2. Insurance Planning. - All Questions and Comprehensive Course Exam

Question 1

Lesson 1. Principles of Insurance

Course 2. Insurance Planning

Question 2

What is the Financial Definition of Insurance?

Answer 2

Insurance is a financial arrangement that redistributes the costs of unexpected losses.

Insurance involves the transfer of potential losses to a group of individuals exposed to the same risk through what is referred to as an insurance “pool.” Members contribute financial consideration to fund the pool based upon the combined predicted losses divided by the number of members. As covered losses occur, members receive funds from the pool to replace the economic loss sustained.

Certainty of financial payment from a pool with adequate resources and accurate predictability of losses are the hallmarks of the insurance transaction.

The following example of how insurance works is based on a community comprised of 180 homes, each worth $180,000. Without insurance, any individual homeowner may face a substantial loss. However, if they all agree to share equally in any losses, the risk to each is only $1,000 per loss.

Question 3

What is the Legal Definition of Insurance?

Answer 3

Insurance is a contractual arrangement whereby one party agrees to compensate another party for losses, in exchange for consideration paid (i.e., the premium).

Insurance law is a branch of contract law. The insurance policy, like all contracts, is an arrangement creating rights and corresponding duties for the parties that are involved. In analyzing an insurance contract, you should remember that a right created for one party represents a duty (obligation) for the other party.

Question 4

In an insurance contract, the party agreeing to pay for the losses is known as the __ ____??____ __.
* insurer
* insured
* premium
* beneficiary

Answer 4

insurer
* In an insurance contract, the party agreeing to pay for the losses is known as the insurer.
* The insured is the party whose loss causes the insurer to make a claims payment.
* The premium is the payment received by the insurer.
* The beneficiary is the recipient of the claim payment.

Question 5

Define Exposure To Loss

Answer 5

The insured’s possibility of loss is called his exposure to loss. If the insured purchases an insurance policy, he transfers the exposure to loss to the insurer.

When meeting with a client, you can ask questions such as: “What risks do we face and what is our exposure?” Exposure refers to the units that are exposed to risk. In other words, the owner of four houses could be said to be exposed to four chances of loss by fire, theft, or windstorm damage, while a single homeowner has one exposure.

Question 6

Define Self-Insurance

Answer 6

Self-Insurance means that a firm or other organization may decide to deal with its own risks. They decide to operate much like a commercial insurance company and will engage in the same types of activities as a commercial insurer. When these activities involve the operation of the law of large numbers and predictions regarding future losses, they are commonly referred to as self-insurance.

To self-insure a firm must set up a sound program with the following requirements.
* Law of large numbers: The firm should be big enough to combine sufficiently large numbers of exposure units so as to make a loss predicable.
* Financial Reliability: The firm should be able to accumulate funds to meet losses that may occur. Also, the firm needs to cover losses if they occur more frequently than predicted.
* Geographic distribution: Dispersion of risk in the event of a catastrophe.

Often the context in which the word “self-insurance” is used would be better described as risk retention. There are some important advantages and disadvantages of retaining risk through self-insurance.

Question 7

Section 1 – Insurance Fundamentals Summary

Insurance is a financial arrangement for redistributing the costs of unexpected losses requiring a legal contract, called a “policy,” whereby an insurer agrees to compensate an insured for unexpected losses.

In this lesson, we have covered the following:

Answer 7

Definitions of Insurance:
* Financial: Insurance is a financial arrangement that redistributes the costs of unexpected losses.
* Legal: Insurance is a contractual arrangement whereby one party agrees to compensate another party for losses.
* Exposure to loss: The insured’s possibility of loss.
* Self-insurance: The firm or individual decides to deal with potential risks and losses using its own funds.

Question 8

Which of the following is NOT considered an element of the financial definition of insurance?
* Certainty of financial payment from a pool.
* Proper redistribution of losses.
* Accurate predictability of losses.
* Rights and duties of the two parties.

