Question 1

________ is an insurance product that will help if you live longer than you expect. For an initial fixed sum or stream of payments, the insurance company agrees to pay you a fixed amount for as long as you live.

Accepted Answer

An annuity is an insurance product that provides a fixed stream of payments to the annuitant for as long as they live. It can be a helpful product for those who are worried about outliving their retirement savings. Life insurance proper provides death benefits to beneficiaries upon the policyholder's death, disability insurance provides income replacement if the policyholder becomes unable to work due to a disability, and health insurance covers medical expenses.

Question 2

The higher the insurance coverage, the more the policyholder can gain from risky activities that make an insurance payoff less likely.

Accepted Answer

Higher insurance coverage typically means the policyholder is better protected financially against losses, but it does not incentivize engaging in riskier activities that would make an insurance payoff less likely. Insurance is designed to mitigate financial loss, not to encourage risk-taking behavior.

Question 3

A basic product of life insurance companies is ________.

Accepted Answer

Life insurance companies offer a range of products including disability insurance, annuities, and health insurance, making all of the above correct.

Question 4

Which of the following pensions does not promise employees a specific retirement benefit?

Accepted Answer

A defined-benefit plan promises employees a specific retirement benefit based on factors such as salary and years of service. An overfunded plan has more assets than liabilities, while an underfunded plan has more liabilities than assets. A defined-contribution plan, on the other hand, does not promise a specific retirement benefit. Contributions are made by both the employer and the employee, and the retirement benefit is determined by the performance of the investments made with those contributions.

Question 5

What insurance protects against liability for harm the insured may cause to others as a result of product failure or accidents?

Accepted Answer

Casualty insurance covers liability for harm caused to others as a result of accidents or product failure. Property insurance covers damage or loss to property, health insurance covers medical expenses, and life insurance provides benefits in the event of death.

Question 6

When a life-long chain smoker attempts to purchase a life insurance policy, the insurance company faces the problem of adverse selection.

Accepted Answer

Adverse selection occurs when individuals who are more likely to have a higher risk of loss are the ones who purchase insurance policies. In this case, a life-long chain smoker is more likely to have health complications and a higher risk of mortality, making them a higher risk for the insurance company to insure.

Question 7

The broad categories of life insurance products including which of the following?

Accepted Answer

All three categories (term, whole life, and universal life) are commonly offered by life insurance companies and serve different purposes. Term life insurance provides coverage for a specific period of time at a lower premium, while whole life insurance provides lifetime coverage with an investment component and higher premiums. Universal life insurance offers flexibility in premium payments and potential to build cash value. The appropriate choice(s) for an individual would depend on their individual financial goals and needs.

Question 8

Private pension plan assets are invested mainly in ________.

Accepted Answer

Private pension plan assets are mainly invested in stocks as they provide better long-term returns.

Question 9

A credit default swap, or CDS, is essentially

Accepted Answer

A credit default swap is a financial agreement in which one party pays the other party for protection against the risk of default on a third party's debt instrument, such as a bond or loan. In essence, it is a form of insurance against default.

Question 10

Vesting refers to the length of time that a person must be enrolled in a pension plan before being entitled to receive benefits.

Accepted Answer

Vesting is indeed defined as the amount of time a person must be enrolled in a pension plan before becoming eligible to receive benefits.

Question 11

During the 2007-2009 financial crisis, state and local governments now found their interest costs rising. Which of the following were causes of this?

Accepted Answer

The lower tax revenues resulting from the weakened economy and the weakened value of monoline insurance guarantees on their debt both contributed to the rising interest costs for state and local governments during the financial crisis.

Question 12

Between 1995 and 2009, the amount of credit default swaps (CDSs)exploded, along with the marketing of securitized mortgages. By their peak in 2008, there were about ________ of CDSs outstanding.

Accepted Answer

By their peak in 2008, the amount of credit default swaps (CDSs) outstanding exploded to about $62 trillion, reflecting the massive growth in this form of derivative financial instrument during that period.

Question 13

Adverse selection occurs when those most likely to get insurance payoffs are the ones who want to purchase the insurance the most.

Accepted Answer

Adverse selection is the tendency of high-risk individuals to be more likely to purchase insurance than low-risk individuals. This can result in insurance companies facing greater financial risk and having to increase premiums to cover potential payouts.

Question 14

Privatization of Social Security

Accepted Answer

Choice A is true because privatization would create individual accounts with actual savings invested in stocks, bonds or mutual funds, which could create a fully funded pension plan.
Choice B is true because under privatization, current workers' contributions would be diverted from the current system to fund individual accounts, and would not be available to pay benefits to current retirees.
Choice C is true because privatization ties Social Security benefits to the stock market, and if the market declines, the value of individual accounts could decrease which could decrease public support for the program.

Question 15

Which proposal for insuring that sufficient funds will be available to provide Social Security benefits to future retirees does the AARP find least objectionable?

Accepted Answer

The AARP finds raising the maximum income cap on which workers and employers are taxed the least objectionable proposal because it does not involve privatizing Social Security or making changes to benefit levels or cost of living increases. It also addresses the issue of a shrinking ratio of workers to beneficiaries by increasing the pool of workers paying into the system.

Question 16

Which life insurance policy usually requires the insured to pay a level premium for the duration of the policy, and the overpayment accumulates as a cash value that can be borrowed by the insured at reasonable rates?

Accepted Answer

Whole life insurance policies require the insured to pay a level premium for the duration of the policy, and a portion of that premium accumulates as a cash value that can be borrowed by the insured at reasonable rates. This cash value can also be used to pay premiums or surrendered for an amount in cash.

Question 17

All insurance is subject to several basic principles, including all of the following except that

Accepted Answer

The principle that the insured should not profit from insurance coverage is known as the principle of indemnity. All other options listed are basic principles of insurance.

Question 18

Fraudulent practices and other abuses of private pension funds led Congress to enact the ________.

Accepted Answer

The Employee Retirement Income Security Act (ERISA) was enacted in 1974 in response to fraudulent practices and other abuses of private pension funds. ERISA establishes minimum standards for private pension plans and provides guidelines for fiduciary responsibilities.

Question 19

The fact that insurance companies charge young males higher automobile insurance premiums than young females is an example of coinsurance.

Accepted Answer

This is an example of risk-based pricing, not coinsurance. Coinsurance refers to the sharing of costs between the insurer and the insured after the deductible is met, not the criteria for setting premiums.

Question 20

Keogh plans and IRAs are

Accepted Answer

Keogh plans and IRAs are both types of individual pension plans that allow individuals to save for retirement with tax advantages.

Quiz 21: Insurance Companies and Pension Funds