Insurance Concepts and Principles of Risk

Question 1

In the insurance business, risk can be be defined as:sharing the possibility of a lossuncertainty regarding the futureuncertainty regarding financial lossuncertainty regarding when death will occur

Accepted Answer

Uncertainty regarding financial lossThe concept of insurance developed from the need to minimize the adverse effects of risk associated with the probability of financial loss.

Question 2

Which of the following risks is insurable?pure risksgamblingspeculative risksinvesting

Accepted Answer

Pure RisksOnly pure risks are insurable because they involve only the chance of loss. They are pure in the sense that they do not mix both profits and losses. Insurance is concerned with the economic problems created by pure risks

Question 3

Buying insurance is one of the most effective ways of:avoiding risktransferring riskreducing riskretaining risk

Accepted Answer

Transferring RiskThrough the insurance contract, the burden of carrying the risk and indemnifying the financial loss is transferred from the individual to the insurance company.

Question 4

Which of the following best describes the function of insurance?

It is a form of legalized gambling
It spreads financial risk over a large group to minimize the loss to any one individual
It protects against living too long
It creates and protects risks

Accepted Answer

It spreads the financial risk over a large group to minimize the loss to any one individualThe function of insurance is to safeguard against financial loss by having the losses of few paid by the contribution of many who are exposed to the same risk.

Question 5

All of the following are elements of an insurable risk EXCEPT:the loss must be due to chancethe loss must be predictablethe loss must be catastrophicthe loss must have a determinable value

Accepted Answer

The loss must be catastrophicOne of the criteria for an insurable risk is that is NOT be catastrophic. A principle of insurance holds that only a small portion of a given group will experience loss at any one time. Risks that would adversely affect large numbers of people or large amounts of property - wars or floods, for example - are typically not insurable

Question 6

The amount of money an insurer sets aside to pay future claims is called:a premiuma reservea dividendan accumulated interest

Accepted Answer

A reserveReserves can be defined as the amounts that are set aside to fulfill the insurance company’s obligation to pay future claims. The reserve is compiled from past premium payments and interest.

Question 7

Which of the following constitutes and insurable interest?

The policyowner must expect to benefit from the insured’s death
the policyowner must expect to suffer a loss when the insured dies or becomes disabled
the beneficiary, by definition, has an insurable interest of the insured.
the insured must have a personal or business relationship with the beneficiary

Accepted Answer

The policyowner must expect to suffer a loss when the insured dies or becomes disabledInsurable interest requires the policyowner to benefit from the insured’s continuing to live or enjoy good health or to suffer a loss when the insured dies or is disabled.

Question 8

Which of the following statements describes the parol evidence rule?

A written contract cannot be changed once it is signed
An oral contract cannot be modified by written evidence
A written contract cannot be changed by oral evidence
An oral contract takes precedence over any earlier written contracts

Accepted Answer

A written contract cannot be changed by oral evidenceThe parol evidence rule states that when parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.

Question 9

Which of the following factors determines whether policy dividends will be paid on a participating policy?Reserves and experienceexpenses and claims costsinterest and benefitspremiums and renewability

Accepted Answer

Expenses and claims costsIf expenses and claims costs are less than expected, dividends are likely to be paid.

Question 10

A licensed agent legally represents:the insurerthe applicant/insuredthe state insurance departmenthimself or herself

Accepted Answer

The insurerAn agent is an individual who has been authorized by an insurer to be its representative to the public and to offer for sale its goods and services

Question 11

All of the following statements regarding policy replacement are correct EXCEPT:

replacement involves convincing a policyholder to lapse or terminate an existing policy and to purchase another
interrupting one cash value insurance plan to begin another could cause serious financial problems for the policyowner
even if the customer wants to replace his or her existing policy, an agent can effect a policy replacement only by following the replacement regulations in the agent’s state
Premiums for replacement policies are generally lower than premiums for the existing policies they replace

Accepted Answer

**Premiums for replacement policies are generally lower than premiums for the existing policies they replace

The new policy will probably be at a higher premium rate because it will be based on the insured’s then-attained age

Question 12

With regard to insurable risks, which of the following statements is NOT correct?

Only pure risks are insurable
An insurable risk must involve loss that is within the insured’s control
Insurers will not insure risks that are catastrophic in nature
An insurable risk mus be measurable

Accepted Answer

An insurable risk must involve loss that is within the insured’s controlTo be insurable, a risk must involve the chance of loss that is fortuitous and outside the insured’s control

Question 13

On August 9, Albert made an application for life insurance that his agent submitted a day later without a premium payment. On August 21, the insurer issued the policy as applied for and on August 24, the agent delivered the policy and collected the initial premium. On what day was the contract offer made?