Answer 8

Rights and duties of the two parties.
* Rights and duties of the two parties is not considered an element of the financial definition of insurance.
* Certainty of financial payment from a pool attracts more members to join a particular insurance pool while accurate predictability of losses helps the pool to redistribute losses properly among its members.
* Proper redistribution of losses is also a hallmark of insurance transactions.

Question 9

An insurance system redistributes the costs of losses from the unfortunate few members experiencing them to all the members of the insurance system who pay premiums.
* False
* True

Answer 9

True
* An insurance system redistributes the costs of losses from the unfortunate few members experiencing them to all the members of the insurance system who pay premiums.

Question 10

What is exposure to loss?
* Probability of loss.
* Possibility of loss.
* Cause of loss.
* Attitude of indifference to loss.

Answer 10

Possibility of loss.
* We consider the insured’s possibility of loss as his exposure to loss. The insured transfers the exposure to loss to the insurer by purchasing an insurance policy.

Question 11

Define Loss

Answer 11

The word “loss,” as it is commonly used, means being without something previously possessed such as “loss of memory” and “loss of time.”

When the word is used in insurance, however, it takes on a more limited meaning. It is called insurable loss.

Question 12

Define Peril

Answer 12

A peril is defined as the cause of the loss. For example, fires, tornadoes, heart attacks, and criminal acts constitute perils.

Insurance policies provide financial protection against losses caused by perils. Insurers call policies that specifically identify a list of covered perils specified-perils contracts.

The alternative format is to cover all losses except those specifically excluded. Insurers call this type of policy an open-perils contract.

Exam Tip: CFP Board often tests the concepts of loss and peril by presenting scenarios in which a specific loss occurrs. Remember that the cause of the loss is the peril.

Question 13

Define Insurable Loss, Direct, and Indirect Losses

Answer 13

A typical insurable loss is an undesired, unplanned reduction of economic value arising from chance. We call losses not resulting from chance depreciation expenses. Therefore, depreciation cannot be insured against, as such loss is guaranteed to occur, rather than being left to chance.

Insurable losses are categorized as direct or indirect losses.

Direct losses are the immediate, or first, result of an insured peril.
* Example: If a fire destroys a home, the loss of the home is the direct loss.
Indirect losses, also called consequential losses (such as loss of use), are a secondary result of an insured peril.
* Example: If a tornado destroys a restaurant, the property damage is the direct loss. The loss of income during the period when the business is being reestablished is the indirect loss.
There must be a direct loss before an indirect loss. Property insurance policies are specific when providing coverage for direct or indirect losses, or for both.

Question 14

Define Chance of Loss, A Priori chance of loss and Ex-Post chance of loss

Answer 14

The chance of loss is the probability of loss.

The concept of chance of loss refers to a fraction. The numerator is either the actual or the expected number of losses. The denominator represents the number exposed to loss. The chance of loss in a given case may or may not be known accurately before a loss occurs.

If we are referring to the predicted chance of loss, we divide the expected number of losses by the number of exposed units. This fraction is called a priori chance of loss.

If we are looking back in time, we can divide the actual number of losses by the total number of exposures. This fraction is called the actual or ex-post chance of loss.

Question 15

If each house in an insurance pool represents one exposure to loss, and we expect three houses out of 1,000 houses in an insurance pool to be destroyed by fire, what would be the expected chance of loss?
* 0.3
* 0.03
* 0.003
* 0.0003

Answer 15

0.003
* If we expect three houses out of 1,000 houses in an insurance pool to be destroyed by fire, the expected chance of loss is 3/1000 or 0.003.

Question 16

Define Hazards

Answer 16

Hazards are conditions that increase the probability of loss from a peril, by increasing either the frequency or the severity of potential losses.
* For example, every home faces the peril of destruction by fire. Storing oily rags near the home’s furnace would be an example of a hazard.

The hazard increases the chances of the peril occurring. If an insured materially increases a hazard, the insurer may suspend the insurance coverage.

