Deck 8: Insuring Your Life

Question 1

Insurance agents are legally required to disclose their commissions in an insurance policy.

Answer 1

False

Question 2

Underwriters can predict whether or not you will suffer a loss this year.

Answer 2

False

Question 3

Risk avoidance involves asking an insurance company to take over the risk in exchange for a small payment.

Answer 3

False

Question 4

Social Security survivor's benefits are intended to provide basic, minimum support to families faced with the loss of a principal wage earner.

Question 5

Your need for additional life insurance can be determined by looking at the difference between your family's available financial resources after your death and your family's total economic needs.

Question 6

Underwriters use life expectancy figures to look at overall longevity for various age groups and also consider specific factors related to an applicant's health, habits, and experiences.

Question 7

Which of the following statements regarding insurance underwriting is true?

A)Insurance underwriters perform any activity that reduces the chance that a loss will occur.
B)Insurance underwriters perform a process used to avoid an act that would create a risk.
C)Insurance underwriters help insurers determine the insurance needs of the potential insured.
D)Insurance underwriters lessen the severity of loss after it occurs.
E)Insurance underwriters design rate classification schedules so that people pay premiums that reflect their chance of loss.

Question 8

The basic purpose of insurance is to:

A)protect the health of you and your family.
B)protect you and your family from economic losses.
C)supplement the income of you and your family.
D)shield you and your family from bad decisions.
E)protect you and your family from nonfinancial losses.

Question 9

The purchase of insurance is a common form of _____ by the insured.

A)loss prevention
B)risk transfer
C)risk assumption
D)risk avoidance
E)loss control

Question 10

Risk avoidance is attractive when the cost of avoidance is less than the cost of handling it some other way.

Question 11

Insurance underwriting is best described as:

A)the process used by insurers to decide who can be insured and to determine applicable rates that will be charged for premiums.
B)a set of activities used to identify the risk and rewards of investing an insured's funds on marketable securities.
C)production-related activities performed primarily by agents on the field.
D)a process of developing taxing structures for insurance policies.
E)a function most often performed by an actuary.

Question 12

Insurance is a tool that can reduce your _____ risk.

A)social
B)mental
C)economic
D)accident
E)exposure

Question 13

Life insurance proceeds paid to your heirs are not usually subject to state or federal income taxes.

Question 14

Only one agent should be consulted for discussing personal financial needs and insurance requirements while buying life insurance.

Question 15

Guaranteed renewable term insurance allows you to renew a policy for another term without qualifying medically.

Question 16

Avoiding alcoholic beverages while driving is an example of loss prevention.

Question 17

The primary purpose of life insurance is to provide a tax-advantaged investment plan.

Question 18

If you have a high-risk hobby, then you could be required to pay more for life insurance than others pay.

Question 19

The need for life insurance increases with children.

Question 20

The availability of group coverage through employee benefit programs should be considered when developing a life insurance program.

Question 21

A(n)_____ policy is a contract between an individual and a company under which the company agrees to reimburse the individual for losses suffered by him or her according to specified terms.

A)underwriting
B)risk
C)insurance
D)debt
E)reimbursement

Question 22

While performing needs analysis, when determining the available resources to offset the economic needs, you would generally ignore:

A)Social Security survivor's benefits .
B)the children's educational qualifications.
C)the earning potential of the surviving spouse.
D)proceeds from assets that can be liquidated comfortably.
E)the employer-provided group life insurance.

Question 23

Families faced with the loss of a principal wage earner receive Social Security benefits:

A)that are deducted from the insurance proceeds, for the purpose of tax calculation.
B)that will pay any additional taxes on the benefit amount.
C)from the government that are intended to provide basic, minimum support.
D)that amount to 5 to 10 times the current income of the principal wage earner.
E)that will repay all the financial obligations of the principal wage earner.

Question 24

_____ involves abstaining from any activity that will affect an individual financially.

A)Risk avoidance
B)Loss prevention
C)Loss control
D)Risk assumption
E)Premium collection

Question 25

Underwriting refers to:

A)selling insurance at a premium less than that of the competitors.
B)the payment of a claim.
C)a method for developing policy wording.
D)the determination of which exposures to insure.
E)restoring the claimant to the financial condition prior to loss.

