Question 1

Privatization of Social Security

Accepted Answer

Privatization of Social Security would indeed transform the system into a fully funded pension plan, as individuals would be responsible for investing their own contributions. This would mean that current contributions would no longer be available to pay benefits to current retirees, as they would be invested in individual accounts. Finally, public support for privatization tends to decline when the stock market experiences a downturn, as seen during the financial crisis of 2008.

Question 2

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

Accepted Answer

All of the above options (term, whole life, and universal life) are broad categories of life insurance products. Term life insurance provides coverage for a specific period of time, while whole life insurance provides lifelong coverage and has a savings component. Universal life insurance is another type of permanent life insurance that combines a savings component with flexible premiums and death benefit options. So, all three options are valid categories of life insurance products.

Question 3

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 to be the least objectionable proposal as it would ensure that those with higher incomes are contributing more into the Social Security system. This would help address the funding gap that Social Security is currently facing. Providing more generous annual cost of living increases might be a popular proposal but it would further strain the finances of Social Security. Privatization of Social Security is strongly opposed by the AARP as it would shift the risk and responsibility of retirement savings onto individuals. Lowering immigration restrictions to increase the number of workers paying into the Social Security system might be a viable proposal, but it would involve significant changes to immigration policy and is therefore unlikely to be implemented in the short term.

Question 4

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 to address fraudulent practices and other abuses of private pension funds. It sets minimum standards for employee benefit plans and provides protections for participants and beneficiaries in those plans. The other options listed are not related to private pension funds.

Question 5

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 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 refers to the tendency of those with higher risk to purchase insurance at a higher rate than those with lower risk. In this case, the chain smoker poses a higher risk to the insurance company, and therefore represents adverse selection.

Question 7

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 8

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 9

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

This statement correctly defines vesting.

Question 10

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 their original position before the loss occurred, not to profit. Therefore, option B is incorrect. All other options are basic principles of insurance.

Question 11

Private pension plan assets are invested mainly in ________.

Accepted Answer

Private pension plan assets are typically invested in a diversified portfolio, but stocks are often the primary investment due to their potential for long-term growth.

Question 12

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 that occurs in insurance markets when those with the highest risk of experiencing a loss are also the most likely to purchase insurance. This occurs because those individuals stand to gain the most from having insurance coverage. As a result, insurers may need to charge higher premiums to cover their costs, which can further deter lower-risk individuals from purchasing insurance, leading to a cycle of adverse selection.

Question 13

________ 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

The described insurance product is an annuity. Life insurance proper pays a benefit upon the insured's death, disability insurance pays a benefit if the insured becomes disabled, and health insurance pays for medical expenses.

Question 14

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 15

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 typically 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. Term life insurance policies do not have a cash value component, and universal life insurance policies offer more flexibility in premium payments and death benefits but may not necessarily accumulate as much cash value.

Question 16

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 is designed to protect individuals and businesses from liabilities resulting from accidents, product failure, or other unexpected events that cause harm to others. This type of insurance typically covers legal fees, court costs, and any settlements or judgments that may result from a lawsuit filed against the insured party.

Question 17

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

Accepted Answer

Defined-contribution plan does not promise employees a specific retirement benefit. In this plan, the employer or employee makes contributions to the employee's individual account. The retirement benefit is based on the size of the account at retirement age and the investment performance of the contributions made.

Question 18

Keogh plans and IRAs are

Accepted Answer

Keogh plans and IRAs are both individual retirement plans that allow individuals to save for retirement on a tax-advantaged basis. They are not government, corporate, or public pension plans.

Question 19

A credit default swap, or CDS, is essentially

Accepted Answer

A credit default swap is a financial contract in which the seller of the CDS agrees to compensate the buyer in the event of a default on a financial instrument, such as a bond or loan. In other words, it is insurance against default on a financial instrument.

Question 20

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

Lower tax revenues due to the weaker economy meant that these governments had less money to pay their debt, which in turn made investors believe that there was a higher chance of default. This meant that the value of monoline insurance guarantees on their debt, which are supposed to protect investors in case of default, was weakened. As a result, interest rates on their debt rose.

Quiz 21: Insurance Companies and Pension Funds