Hazards can be separated into four categories:
1. Physical Hazards: Involve physical characteristics such as type of construction, location, occupancy of building, having frayed wires on plugs, steep stairs with no railing, or smoking in bed.
2. Moral Hazards: Involve dishonest tendency such as exaggerating losses in a theft claim or auto insurance fraud (e.g., two cars intentionally bump each other with many passengers claiming injury).
3. Morale Hazards: Involve an increase in losses due to knowledge of insurance coverage such as having a different attitude toward a loss because the loss will be covered by an insurance company (e.g., leaving a car unlocked, ordering unnecessary medical tests, or a jury’s tendency to grant larger amounts of money in situations where an insurer will have to pay).
4. Legal Hazards: Involve increased frequency and severity of losses such as legislative action (e.g., ADA requirements or mandated insurance coverages).

Exam Tip: It is important to distinguish between a peril and a hazard. As we’ve mentioned, the peril is the occurrance for which we insure. There are circumstances that are often controllable by an insured, that increase the likelihood of loss but are not the specific cause of the loss. These circumstances are called hazards.

Question 17

If a property owner burns down a building to collect the insurance claim, the fire causes the damage and is considered the peril, while the owner’s behavior is considered a __ ____??____ __.
* morale hazard
* moral hazard
* risk
* claim

Answer 17

moral hazard
* If someone burns down a building to collect the insurance, their actions are considered a moral hazard.

Question 18

Define Speculative Risks

Answer 18

Speculative risk refers to those exposures to price change that may result in gain or loss.

Most investments, including stock market investments, are classified as speculative risks. Other speculative risks result from the potential gains or losses associated with interest rate changes, price movements of foreign currencies, and price movements of agricultural and other commodities. With speculative risk, the risk is man-made and did not exist naturally. The individual’s goal is not merely to avoid loss, but rather to create risk in the hopes of actually gaining. Since insurance deals with pure risk that exists only when a chance of loss/no loss is possible, man-made speculative risks such as the stock market and gambling are not suitable for coverage.

Pure Risk + Speculative Risk = Risk

Practitioner Advice: Often clients say they don’t believe in buying insurance because they feel it is a “gamble.” This is odd, considering insurers do not take on speculative risk. When people say they won’t buy disability insurance because they have to become disabled in order to “win,” they miss the point of insurance. The risk of disability already exists whether you purchase insurance or not. You either can become disabled or not; there is no gain potential in becoming healthier because you have a policy. On the other hand, when you bet $100 in hopes of winning $1,000 if your favorite football team wins the Super Bowl, your chance of loss or gain did not exist prior to your bet. You created this risk.

Question 19

Define Adverse Selection

Answer 19

When one party to a transaction has more relevant information or more control of outcomes than another party to the transaction, the party with superior information or control can take advantage of the situation. Insurance scholars call this possession of asymmetric information adverse selection.

Adverse selection is also defined as the actions of individuals acting for themselves or others, who are motivated directly or indirectly to take financial advantage of a risk classification system. For example, adverse selection occurs when people who know their health is deteriorating try to purchase health insurance to cover the cost of a needed operation. Another example would involve a person trying to purchase fire insurance immediately after an arsonist threatened his property.

The reason the term is called adverse selection is because the insurer is trying to select suitable people for coverage from an applicant pool that really doesn’t represent a fair cross-section of the population. This is because those at risk tend to apply in greater proportion to those who are at lower risk. Thus, there is a tendency to select for coverage a higher percentage of adverse candidates.

**Practitioner Advice: Though many new life and health insurance agents get very excited when they receive an unsolicited request to purchase an insurance policy, most seasoned agents remain cautious. Experience shows that such inquiries usually come with a higher risk of adverse selection. It is important to ask these individuals appropriate questions to properly assess their situations. More times than not, an agent will discover that the potential client was compelled into action due to a known change to his or her health.
**

Exam Tip: Adverse selection represents a real risk to an insurance company. Beyond knowing the definition of adverse selection, work towards recognizing a scenario where adverse selection could be present for an insurer.