-August 9th, 10th, 21st, or 24th

Accepted Answer

August 21stIf an applicant does not submit an initial premium with the application, the applicant is inviting the insurance company to make a contract offer. The insurer can respond by issuing a policy (the offer) that the applicant can accept by paying the premium when the policy is delivered.

Question 14

All statements made by an applicant in an application for life insurance are considered to be:WarrantiesAffirmationsRepresentationsDeclarations

Accepted Answer

RepresentationsMost states require that life insurance policies contain a provision that all statements made in the application be deemed representations, not warranties. A representation is a statement made by the applicant that the applicant believes to be true. A warranty is a statement made by the applicant that is guaranteed to be true. If an insurance company rejects a claim on the basis of representation, the company bears the burden of proving materiality

Question 15

Which of the following legal terms indicates that a life insurance contract contains the enforceable promises of only one party?AdhesionUnilateralConditionalAleatory

Accepted Answer

UnilateralInsurance contracts are unilateral in that only one party - the insurer - makes any kind of enforceable promise

Question 16

Which of the following types of agent authority is specifically set forth in writing in the agent’s contract?ExpressImpliedApparentPersonal

Accepted Answer

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

Question 17

Assume a home catches fire after it is struck by lightning and the fire destroys its structure and contents. By insurance definition, the fire is:the riskthe hazardthe perilthe proximate clause

Accepted Answer

The PerilA peril is the immediate specific event causing loss and giving rise to risk. When a building burns, fire is the peril.

Question 18

What constitutes “consideration” for a life insurance policy?Application and initial premiumAgent’s commissionAdhesion feature of the contractPolicy’s benefits

Accepted Answer

Application and the initial premiumConsideration is the value given in exchange for the promises sought. In an insurance contract, consideration is given by the applicant in exchange for the insurer’s promise to pay benefits, and it consists of the application and the initial premium.

Question 19

Statements made by an applicant for life insurance that are guaranteed to be true are:WarrantiesMaterial statementsrepresentationsDeclarations

Accepted Answer

WarrantiesA warranty in insurance is a statement made by the applicant that is guaranteed to be true. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract. Warranties are presumed to be material because they affect the insurer’s decision to accept or reject an applicant.

Question 20

Which of the following insurance companies is owned by its policyholders?Service insurerStock insurerReinsurerMutual insurer

Accepted Answer

Mutual insurerMutual insurers are owned by the policyholders. Anyone purchasing insurance from a mutual insurer is both a customer and an owner.