Question 26

Insurance companies use _____ to determine whom they will insure and what they will charge for the coverage.

A)Social Security survivor's benefits
B)the needs analysis method
C)underwriting
D)risk assumption
E)loss control

Question 27

Which of the following statements regarding the multiple-of-earnings method is true?

A)The multiple-of-earnings method determines the amount of life insurance coverage needed by multiplying the net annual earnings of the insured by some selected number.
B)The multiple-of-earnings method determines the amount of life insurance coverage needed by multiplying the gross annual earnings of the insured by some selected number.
C)The multiple-of-earnings method considers the insured's financial obligations to compute the insurance premium amount.
D)The multiple-of-earnings method subtracts specific financial obligations and resources from the gross annual earnings of the insured to determine the amount of annual insurance premium.
E)The multiple-of-earnings method multiplies the amount of tax benefits available to the insured when the life insurance benefit is paid.

Question 28

Insurance companies make profit by:

A)charging consultation fees to the insured.
B)avoiding the risk of loss of the insured.
C)charging underwriting fees from insurance agents.
D)paying out less than the sum of the premiums and the earnings on them.
E)giving less than the amount mentioned in the policy to the insured.

Question 29

Which of the following statements regarding risk avoidance is true?

A)Risk avoidance is any activity that helps evade an act that creates a risk.
B)Risk avoidance is any activity that increases the chance that a loss will occur.
C)Risk avoidance is any activity that lessens the severity of loss once it occurs.
D)Risk avoidance is an act that reduces the probability that a loss will occur.
E)Risk avoidance is an effective way to handle small exposures to loss when insurance is too expensive.

Question 30

_____ determines the amount of life insurance coverage required for an individual by considering his or her financial obligations and available financial resources in addition to life insurance.

A)The savings analysis method
B)The needs analysis method
C)The earnings analysis method
D)The liabilities analysis method
E)The borrowings analysis method

Question 31

While using the needs analysis approach to determine how much life insurance to purchase, you should:

A)add available resources to your family's total economic needs.
B)multiply your gross annual earnings by the size of your family.
C)purchase the equivalent of your current annual income.
D)divide your gross annual earnings by the size of your family.
E)deduct available resources from your family's total economic needs.

Question 32

Insurance companies use actuarial data to measure the:

A)creditworthiness of a given population.
B)risk of loss for a given population.
C)wealth of a given population.
D)gross productivity of a given population.
E)age of a given population.

Question 33

The _____ method is the most detailed method of determining the amount of life insurance coverage needed for an individual.

A)human life value
B)multiple-of-earnings
C)risk assessment
D)economic identification
E)needs analysis

Question 34

A life insurance policy can be structured so that the death benefits are paid directly to a named beneficiary, which means that:

A)the life insurance proceeds are paid directly to named beneficiaries after payment of state or federal income taxes.
B)the cash benefits from your life insurance policy cannot be claimed by creditors.
C)the life insurance proceeds are invested for the beneficiary.
D)the cash benefits are remitted to the beneficiary only after the beneficiary pays estate taxes.
E)the life insurance company makes additional payments to the family of the insured so that they continue to live comfortably.

Question 35

The primary purpose of life insurance is to provide:

A)financial security for your dependents after your death.
B)protection from creditors and lawsuits before your death.
C)tax-advantaged investments for your family.
D)high-yield investments for you and your family.
E)liquidity to expand your business operations.

Question 36

The probability of a loss occurring can be reduced by:

A)risk observance.
B)loss prevention.
C)risk assumption.
D)loss retention.
E)insurance.

Question 37

The preferred technique for determining how much life insurance coverage is needed for an individual is:

A)computing the human life value.
B)using the probability of death each year, prevailing interest rates, and assumed inflation rates to find the discounted present value of a future income stream.
C)assessing the family's total economic needs and subtracting the financial resources available to meet those needs.
D)estimating the sum of money which, when paid in installments, will produce the same income as the person would have earned after deducting assumed amounts for taxes and personal maintenance expenses.
E)using the multiple-of-earnings method adjusted for occupation.

Question 38

The underwriting function of insurance companies is designed to ensure that premiums are based on:

A)income levels.
B)savings for the insured.
C)the value of gains.
D)the chance of losses.
E)expense levels.