Question 20

An insurable loss is:
* An event that has not been predicted.
* An exposure that cannot be easily measured before the event has occurred.
* An unexpected reduction of economic value.
* Being without something one has previously possessed.

Answer 20

An unexpected reduction of economic value.
* The word loss, as it is commonly used, means ‘being without something previously possessed.’ But its meaning, when used in the context of insurance, becomes limited.
* A typical insurable loss is an undesired, unplanned reduction of economic value arising from chance.
* For example, loss or damage to property or life due to fires, tornadoes, heart attacks, and criminal acts.

Question 21

The definition of peril is:
* An event or condition that increases the chance of loss.
* The uncertainty concerning loss.
* A measure of the accuracy with which a loss can be predicted.
* The actual cause of the loss.

Answer 21

The actual cause of the loss.
* A peril is the actual cause of the loss. For example, fire, tornadoes, heart attack, and criminal acts.
* The event or condition that increases the chance of loss is a hazard.

Question 22

A moral hazard is:
* A loss of faith in the insurance company because of a denial of claims.
* Illustrated by the theft of a wallet by a thief.
* An attempt to defraud the insurer.
* The potential for the insurance company to increase premiums after a loss.

Answer 22

An attempt to defraud the insurer.
* If an individual causes a loss to collect insurance proceeds, the loss is said to result from the moral hazard.
* If somebody burns down a building to collect insurance, the fire causes the damage, but the moral hazard is responsible for the increased frequency of loss.

Question 23

Each of the following are types of responses to risk utilized in financial planning EXCEPT:
* Risk Avoidance
* Risk Reduction
* Risk Transfer
* Risk Reassignment

Answer 23

Risk Reassignment

There are five commonly utilized risk management techniques in financial planning:
* Risk Avoidance
* Risk Reduction
* Risk Transfer
* Risk Retention
* Risk Diversification

Question 24

Define Risk Retention

Answer 24

Risk retention means retaining or bearing the risk personally. Retention is the most common approach to risk because it is the default strategy - not taking any action to transfer a risk means it is retained. Since people are not always aware of the risks they face, much of the retention is done unconsciously and unintentionally.

Risk Retention Example:
A person who retains any income losses caused by a disability is experiencing risk retention.

Exam Tip: Use the matrix below to determine the best risk management approach based on the potential cost of loss and probability of occurrence.
* Low cost, low prob - Risk Retention
* Low cost, high prob - Risk Reduction
* High cost, low prob - Risk transfer
* High cost, high prob - Risk Avoidance

Question 25

Amelia exercises regularly and eats a well-balanced vegetarian diet. She wants to avoid any loss due to high cholesterol or heart diseases. Identify the type of risk response Amelia has implemented. * Risk avoidance. * Risk reduction. * Risk transfer. * Risk retention.

Answer 25

Risk reduction. * By exercising regularly and having a proper diet, Amelia is reducing the chance that a loss will occur or reducing the magnitude of a loss if it does occur. Thus, her response to risk in this example is risk reduction.

Question 26

Michael is not taking a medical insurance policy, even after falling sick many times in the past year. Select the correct category of risk management used by Michael. * Risk reduction. * Risk avoidance. * Risk transfer. * Risk retention.

Answer 26

Risk retention. * In the above case, by not taking a medical insurance policy, Michael has decided to bear (retain) all the losses personally.

Question 27

Arrange the six steps of risk management that are part of the personal financial planning process in the correct order: * Analyze information. * Develop the risk management plan. * Monitor and revise the risk management plan. * Gather information. * Implement the risk management plan. * Establish risk management objectives.

Answer 27

1. Establish risk management objectives. 2. Gather information. 3. Analyze information. 4. Develop the risk management plan. 5. Implement the risk management plan. 6. Monitor and revise the risk management plan.