Term	Definition
In the insurance business, risk can be be defined as: sharing the possibility of a loss uncertainty regarding the future uncertainty regarding financial loss uncertainty regarding when death will occur	Uncertainty regarding financial loss The concept of insurance developed from the need to minimize the adverse effects of risk associated with the probability of financial loss.
Which of the following risks is insurable? pure risks gambling speculative risks investing	Pure Risks Only pure risks are insurable because they involve only the chance of loss. They are pure in the sense that they do not mix both profits and losses. Insurance is concerned with the economic problems created by pure risks
Buying insurance is one of the most effective ways of: avoiding risk transferring risk reducing risk retaining risk	Transferring Risk Through the insurance contract, the burden of carrying the risk and indemnifying the financial loss is transferred from the individual to the insurance company.
Which of the following best describes the function of insurance? It is a form of legalized gambling It spreads financial risk over a large group to minimize the loss to any one individual It protects against living too long It creates and protects risks	It spreads the financial risk over a large group to minimize the loss to any one individual The function of insurance is to safeguard against financial loss by having the losses of few paid by the contribution of many who are exposed to the same risk.
All of the following are elements of an insurable risk EXCEPT: the loss must be due to chance the loss must be predictable the loss must be catastrophic the loss must have a determinable value	The loss must be catastrophic One of the criteria for an insurable risk is that is NOT be catastrophic. A principle of insurance holds that only a small portion of a given group will experience loss at any one time. Risks that would adversely affect large numbers of people or large amounts of property - wars or floods, for example - are typically not insurable
The amount of money an insurer sets aside to pay future claims is called: a premium a reserve a dividend an accumulated interest	A reserve Reserves can be defined as the amounts that are set aside to fulfill the insurance company’s obligation to pay future claims. The reserve is compiled from past premium payments and interest.
Which of the following constitutes and insurable interest? The policyowner must expect to benefit from the insured’s death the policyowner must expect to suffer a loss when the insured dies or becomes disabled the beneficiary, by definition, has an insurable interest of the insured. the insured must have a personal or business relationship with the beneficiary	The policyowner must expect to suffer a loss when the insured dies or becomes disabled Insurable interest requires the policyowner to benefit from the insured’s continuing to live or enjoy good health or to suffer a loss when the insured dies or is disabled.
Which of the following statements describes the parol evidence rule? A written contract cannot be changed once it is signed An oral contract cannot be modified by written evidence A written contract cannot be changed by oral evidence An oral contract takes precedence over any earlier written contracts	A written contract cannot be changed by oral evidence The parol evidence rule states that when parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.
Which of the following factors determines whether policy dividends will be paid on a participating policy? Reserves and experience expenses and claims costs interest and benefits premiums and renewability	Expenses and claims costs If expenses and claims costs are less than expected, dividends are likely to be paid.
A licensed agent legally represents: the insurer the applicant/insured the state insurance department himself or herself	The insurer An agent is an individual who has been authorized by an insurer to be its representative to the public and to offer for sale its goods and services
All of the following statements regarding policy replacement are correct EXCEPT: replacement involves convincing a policyholder to lapse or terminate an existing policy and to purchase another interrupting one cash value insurance plan to begin another could cause serious financial problems for the policyowner even if the customer wants to replace his or her existing policy, an agent can effect a policy replacement only by following the replacement regulations in the agent’s state Premiums for replacement policies are generally lower than premiums for the existing policies they replace	**Premiums for replacement policies are generally lower than premiums for the existing policies they replace The new policy will probably be at a higher premium rate because it will be based on the insured’s then-attained age
With regard to insurable risks, which of the following statements is NOT correct? Only pure risks are insurable An insurable risk must involve loss that is within the insured’s control Insurers will not insure risks that are catastrophic in nature An insurable risk mus be measurable	An insurable risk must involve loss that is within the insured’s control To be insurable, a risk must involve the chance of loss that is fortuitous and outside the insured’s control
On August 9, Albert made an application for life insurance that his agent submitted a day later without a premium payment. On August 21, the insurer issued the policy as applied for and on August 24, the agent delivered the policy and collected the initial premium. On what day was the contract offer made? -August 9th, 10th, 21st, or 24th	August 21st If an applicant does not submit an initial premium with the application, the applicant is inviting the insurance company to make a contract offer. The insurer can respond by issuing a policy (the offer) that the applicant can accept by paying the premium when the policy is delivered.
All statements made by an applicant in an application for life insurance are considered to be: Warranties Affirmations Representations Declarations	Representations Most states require that life insurance policies contain a provision that all statements made in the application be deemed representations, not warranties. A representation is a statement made by the applicant that the applicant believes to be true. A warranty is a statement made by the applicant that is guaranteed to be true. If an insurance company rejects a claim on the basis of representation, the company bears the burden of proving materiality
Which of the following legal terms indicates that a life insurance contract contains the enforceable promises of only one party? Adhesion Unilateral Conditional Aleatory	Unilateral Insurance contracts are unilateral in that only one party - the insurer - makes any kind of enforceable promise
