Deck 17: Life Cycle Financial Risks

Question 1

Compounding can have a significant effect if the principle amount is huge, despite a short savings period.

Answer 1

False

Question 2

In terms of the financial threats and ignoring the very real psychological and emotional elements, the risk of old age is mainly borne by the dependents of the person.

Answer 2

False

Question 3

Like the mortality and longevity cases, we have health and disability tables from which the relevant probabilities can be derived.

Answer 3

False

Question 4

During the development phase of a country, birth rates and fertility rates decline, but at a much slower pace than mortality rates.

Question 5

Select tables are used to make mortality calculations without the selection effects of medical examination.

Question 6

Income growth and inflation has the opposite effect compared to discounting.

Question 7

High interest rates means that the retirement of most people will be financed mainly by the direct contribution by employers, employees, and the government, and only a relatively small part will be financed by interest accumulation.

Question 8

Interest rates can be ignored in retirement plans because it is spread over a relatively long period.

Question 9

Females are the biologically more resilient than males.

Question 10

World Health Organization (WHO) statistics show a negative correlation between the development level of the economy and the percentage of gross domestic product (GDP) spent on health-related costs.

Question 11

Life tables and mortality tables are constructed for basic purposes and for the reference of all industries in an economy; therefore, they are based on general populations.

Question 12

The life expectancy of females at birth is typically lesser than that of males.

Question 13

A high proportion of retired people will live far longer than the assumed life expectancy.

Question 14

A substantial part of the years lost due to poor health occurs during the retirement period.

Question 15

The present value of a future stream of earnings is affected by interest rates and by time.

Question 16

Factors like inflation or a continuous increase in the standard of living operate in the opposite direction to the incoming interest rate.

Question 17

The present value at 6 percent interest rate would be higher than the present value at 3 percent interest rate for the same person.

Question 18

The rate that banks pay customers on their savings investments is generally below the prime rate so that positive returns on lending activities are not canceled out.

Question 19

The general population is typically healthier than the insured population.

Question 20

Mortality tables and life tables are essential tools in the hands of actuaries.The actuary needs only one of the tables for making all the required calculations since one table can be derived from the other.

Question 21

The risk manager must find a way to create a similar cash flow to replace the lost income once the person dies.Because the timing of the death cannot be predicted, it is common to calculate the _____ of the income stream to derive a single number.

A)book value
B)threshold point value
C)future value
D)present value
E)annuity value

Question 22

Identify the risk of living too long such that one's advanced age hinders one's ability to continue adequately providing for oneself.

A)Expectancy risk
B)Withdrawal risk
C)Survival risk
D)Longevity risk
E)Mortality risk

Question 23

Which of the following tables reflects either the probability of survival, or the number of people surviving at each age?

A)Morbidity table
B)Longevity table
C)Expectancy table
D)Survival table
E)Health table

Question 24

Which of the following is true about estimating the economic value of life?

A)There are objective market values that can be referred to, and there are mechanisms in which one could purchase a substitute at a given price.
B)We have direct ways to estimate the -to-measure economic value of a human life.
C)It needs to be calculated by including psychological or emotional elements that are typically attached to death.
D)The estimation of the value of human life is needed for private purposes, but not for business purposes.
E)Estimating the value of the income stream that the deceased person would have had if she or he had survived is one way to estimate the economic value of life.

Question 25

Identify the figures of a mortality table that relate to an insured population where the possible effects of medical examinations used for selecting the terms of insurance may influence the findings.

A)Ultimate tables
B)Expectancy tables
C)Select tables
D)Morbidity tables
E)Exclusive tables

Question 26

Identify the life table that can be constructed by following a cohort of people that were born during a particular year over a long period of time and recording all deaths until the last one dies.

A)Longevity life table
B)Expectancy life table
C)Morbidity life table
D)Survival life table
E)Generation life table

Question 27

Identify the correct statement about present value in the calculation of the economic value of life.

A)Because the timing of the death cannot be predicted, it is common to calculate the annuity value of the income stream to derive at a single number that is used for the calculation of present value.
B)The use of the present value concept is impractical because it gives us several figures for the estimated of the economic value of the person.
C)The importance of the present value technique lies in its use as a tool for planning the needed financial protection against the case of a premature death.
D)Discounting in the present value method makes the distant future cash flows more significant.
E)The present value of a future stream of earnings is independent of interest rates and time.

Question 28

Discounting in the present value method makes the distant future cash flows:

A)irrelevant.
B)highly volatile.
C)more significant.
D)unpredictable.
E)less significant.

Question 29

Despite the drastically changing population structure, dependency ratios are quite stable over time.