Question 28

# Exam 1. Principles of Insurance Exam 1. Principles of Insurance | Course 2. Insurance Planning

Question 29

Those at risk tend to apply for insurance in greater portion to those who are at lower risk. This is referred to as __ ____??____ __. * the law of large numbers * a morale hazard * adverse selection * indirect loss

Answer 29

adverse selection * Adverse selection is also defined as the actions of individuals acting for themselves or others, who are motivated directly or indirectly to take financial advantage of a risk classification system.

Question 30

Which of the following is NOT a criterion for insurance to be considered efficient? * The risk must be financially measurable. * The loss must be predictable. * The risk is not subject to a catastrophic loss. * The insurer must be able to charge a high enough premium to cover claims and the expenses of being in the insurance business.

Answer 30

The loss must be predictable. * The **loss must be accidental and not predictable**.

Question 31

Leaving a car unlocked, ordering unnecessary medical tests, or a jury's tendency to grant larger amounts of money in situations where an insurer will have to pay are examples of which type of hazard? * Morale hazard * Physical hazard * Legal hazard * Moral hazard

Answer 31

Morale hazard * A morale hazard involves an increase in losses due to knowledge of insurance coverage because the loss will be covered by insurance.

Question 32

Which of the following statements accurately describes a direct loss? I. A tornado causes significant damage to a business, causing the business to be closed for 6 months and results in lost revenue of $250,000. II. Faulty wiring in a detached garage causes a fire which completely destroys the garage. III. An out of control automobile crashes through the window of a business and destroys fragile merchandise displayed in the window. IV. Lightning strikes and destroys a satellite dish on the roof of a house. * I only * II, III, and IV * III and IV * I and II

Answer 32

II, III, and IV * Direct losses are the immediate, or first, result of an insured peril. For example, if a fire destroys a home, the loss of the home is the direct loss.

Question 33

One result of an insurance company’s systems of operations is increased accuracy in the prediction of losses, thereby __ ____??____ __. * reducing risk for the insured * eliminating risk for the insured * eliminating risk for the insurer * reducing risk for the insurer

Answer 33

reducing risk for the insurer * By applying the law of large numbers, the insurance company can more accurately predict the dollar amount of losses it will experience in a given period.

Question 34

The uncertainty concerning a loss is called a __ ____??____ __. * risk * adverse selection * peril * hazard

Answer 34

risk * The uncertainty concerning a loss is called a risk. * Insurance pools reduce risk by applying a mathematical principle called the law of large numbers.

Question 35

An insurance policy that covers all losses except those specifically excluded is called __ ____??____ __. * an open-perils contract * a specified peril contract * a unilateral contract * a proximate cause contract

Answer 35

an open-perils contract * Insurance companies refer to a contract that covers all losses except those specifically excluded an **open-perils contract.**

Question 36

Chet has the habit of leaving his house unlocked when he is away, even for several days at a time. This is an example of __ ____??____ __. * a hazard * adverse selection * a peril * a loss

Answer 36

a hazard * **Hazards are conditions that increase the probability of loss from a peril, by increasing either the frequency or the severity of potential losses**.

Question 37

Which approach to risk management tends to be the default strategy? * Risk retention * Risk avoidance * Risk transfer * Risk reduction

Answer 37

Risk retention * **Much of the retention is done unconsciously and unintentionally by not being aware of certain risks**.

Question 38

Choosing not to rent jet skis for inexperienced riders while on summer vacation is a form of __ ____??____ __. * risk reduction * retention of risk * risk avoidance * risk transfer

Answer 38

risk avoidance * Risk avoidance means avoiding the risk altogether. * By electing to not jet ski, the inexperienced rider completely avoids the risk.

Question 39

Risk may be defined as the variation in possible outcomes of an event based on chance. Which of the following is an example of a pure risk? * Playing blackjack in Las Vegas. * Buying futures contracts on agricultural crops. * Exposure to loss because of a flood. * Investing in blue chip stocks in the stock market.

Answer 39

Exposure to loss because of a flood. * **Pure risk refers to possibilities that can result in only loss or no change**. * Insurance deals only with pure risks.