Which of the following types of agent authority is specifically set forth in writing in the agent’s contract? Express Implied Apparent Personal	Express Express authority is the authority a principal gives to its agent. Express authority is granted by means of the agent’s contract, which is the principal’s appointment of the agent to act on its behalf.
Assume a home catches fire after it is struck by lightning and the fire destroys its structure and contents. By insurance definition, the fire is: the risk the hazard the peril the proximate clause	The Peril A peril is the immediate specific event causing loss and giving rise to risk. When a building burns, fire is the peril.
What constitutes “consideration” for a life insurance policy? Application and initial premium Agent’s commission Adhesion feature of the contract Policy’s benefits	Application and the initial premium Consideration is the value given in exchange for the promises sought. In an insurance contract, consideration is given by the applicant in exchange for the insurer’s promise to pay benefits, and it consists of the application and the initial premium.
Statements made by an applicant for life insurance that are guaranteed to be true are: Warranties Material statements representations Declarations	Warranties A warranty in insurance is a statement made by the applicant that is guaranteed to be true. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract. Warranties are presumed to be material because they affect the insurer’s decision to accept or reject an applicant.
Which of the following insurance companies is owned by its policyholders? Service insurer Stock insurer Reinsurer Mutual insurer	Mutual insurer Mutual insurers are owned by the policyholders. Anyone purchasing insurance from a mutual insurer is both a customer and an owner.
With regard to life insurance, all of the following statements are correct EXCEPT All individuals are considered to have insurable interests in themselves Spouses are automatically considered to have insurable interests in each other A creditor has an insurable interest in a debtor Insurable interest must be maintained throughout the life of the contract	NOT TRUE - Insurable interest must be maintained throughout the life of the contract Insurable interest is required only when a contract is issued; it does not have to be maintained throughout the life of the contract, nor is it necessary at the time of the claim.
A life insurance company is organized in Orlando where it maintains its home office. In Florida, the company is classified as: Domestic company local company foreign company preferred company	Domestic company An insurer is termed “domestic” in a state when it is incorporated in that state
A life insurance company is organized in Illinois, with its home office in Philadelphia, is licensed to conduct business in Wisconsin. In Wisconsin, this company is classified as: Domestic company Alien company foreign company regional company	Foreign company A foreign company operates within a state in which it is not chartered and in which its home office is not located
To whom does the cash value of a life insurance policy belong? Policyowner Insured Insurer Beneficiary	Policyowner The accumulation that builds over the life of a policy is called the “cash value,” and it belongs to the policyowner, who may or may not be the insured.
Frank is the insured in a $40,000, 5-year level term policy issued in 2013. He died in 2019. His beneficiary received: Nothing $20,000 $40,000 The cash value of the policy	Nothing In this case, the insured died after his term policy had expired. As a result, his beneficiary received nothing.
All of the following statements regarding assignment of a life insurance policy are correct EXCEPT: To secure a loan, the policy can be transferred temporarily to the lender as security for the loan The policyowner must obtain approval from the insurance company before a policy can be assigned The life insurance company assume no responsibility for the validity of an assignment The life insurance company must be notified in writing by the policyowner of any assignment	NOT TRUE - **The policyowner must obtain approval from the insurance company before a policy can be assigned. Policyowners actually own their policies and may do with them as they please. They can even give them away, just as they can give away any other kind of property they own. Nevertheless, they must notify the insurance company in writing of any transfers of ownership (assignments). The company must then accept the validity of the assignments without question.
After a family's breadwinner dies, the "blackout period" generally can be defined as the period: during which children are living at home That begins when the youngest child turns 16 and ends when the surviving parent retires During which children are in school From the surviving parent's retirement to death	That begins when the youngest child turns 16 and ends when the surviving parent retires The "blackout period" is the time during which no social security benefits are payable to a surviving spouse. This period begins when the youngest child reaches age 16 and continues until the spouse retires.
A company with 3 partners is considering a buy-sell plan. All of the following statements pertaining to buy-sell plans and this partnership are correct EXCEPT: An insured entity buy-sell agreement designates the partnership as the beneficiary If they choose a cross-purchase plan, each partner would have to purchase 2 policies for a total of 6 plans No benefits will accrue to the partnership from the buy-sell agreement until one of the partners dies If they choose an entity buy-sell agreement, the business would be party to the agreement	NOT TRUE - No benefits will accrue to the partnership from the buy-sell agreement until one of the partners dies A buy-sell plan offers several advantages to the partners while they are all living. The partners know they will have a legal right to buy a deceased partner's share of the business, and the family and heirs of the partners know that the partnership interest will be disposed of at a fair price. Further, the money needed to purchase the deceased partner's interest will be available when needed. All this adds up to security and peace of mind for all involved, including the employees of the business.
Bill names his church as the beneficiary of his $300,000 life insurance policy. When Bill dies, who is responsible for the income taxes payable on the lump-sum proceeds received by the church? Bill's estate is responsible Bill's Church is responsible No income tax is payable on the death proceeds Bill's estate and Bill's church split the tax	No income tax is payable on the death proceeds Lump-sum proceeds payable upon the death of the insured are not subject to income tax, no matter who the beneficiary is.