Question 30

If we assume that the cash flow grows at an annual rate of 3 percent, and the relevant interest rate is 6 percent, we can assume a constant income stream and discount it at a net interest rate of approximately:

A)3 percent.
B)2 percent.
C)0.5 percent.
D)6 percent.
E)9 percent.

Question 31

Identify the law that provided predictions of future losses with greater accuracy as the sample of people become larger.

A)The principle of indemnity
B)Attribution theory
C)The law of large numbers
D)Association fallacy
E)Fundamental attribution error

Question 32

Identify the figures of a mortality table that relate to an insured population where the possible effects of medical examinations used for selecting the terms of insurance do not influence the findings.

A)Ultimate tables
B)Expectancy tables
C)Select tables
D)Morbidity tables
E)Exclusive tables

Question 33

The assumption that the annual income is constant over time is not important because:

A)the total present value of the lifetime income stream is independent of the future income stream.
B)the future income streams have a small effect on the total present value of the lifetime income stream.
C)the total present value of the lifetime income stream is highly dependent on future income streams.
D)the future income streams have a significant effect on the total present value of the lifetime income stream.
E)the future income streams for a particular time period is equal to the total present value of the lifetime income stream.

Question 34

The risk management of individuals is strongly related to mortality because it determines the probabilities of:

A)dying and surviving.
B)being disabled
C)good health and bad health.
D)employment and unemployment.
E)having enough savings after retirement.

Question 35

Insured population tends to be healthier than the uninsured population because:

A)they have insurance.
B)they are typically employed and pass medical screenings as a condition of insurability.
C)their mortality rates tend to be significantly higher than those of uninsured populations.
D)they can typically keep a tab on their health conditions every month.
E)the uninsured population do not have the various options of medical treatment that the insured population have access to.

Question 36

Which of the following is true about the financial planning process?

A)It creates a cash flow plan that could easily be translated to present values.
B)It is expected that this method gives a less accurate estimate of financial needs than the present value of the lost income stream.
C)It is expected that this method results in higher values than the ones obtained by the present value of the lost income stream.
D)This method overestimates the needs by assuming that the dead person stops consuming.
E)This method tries to estimate the economic value of a human life by calculating the value of the future income stream that will be lost in case of the person's death.

Question 37

Mortality risk is the risk of:

A)long life.
B)disability.
C)longevity.
D)bad health.
E)premature death.

Question 38

It is expected that the financial planning process gives a more accurate estimate of financial needs and results in somewhat lower values than the ones obtained by the present value of the lost income stream.This expectation is based on the assumption that:

A)the financial planning process underestimates the needs by assuming that the dead person incurs some expenses for a particular period after death.
B)the lost income approach overestimates the needs by assuming that the dead person stops consuming.
C)the lost income approach overestimates the needs by assuming that the dead person incurs some expenses for a particular period after death.
D)the lost income approach underestimates the needs by assuming that the dead person incurs some expenses for a particular period after death.
E)the financial planning process overestimates the needs by assuming that the dead person stops consuming.

Question 39

Which of the following statements is true about mortality tables?

A)The mortality rate for males is relatively low at birth than that of the females.
B)The mortality rate for males rises to a peak between the ages of eighteen to twenty-two.
C)The mortality rate for males rises to a peak between the ages of twenty-three and twenty-nine.
D)The rise in mortality tables is continuous for males above age ten and for females after age twenty-nine.
E)The mortality rate for females rises to a peak between the ages of ten to sixteen.

Question 40

Which of the following statements is true about life tables?

A)This table reflects either the probability of survival, or the number of people surviving at each age.
B)The most common way to generate a this table is to use the current morbidity rates.
C)This table shows how many people are expected to have deteriorating health conditions, out of the initial population.
D)These tables are not required for calculation by actuaries.
E)It is not possible to derive this table from a mortality table.

Question 41

The risk manager must find a way to create a similar cash flow to replace the lost income once the person dies.The use of the _____ concept is practical because it can give us one figure for the estimated economic value of the person.

Question 42

A(n) _____ will be defined as dying prior to a certain age.

Question 43

A population pyramid is almost symmetrical and looks like a pyramid because:

A)the age structure of a population is quite similar for smokers and non-smokers.
B)the life expectancy is very high at birth, and gradually decreases with the age of an individual.
C)the age structure of a population is calculated simultaneously for the working individuals and the retired individuals.
D)the age structure of a population is quite similar for males and females.
E)the age structure of a population is dependent on the income levels of individuals.

Question 44

The difference between the life expectancy and healthy adjusted life expectancy is a measure of the average equivalent number of years lost due to:

A)bad health and disability.
B)a bad economy.
C)bad health excluding disability.
D)death of a breadwinner in the family.
E)to disability excluding bad health.