Question 40

A jury’s tendency to award larger amounts of damages in situations in which an insurer will have to pay is an example of __ ____??____ __. * a moral hazard * a morale hazard * a physical hazard * a legal hazard

Answer 40

a morale hazard * Morale hazards involve an increase in losses due to knowledge of insurance coverage such as having a different attitude toward a loss because the loss will be covered by an insurance company.

Question 41

The possibility of a house fire is an example of __ ____??____ __. * a degree of risk * speculative risk * a direct loss * pure risk

Answer 41

pure risk * Pure risk refers to possibilities that can result in only loss or no change. Insurance deals only with pure risks.

Question 42

What type of hazard is present in a home that has faulty wiring, rotting stairs, and a resident that regularly smokes in bed? * Moral hazard * Physical hazard * Legal hazard * Morale hazard

Answer 42

Physical hazard * Physical hazards involve physical characteristics such as type of construction, location, occupancy of building, having frayed wires on plugs, steep stairs with no railing, or smoking in bed.

Question 43

“I’m insured, why should I care” is an example of a __ ____??____ __. * moral hazard * physical hazard * legal hazard * morale hazard

Answer 43

morale hazard * Morale hazards involve an increase in losses due to knowledge of insurance coverage such as having a different attitude toward a loss because the loss will be covered by an insurance company.

Question 44

Each of the following statements regarding the law of large numbers and insurance is correct EXCEPT: * The insurance company must have a large enough number of exposures from which to gather their loss experience. * The greater the number of observations of an event based on chance, the more likely the actual result will approximate the expected result. * The law of large numbers allows accurate predictions of individual events. * The insurance company must have enough insured units so that the actual number of losses will be closer to the predicted number.

Answer 44

The law of large numbers allows accurate predictions of individual events. * The greater the number of exposures in the risk pool, the more likely the projected loss figure will be realized.

Question 45

Advantages of a company retaining risk through self-insurance include each of the following EXCEPT: * Losses may be less than average experience. * Build up reserves if there is a long time between losses. * Protection from catastrophic loss. * Avoid having to support higher risk firms that may be in a commercial pool.

Answer 45

Protection from catastrophic loss. * Retaining risk through self-insurance does not provide protection from catastrophic loss.

Question 46

When the word “loss” is used in insurance it means __ ____??____ __. * direct loss * chance of loss * insurable loss * indirect loss

Answer 46

insurable loss * The word "loss," as it is commonly used, means being without something previously possessed. When used in insurance it takes on a more limited meaning and is called insurable loss.

Question 47

There must be __ ____??____ __. * a known chance of loss before there is an insurable loss. * a hazard before a peril * a direct loss before an indirect loss. * an indirect loss before a direct loss.

Answer 47

a direct loss before an indirect loss. * There must be a direct loss before an indirect loss. * Property insurance policies are specific when providing coverage for direct or indirect losses, or for both.

Question 48

An insured choosing a higher deductible for medical insurance is a form of __ ____??____ __. * risk avoidance * risk retention * ignoring risk * risk reduction

Answer 48

risk retention * By choosing a higher deductible, the insured chooses to retain more risk because the deductible will be paid by the insured.

Question 49

Kevin lives in an area of the country which experiences seismic activity from time to time. Recently, a moderate earthquake caused a gas line to rupture in Kevin’s home while no one was home. The gas accumulated and eventually exploded, causing fire to damage 50% of the home. Firefighters arrived quickly but the water used to extinguish the flames caused an additional $50,000 damage to property inside the house. The earthquake is considered to be __ ____??____ __. * the sole covered peril * the proximate cause of the loss * a moral hazard because of the known seismic activity * a physical hazard which intensified the loss

Answer 49

the proximate cause of the loss * The proximate cause of a loss is the first peril in a chain of events resulting in a loss. Without proximate cause, the loss would not have occurred.

Question 50

When considering a program for a firm to self-insure, each of the following statements are correct EXCEPT: * The firm needs to have the financial capacity to cover losses if they occur more frequently than predicted. * The firm should be big enough to combine sufficiently large numbers of exposure units so as to make a loss predicable. * The firm should be able to accumulate funds to meet losses that may occur. * There needs to be geographic concentration of risk.

