Insurance Concepts and Principles of Risk

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

Which of the following risks is insurable?

• pure risks

• gambling

• speculative risks

• investing

Buying insurance is one of the most effective ways of:

• avoiding risk

• transferring risk

• reducing risk

• retaining risk

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

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 amount of money an insurer sets aside to pay future claims is called:

• a premium

• a reserve

• a dividend

• an accumulated 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

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

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

A licensed agent legally represents:

• the insurer

• the applicant/insured

• the state insurance department

• himself or herself

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

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

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

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

Warranties
Affirmations
Representations
Declarations

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

Adhesion
Unilateral
Conditional
Aleatory

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

Express
Implied
Apparent
Personal

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

What constitutes “consideration” for a life insurance policy?

Application and initial premium
Agent’s commission
Adhesion feature of the contract
Policy’s benefits

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

Warranties
Material statements
representations
Declarations

Which of the following insurance companies is owned by its policyholders?

Service insurer
Stock insurer
Reinsurer
Mutual insurer

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

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

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

To whom does the cash value of a life insurance policy belong?

Policyowner
Insured
Insurer
Beneficiary

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

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

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

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

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

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

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

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

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

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

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

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

When a policyowner cannot exercise rights of ownership without the policy beneficiary's consent, the beneficiary is designated:

Vested
Contractual
Irrevocable
Primary

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

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

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

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