Question 39

Jonathan estimates that financial resources worth $2,000,000 will be necessary to protect his family after his death. What amount of insurance, as per the needs analysis method, should Jonathan purchase if he has current financial resources worth $1,000,000?

A)$1,000,000
B)$2,000,000
C)$2,500,000
D)$1,500,000
E)$500,000

Question 40

From the standpoint of a person buying insurance, the central purpose of insurance should be:

A)to transfer the risk of serious losses.
B)to collect for all accidental losses.
C)to profit from uncertain future events.
D)to contribute to charitable purposes.
E)to reduce the cost of taking small risks.

Question 41

A(n)_____ policy is a type of term insurance.

A)straight term
B)whole life
C)increasing term
D)variable term
E)risk assumption

Question 42

Term life insurance is characterized by:

A)level annual premiums throughout one's life.
B)lower initial premiums than other types of insurance.
C)permanent coverage for young applicants.
D)non-convertibility.
E)cash value accumulation.

Question 43

Which of the following is a characteristic of a universal life insurance policy?

A)No flexible premiums
B)Cash value lower than the death benefit
C)Absence of a savings feature
D)Fixed premiums and protection levels
E)Lighter fees than other insurance policies

Question 44

It can be difficult to evaluate the true cost of a _____ policy at the time of purchase.

A)term life insurance
B)whole life insurance
C)universal life insurance
D)variable life insurance
E)mortgage life insurance

Question 45

It is advisable to purchase life insurance from an insurance company that has been in business for at least _____ years.

A)5
B)10
C)19
D)15
E)25

Question 46

Group life insurance is a(n):

A)term policy designed to pay off the mortgage balance in the event of the borrower's death.
B)insurance that is sold in conjunction with the sale of a group of assets.
C)insurance in which benefits are a function of the returns being generated on the investments selected by the policyholder.
D)insurance that provides a master policy for a group.
E)insurance that issues many master policies for an insured.

Question 47

Which of the following leads to the payment of a higher insurance premium by the potential insured?

A)Job promotion of the potential insured
B)High-paying career of the potential insured
C)Obesity of the potential insured
D)Childbirth in the family of the potential insured
E)Wedding of the potential insured

Question 48

If a term life insurance is convertible, the policy can be:

A)transferred to the life of another person.
B)exchanged for cash.
C)changed to health or disability protection.
D)changed to a comparable whole life policy.
E)revised as needed by the insurer.

Question 49

Henry must make set premium payments on his insurance policy until he dies, and if he cancels the policy, he will receive the cash value. His plan is a _____ policy.

A)term life
B)continuous whole life
C)limited payment whole life
D)viatical life
E)group life insurance

Question 50

Universal life insurance is:

A)a deferred premium payment policy.
B)primarily sold to college students.
C)a combined savings\investment plan and insurance policy.
D)a provision for a secondary beneficiary.
E)less expensive than other policy types.

Question 51

The death benefit of a(n)_____ life insurance policy may go down because of poor investment returns.

A)limited payment
B)whole
C)variable
D)group
E)industrial

Question 52

Employers often provide _____ life insurance as a fringe benefit for their full-time employees.

A)group
B)credit
C)mortgage
D)standard
E)home service

Question 53

A life insurance policy with a small face amount where the premium may be collected weekly by agents is termed:

A)credit life insurance.
B)mortgage life insurance.
C)industrial life insurance.
D)special-purpose insurance.
E)group life insurance.

Question 54

Which of the following types of insurance policies provides temporary coverage for a set period?

A)Universal life insurance policy
B)Whole life insurance policy
C)Variable life insurance policy
D)Term life insurance policy
E)Extended life insurance policy

Question 55

You want to pay premiums for 20 years and have your insurance premium obligations finished at that time. However, you feel you will need life insurance for the rest of your life. You should choose a _____ insurance.

A)continuous premium whole life
B)limited payment whole life
C)single premium whole life
D)renewable premium whole life
E)convertible whole life

Question 56

Sales commissions and marketing expenses can increase the costs of a fully loaded _____ policy.

