfer is the transferring or shifting of the risk of loss through insurance or warranty.

You recently met with your client, Don, age 40. Don is widowed and has one dependent child. During your meeting with him you discussed the concept of risk management. Which of the following statements regarding the ways to manage risk is incorrect? A) The selling of Don's Jet Ski is an example of risk reduction. B) Not purchasing life insurance is an example of risk retention. C) Purchasing a warranty is an example of risk transfer. D) Insurance is not necessary for every risk of financial loss.

A. An insurance contract is unilateral, where both parties agree to a legally enforceable promise. Rationale An insurance contract is unilateral, where one party agrees to a legally enforceable promise.

You recently met with your client, Tripp, to discuss his insurance policies. Tripp was reading a book on contracts and wanted to know how his insurance contract related to the material he was reading and to his circumstances. During your conversation, Tripp made several statements to clarify that he understood insurance. Which of the following statements would you have told him was incorrect? A) An insurance contract is unilateral, where both parties agree to a legally enforceable promise. B) The insurance contract is aleatory, where unequal monetary values are exchanged. C) An insurance contract is based on the principal of indemnity, where the insured cannot make a profit from a claim on insurance. D) An insurance contract is a contract of adhesion, where the insured accepts the contract as written and is unable to negotiate the terms of the contract.

C. Zach and Laura should probably have an open perils and replacement value for all property covered under the homeowners policy. Rationale Zach and Laura should probably have an open perils and replacement value for all property covered under the homeowners policy because it provides the best coverage. Most policies do not cover all possible losses. For example, they often exclude losses due to earth movement, mold, rising water, sewer backup, war, nuclear accidents, neglect, dogs and intentional acts. Most policies require additional coverage for certain valuable collections or items, like guns, wine, coins, stamps, cash and jewelry. Broad peril coverage means the insurance company covers many perils however they are specific in nature.

Zach and Laura recently purchased a new home. They came to your office to ask several questions about their homeowner's policy. Which of the following is true regarding homeowners insurance? A) Most policies cover all possible losses. B) Most policies cover all possessions within the home. C) Zach and Laura should probably have an open perils and replacement value for all property covered under the homeowners policy. D) Broad peril coverage means the insurance company covers "all" perils.