Answer 50

There needs to be geographic concentration of risk. * There **needs to be a geographic distribution of risk** in the event of a catastrophe, not a geographic concentration.

Question 51

Losses not resulting from chance are called __ ____??____ __. * indirect losses * direct losses * depreciation expenses * consequential losses

Answer 51

depreciation expenses * Losses not resulting from chance are referred to as depreciation expenses. * Therefore, depreciation cannot be insured against, as such loss is guaranteed to occur, rather than being left to chance.

Question 52

A farmer purchasing crop insurance is an example of __ ____??____ __. * risk retention * risk reduction * risk transfer * risk avoidance

Answer 52

risk transfer * Risk transfer means transferring the financial consequences of any loss to some other party.

Question 53

Each of the following statements regarding risk is correct EXCEPT: * Insurance deals only in speculative risk. * Risk is the variation in possible outcomes of an event based on chance. * Risk can also be defined as the uncertainty concerning a possible loss. * The degree of risk is a measure of the accuracy with which the outcome of an event based on chance can be predicted.

Answer 53

Insurance deals only in speculative risk. * Speculative risk refers to those exposures to price change that may result in gain or loss. * **Insurance deals only with pure risks**.

Question 54

An insured’s possibility of loss is __ ____??____ __. * their insurable interest * risk of loss * their exposure to loss * their self-insurance capacity

Answer 54

their exposure to loss * The insured's possibility of loss is called their exposure to loss. * If the insured purchases an insurance policy, they transfers the exposure to loss to the insurer.

Question 55

An insured is involved in a minor auto accident along with three other passengers. Before the police arrive, the passengers agree to each complain of severe back pain when questioned about the accident, even though none of them is experiencing back pain. This is an example of a __ ____??____ __. * moral hazard * morale hazard * legal hazard * physical hazard

Answer 55

moral hazard * Moral hazards involve dishonest tendency such as exaggerating losses in a theft claim or auto insurance fraud.

Question 56

Which of the following is an indirect loss? I. A tornado causes significant damage to a business, causing the business to be closed for 6 months and results in lost revenue of $250,000. II. Faulty wiring in a detached garage causes a fire which completely destroys the garage. III. An out of control automobile crashes through the window of a business and destroys fragile merchandise displayed in the window. IV. Lightning strikes and destroys a satellite dish on the roof of a house. * I only * II, III, and IV * III and IV * I and II

Answer 56

I only * Indirect losses, also called consequential losses (such as loss of use), are a secondary result of an insured peril.

Question 57

Lesson 2. Evaluation and Analysis of Risk Exposures | Course 2. Insurance Planning

Question 58

With which of the following insurance policies do most people insure their real and personal property? * Liability * Life Insurance * Homeowners * Personal Auto

Answer 58

Homeowners * Most people insure their real and personal property with a homeowners insurance policy. This policy provides some extra living expense and liability coverage and can be quite flexible when endorsements for special situations are attached to the basic policy.

Question 59

Disability insurance usually replaces a portion of your __ ____??____ __ while you are unable to perform your job. * earned income * medical costs * insurance premiums * daily living costs

Answer 59

earned income * Many individuals purchase disability insurance to replace a portion of their earned income should they become disabled.

Question 60

Each of these play an important role in risk management EXCEPT: * Personal risk. * Loss prevention. * Risk avoidance. * Loss reduction.

Answer 60

Personal risk. * Personal risk does not play a direct role in the risk management process. * Loss prevention, risk avoidance, and loss reduction all play important roles in personal risk management as the current legal and economic environment has elevated the chance of liabilities and losses.