Which provision of a life insurance policy states that the application is part of the contract? Consideration clause Insuring Clause Entire contract Clause Incontestable clause	Entire contract clause The entire contract clause states that the policy document; the application, which is attached to the policy; and any attached riders constitute the entire contract. The policy cannot refer to any outside documents as being part of the contract.
Ron, the insured, dies during the grace period for his $100,000 life insurance policy. Considering that the premium on the policy has not been paid, what happens? The premium is cancelled because the insured died during the grace period The amount of the premium is deducted from the policy proceeds paid to the beneficiary The premium due, plus a 10% penalty, is charged against the policy The beneficiary must pay the premium after the death claim is paid	The amount of the premium is deducted from the policy proceeds paid to the beneficiary If the premium of a policy has not been paid and the insured dies during the grace period, the policy benefit is payable. However, the premium amount due is deducted from the benefits paid to the beneficiary
Which of the following is stated in the considerations clause of a life insurance policy? Insured's risk classification Insured's general health questions Amount and frequency of premium payments Benefits payable upon the insured's death	Amount and frequency of premium payments The consideration clause specifies the amount and frequency of premium payments that the policyowner must make to keep the insurance in force
`John stopped paying premiums on his permanent life insurance policy 8 years ago though he never surrendered it. He is still insurable and has no outstanding loan against the policy. The company probably will decline to reinstate the policy because the time limit for reinstatement has expired. The time usually is: 6 months 1 year 2 years 3 years of as long as 7 years`	3 years or as long as 7 years There is a limited period of time in which policies may be reinstated after lapse. This period is usually 3 years, but may be as long as 7 years, in some cases.
All of the following statements pertaining to reinstatement of a life insurance policy are correct EXCEPT a suicide exclusion period is renewed with a reinstated policy When reinstating a policy, the insurer may charge the policyowner for past-due premiums When reinstating a policy, the insurer may charge the policyowner for interest on past-due premiums a new contestable period usually becomes effective in a reinstated policy	NOT TRUE - A suicide exclusion period is renewed with a reinstated policy When reinstating a life policy, no new suicide exclusion goes into effect
Leland elects to surrender his whole life policy for a reduced paid-up policy. the cash value of his new policy will Continue to increase Decrease gradually Remain the same as in the old policy Decrease by 50% immediately	Continue to increase When Leland surrenders his whole life policy for a reduced paid-up policy, the face value is reduced but the cash value continues to increase.
Kevin, the insured in a $200,000 life insurance policy, and his sole beneficiary, Lynda, are killed instantly in a car accident. Under the Uniform Simultaneous Act, to whose estate will the policy proceeds be paid? paid to Lynda's estate paid to Kevin's estate paid equally to both Kevin's and Lynda's estate Escheat to the state	paid to Kevin's estate Under the uniform simultaneous death act, if the insured and primary beneficiary are killed in the same accident and there is not sufficient evidence to show who died first, the policy proceeds are to be distributed as if the insured died last. Kevin's estate would receive the proceeds because Lynda, the beneficiary, was deemed to have predeceased Kevin, and no other beneficiary was named.
When a policyowner cannot exercise rights of ownership without the policy beneficiary's consent, the beneficiary is designated: Vested Contractual Irrevocable Primary	irrevocable If a beneficiary is named irrevocable, the policyowner gives up the right to change that beneficiary, and unless otherwise specified in the policy, the owner cannot take any action that would affect the right of that beneficiary to receive the full amount of the insurance at the insured's death. This includes taking out a policy loan or surrendering the policy.
All of the following statements about term insurance are correct EXCEPT: it pays a benefit only if the insured dies during a specified period level, decreasing, and increasing are basic forms of term insurance cash values build during the specified period it provides protection for a temporary period of time	NOT TRUE - cash values build over time There are no cash values in term policies
Bob purchases a $50,000, 5-year level term policy. All of the following statements about Bob's coverage are correct EXCEPT: The policy provides a straight, level $50,000 of coverage for 5 years If the insured dies at any time during the 5 years, his beneficiary will receive the policy's face value If the insured dies after the specified 5 years, only the policy's cash value will be paid If the insured lives beyond the 5 years, the policy expires and no benefits are payable	NOT TRUE - if the insured dies after the specified 5 years, only the policy's cash value will be paid If the insured lives beyond the 5 year period, the policy expires and no benefits are payable. There are no cash values to term policies.
Mrs. Williamson purchases a 5-year, $50,000 term policy with an option to renew. Which of the following statements about the policy's renewability are CORRECT? The premium for the renewal period will be the same as the initial period The premium for the renewal period will be higher than the initial period The premium for the renewal period will be the same as the initial period, but a one-time service charge will be assessed upon renewal The premium for the renewal period will be lower than the initial period	The premium for the renewal period will be higher than the initial period Premiums for the renewal period will be higher because of the insured's advanced age and, thus, increased risk.
Joanna and her husband, Tom, have a $40,000 annuity that pays them $200 a month. Tom dies and Joanna continues receiving the $200 monthly check as long as she lives. When Joanna dies, the company ceases payment. This is an example of: installment refund annuity joint and full survivor annuity life annuity cash refund annuity	Joint and full survivor annuity The joint and full survivor option provides for payment of the annuity to two people. If either person dies, the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone.

Insurance Concepts and Principles of Risk

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In the insurance business, risk can be be defined as:
sharing the possibility of a loss
uncertainty regarding the future
uncertainty regarding financial loss
uncertainty regarding when death will occur

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