Question 1

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 by Congress in 1974 to protect the retirement assets of Americans. ERISA established minimum standards for private pension plans, including requirements for reporting and disclosure, fiduciary responsibilities, and vesting and funding. ERISA was enacted in response to concerns about fraud and abuse in private pension funds. The other options are not relevant to private pension funds.

Question 2

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

Accepted Answer

The principle of insurance is to restore the insured to the same financial position he was in before the loss occurred. This means that the insured should not profit from the insurance coverage.

Question 3

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 4

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 the overpayment accumulates as a cash value that can be borrowed by the insured at reasonable rates. This makes it a good choice for those looking for long-term coverage and savings. Term and Universal life policies do not accumulate cash value in the same way.

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 provides coverage for liability for harm caused to others as a result of product failure or accidents. This can include coverage for property damage, bodily injury, and other related costs. Property insurance covers damage to property or loss of property, health insurance covers medical expenses related to illness or injury, and life insurance provides a death benefit to beneficiaries in the event of the insured’s death.

Question 6

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 7

________ 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 specifically designed to provide lifetime income to the policyholder. It is meant to help individuals who live longer than expected by providing guaranteed income payments for the duration of their life. An annuity can be purchased through a lump sum payment or a series of payments, and the insurance company promises to pay a fixed amount for as long as the policyholder lives.

Question 8

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

Accepted Answer

Defined-contribution plans, such as 401(k)s, do not promise employees a specific retirement benefit. Instead, the employer contributes a set amount to the employee's retirement account, and the employee is responsible for investing and managing the funds. The retirement benefit ultimately depends on the performance of the investments. Defined-benefit plans, on the other hand, promise employees a specific retirement benefit calculated based on factors such as years of service and salary. Overfunded and underfunded plans refer to the funding status of a defined-benefit plan, not the type of plan.

Question 9

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 10

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

Accepted Answer

All three options (Term, Whole life, and Universal life) are broad categories of life insurance products. Term life insurance provides coverage for a specific period, whole life insurance provides lifelong coverage and builds cash value, and universal life insurance also provides lifelong coverage with the ability to adjust premiums and death benefit amounts. The best choice(s) depends on individual circumstances and goals. For those seeking more affordable coverage with a set time frame, term life insurance may be the best option. For those seeking lifelong coverage with the option to build cash value, whole life insurance may be the best fit. Universal life insurance may be the best choice for those with changing financial and coverage needs over time. It is important to consult with a financial professional to determine the best life insurance product for individual needs.

Question 11

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 experience negative events (such as death) are more likely to purchase insurance. In the case of a life-long chain smoker, they are more likely to have health issues and a shorter life expectancy, which means they are a higher risk for the insurance company to insure. This is an example of adverse selection.

Question 12

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 has consistently supported the proposal to raise the maximum income cap on which workers and employers are taxed as a means of generating more revenue to fund Social Security benefits. This approach has been seen as a viable solution because it would not require significant changes to the structure of the Social Security system or benefits, and would not negatively impact lower-income workers who do not earn enough to reach the cap.

Question 13

A credit default swap,or CDS,is essentially

Accepted Answer

A credit default swap is essentially insurance against default on a financial instrument. It is a contract between two parties where one party pays premiums to the other party in exchange for protection against default on a specific financial instrument, such as a bond or loan. If the financial instrument defaults, the protection buyer receives a payout to compensate for their losses.

Question 14

Keogh plans and IRAs are

Accepted Answer

Both Keogh plans and IRAs are individual retirement plans, which are established and funded by individuals as opposed to being sponsored by employers or the government.

Question 15

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

Accepted Answer

Lower tax revenues due to the weaker economy made it difficult for state and local governments to service their debts, and the weaker value of monoline insurance guarantees on their debt made it more expensive for them to borrow in the first place.

Question 16

Which of the following is not what can we expect in the future regarding pension funds?

Accepted Answer

Pension funds, by their nature, are conservative investors focused on long-term stability rather than creating more stable financial markets. Their primary goal is to ensure the security and growth of their members' retirement savings, which does not directly translate to stabilizing financial markets. The other options (B, C, D) are logical expectations based on current trends in pension fund development and investment strategies.

Question 17

Privatization of Social Security

Accepted Answer

A) Privatization of Social Security would transform the program from an unfunded pay-as-you-go system to a fully funded pension plan as individuals would own and manage their retirement accounts.
B) Privatization would mean that workers' current contributions to Social Security would no longer be available to pay benefits to current retirees as those contributions would be invested in individual accounts.
C) Privatization receives less public support when the stock market declines because individuals would be responsible for their own investment choices and bear the risks of market volatility.

Question 18

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 a phenomenon in insurance markets where individuals who are more likely to make claims (i.e., those with pre-existing conditions or who are engaged in riskier behaviors) are more likely to purchase insurance. This creates a problem for insurers as they have to charge higher premiums to cover their expected losses, which can lead to further adverse selection as healthier individuals opt out of purchasing insurance.

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

Private pension plan assets are invested mainly in ________.

Accepted Answer

Private pension plan assets are invested mainly in stocks. This is because stocks historically provide higher returns than government securities or certificates of deposit, allowing pension plans to grow their assets and meet the retirement needs of their beneficiaries. While some pension plans may hold bonds as well, stocks are typically the primary investment vehicle.

Quiz 21: Insurance Companies and Pension Funds