A)term life insurance
B)whole life insurance
C)universal life insurance
D)variable life insurance
E)mortgage life insurance

Question 57

_____ can be both an advantage and a disadvantage of universal life insurance.

A)Flexible premiums
B)Tax features
C)High returns
D)Unbundling premiums
E)Underwriting

Question 58

A(n)_____ provision enables you to purchase the policy again at its expiration.

A)reward
B)renewable
C)loss prevention
D)limited risk
E)arbitration

Question 59

Which of the following represents a disadvantage of a whole life insurance policy?

A)It is difficult to evaluate the true cost of a whole life insurance policy at the time of purchase.
B)A whole life insurance policy provides only temporary coverage for a set period.
C)A whole life insurance policy may require a policyholder to pay higher premiums when the policy is renewed.
D)A whole life insurance policy often provides lower yields than other investment vehicles.
E)A whole life insurance policy does not provide any tax advantages on accumulated earnings.

Question 60

_____ is a relatively   expensive type of decreasing term life insurance.

A)Group life
B)Credit life
C)Industrial life
D)Home service life
E)Whole life

Question 61

Which of the following statements regarding a good insurance agent is true?

A)The agent is aggressive while pursuing business from the potential insured.
B)The agent is recommended by professionals like bankers and attorneys.
C)The agent charges high commissions for providing insurance coverage.
D)The agent replies with fancy buzzwords and generic answers to questions.
E)The agent is the first one to solicit the potential insured's patronage.

Question 62

The settlement option chosen by most policyholders is:

A)lump sum.
B)interest only.
C)fixed amount.
D)fixed time.
E)life income.

Question 63

Which of the following policy features allows the insured to increase coverage periodically without showing proof of insurability?

A)Multiple indemnity clause
B)Guaranteed purchase option
C)Disability clause
D)Paid-up insurance option
E)Extended-term option

Question 64

Marilyn Simms died with a $200,000 life insurance policy. Her husband, Jack, is the primary beneficiary, and their children, Mimi (age 24)and Ann (age 30), are the contingent beneficiaries. All three survive Marilyn. How will the policy proceeds be distributed?

A)$200,000 to Jack
B)$100,000 each to Mimi and Ann
C)$100,000 to Jack and $50,000 each to Mimi and Ann
D)$66,666 each to Jack, Mimi, and Ann
E)$150,000 to Jack and $25,000 each to Mimi and Ann

Question 65

Group life insurance is most likely to be for:

A)variable life.
B)a special purpose.
C)whole life.
D)a term.
E)a family.

Question 66

A grace period permits a policyholder to retain full death protection even though the premium has not been paid for:

A)12 months.
B)6 months.
C)3 months.
D)50 days.
E)31 days.

Question 67

_____ is any activity that keeps loss from occurring.

A)Loss control
B)Risk transfer
C)Loss prevention
D)Risk sharing
E)Loss acceptance

Question 68

A nonforfeiture option guarantees that a policyholder will not lose the policy's:

A)face value.
B)death benefits for survivors.
C)cash value.
D)premium refunds.
E)premium reductions.

Question 69

The policy owner assumes the investment risk with a _____  insurance policy.

A)whole life
B)term life
C)variable life
D)viatical life
E)group life

Question 70

You can learn about the financial strength of an insurance company by checking _____ rating system.

A)the insurance agent's
B)the U.S. Securities and Exchange Commission's
C)Standard & Poor's
D)the Federal Bureau of Investigation's
E)a financial institution ' s

Question 71

_____ is the choice to accept and bear the risk of loss.

A)Loss assumption
B)Risk assumption
C)Risk avoidance
D)Loss avoidance
E)Risk sharing

Question 72

A life insurance agent who takes his or her profession seriously is likely to have earned a professional certification like the:

A)Chartered Financial Analyst.
B)Chartered Life Underwriter.
C)Chartered Financial Advisor.
D)Certified Insurance Agent.
E)Certified Asset Professional.

Question 73

_____ is any activity that lessens the severity of loss once it occurs.

A)Loss control
B)Loss prevention
C)Risk control
D)Risk avoidance
E)Risk sharing

Question 74

Alice is 40 years old and earns $35,000 annually. The multiple-of-earnings method used to determine the amount of life insurance coverage needed for an individual shows that she should have 6.5 times her earnings. How much insurance should Alice have? (Show all work.)