Question 45

The financial burden of aging is a direct function of:

A)the current income of the individual.
B)the number of family members than the individual supports.
C)the number of years that the individual will live beyond retirement.
D)the income that the individual receives during retirement.
E)the number of family members who earn in the family.

Question 46

The life expectancy after retirement or some other relevant age is:

A)imperative life expectancy.
B)conditional life expectancy.
C)necessative life expectancy.
D)subjunctive life expectancy.
E)passive life expectancy.

Question 47

Define longevity risk.What are the problems associated with it?

Question 48

Which of the following statements is true about a population pyramid?

A)It measures the average equivalent number of years lost due to bad health and disability.
B)It is essential for the understanding of dependency ratios and retirement policy problems.
C)It combines weighted information about morbidity and mortality, and it is expressed in terms of the numbers of healthy years lost.
D)It is a graphical presentation of the health structure of the population.
E)It measures the years lived in good health and is used to calculate healthy adjusted life expectancy.

Question 49

It measures the average length of life in a population.In a stable population, it would be an approximation of the average age of deceased people.Identify it.

A)Death expectancy rate
B)Morbidity
C)Withdrawal expectancy
D)Prognosis
E)Life expectancy

Question 50

Write a short note on population pyramids.

Question 51

Identify the country with a fully reversed age pyramid.

A)China
B)Ethiopia
C)India
D)Japan
E)United States

Question 52

Write a short note on disability adjusted life years.

Question 53

Explain the risk of premature death and its consequences.

Question 54

Compounding has a strong effect when:

A)the principle amount is large.
B)the interest rate is low.
C)the standard of living is high.
D)inflation rates are high.
E)the savings period is long.

Question 55

Which of the following is true about the age structure and the population pyramid of China?

A)It has a fully reversed age pyramid.
B)It has an age structure similar to that of a young, developing country.
C)It has experienced the natural evolutionary baby boom.
D)It has a rectangular-shaped population pyramid rather than an inverted pyramid.
E)It has an age structure similar to that of a mature, developed country.

Question 56

The typical table used for many actuarial calculations in the United States is known as the Ultimate 2001 _____ Mortality Table.

Question 57

The United States still has a rectangular-shaped population pyramid rather than an inverted pyramid.Which of the following can be attributed as a reason for this anomaly?

A)It has not experienced a natural evolutionary baby boom.
B)This is the result of the very strictly enforced birth control introduced by the U.S.government.
C)This is the result of the absorption of many new immigrants into the population.
D)It has experienced a drastic increase in birth rates in the recent decade.
E)It has seen a drastic decline in the number of smokers in the past two decades.

Question 58

This is the rate that private banks charge each other for loans, and it is manipulated to alter the supply of money.This rate is a determinant of other rates that banks charge their most credit-worthy customers.Identify this rate.

A)Interest rate
B)Prime rate
C)Federal funds rate
D)Sub-prime rate
E)Commercial paper rate

Question 59

Life expectancy figures are calculated from the:

A)morbidity table.
B)longevity table.
C)expectancy table.
D)survival table.
E)health table.

Question 60

Interest rates higher than those offered through private banks are available to individuals investing long- and short-term investment vehicles.The interest rate will vary considerably depending on the source, but there is a national indicator often used as a benchmark in rate making.Identify it.

A)Mutual fund
B)Corporate debt
C)Money market account
D)Treasury bill
E)Prime rate

Question 61

The World Bank and the Global Health Organization suggested a new index to measure the global burden of disease known as _____.It combines weighted information about morbidity and mortality, and it is expressed in terms of the numbers of healthy years lost.

Question 62

The _____ rate is a determinant of the prime rate, or the interest rate that banks charge their most credit-worthy customers.

Question 63

The _____ is the amount of money that is needed to finance the retirement period.

Question 64

In a population pyramid, as _____ rates start to decline, the baby boom comes to an end, and the base of the pyramid gets narrower.

Question 65

Quality adjusted life years (QALY) measures the years lived in good health and is used to calculate _____.

Question 66

The financial planning process means creating a(n) _____ plan that could easily be translated to present values.

Question 67

_____ ratios are the ratios of to the number of people in the working-age group.

Question 68

Longevity risk relates to the duration of the postretirement period, and for that purpose we need to consider _____ life expectancy.

Question 69

A(n) _____ is a graphical presentation of the age structure (distributions) of the population (in percentages or in absolute numbers).

Question 70

_____ risk can be defined as the risks that our physical and mental well-being will be diminished throughout our lifetime.

Question 71

World Health Organization (WHO) statistics show that _____ for the entire population is below sixty for less developed countries.

Question 72

_____ are government bonds paying guaranteed, fixed interest rates.Because the government cannot default on its loan obligations, the yield investment vehicles can be said to be a risk-free rate of return.