Question 61

Match the insurance type to the correct policy for coverage. Health Insurance Personal Property Personal Liability * Umbrella policies * Homeowners insurance policy * Employee benefit plan

Answer 61

* Health Insurance - Employee benefit plan * Personal Property - Homeowners insurance policy * Personal Liability - Umbrella policies

Question 62

What will insurance companies pay for when rebuilding at the same location? * Replacement cost with a depreciation deduction * Actual cash value * Fair market value * Replacement cost with no deduction for depreciation

Answer 62

Replacement cost with no deduction for depreciation * When rebuilding at the same location, insurance companies will pay replacement cost with no deduction for depreciation.

Question 63

Each of the following are potential problems firms face with international operations EXCEPT: * Valuation of property * Lack of local insurance facilities * Currency fluctuations * Potential for profitability

Answer 63

Potential for profitability * Valuation of property due to currency fluctuations and lack of local insurance facilities are potential problems that firms with international operations may experience.

Question 64

The __ ____??____ __ is the most likely maximum amount of damage a peril might cause under average circumstances. * maximum probable loss * policy limit * maximum possible loss * hazard threshold

Answer 64

maximum probable loss * The **maximum probable loss** is the most likely maximum amount of damage a peril might cause under average circumstances. * The **maximum possible loss** refers to the total amount of financial harm a given loss could cause under the worst circumstances.

Question 65

Each of the following are characteristics of a flow chart EXCEPT: * A graphical representation of processes. * Represents the production and distribution process. * Helps reveal the consequential impact of losses. * Listing of assets and liabilities.

Answer 65

Listing of assets and liabilities. * A flow chart graphically represents the production or distribution process and helps analyze the consequential impact of losses that could affect the firm.

Question 66

What are the property valuation problems faced by firms operating international operations? I. Valuation of property in foreign countries due to currency fluctuations. II. Lack of local insurance facilities. III. Lack of trained staff. IV. Cultural differences in trained staff. * I and II * III and IV * II and III * I and IV

Answer 66

I and II * Firms with international operations have property and employees in several countries. They have to identify all their property, and transportation between locations.

Question 67

Direct losses typically lead to indirect losses. * False * True

Answer 67

True * Direct losses can lead to indirect losses.

Question 68

Match the category of loss with the correct description. Bodily Injuries Personal Injuries Property Damages * Wages lost while the plaintiff was recovering from an injury. * Destruction and loss of use of tangible personal property. * Suffered when a person is deprived of his or her rights.

Answer 68

* Bodily Injuries - Wages lost while the plaintiff was recovering from an injury. * Personal Injuries - Suffered when a person is deprived of his or her rights. * Property Damages - Destruction and loss of use of tangible personal property.

Question 69

# Contributory Negligence Example: Assume the plaintiff fails to signal a turn and the plaintiff's car is hit in the side by an oncoming car that was speeding. Assume the defendant, driver of the speeding car, establishes the plaintiff's, negligent failure to signal caused, or at least contributed to, the loss. In this circumstance, neither plaintiff nor defendant could recover from each other under the contributory negligence rule.

Question 70

For recovery under the comparative negligence rule, assume the plaintiff, Moe D’Laun, a landscape architect, sustains $100,000 of damage in an automobile accident. Assume a court decides Moe was 30% responsible for the accident. Under the comparative negligence rule, Moe would recover $70,000. How much would Moe recover under the contributory negligence rule? * $50,000 * $0 * $100,000 * $30,000

Answer 70

$0 * Under the contributory negligence rule, Moe would recover nothing. * If it can be shown the plaintiff's own negligence contributed to or led to the injury sustained, the court will not allow recovery of damages from the defendant under the contributory negligence rule.

Question 71

Match the key term with the correct definition. Breach of Contract Legal Liability Insurance Torts Criminal Acts * Provides protection against the financial impact of lawsuits. * General wrongs against society. * Involves unreasonable conduct toward another person. * A failure, without a legal excuse, to perform contractual duties.

Answer 71

* Breach of Contract - A failure, without a legal excuse, to perform contractual duties. * Legal Liability Insurance - Provides protection against the financial impact of lawsuits. * Torts - Involves unreasonable conduct toward another person. * Criminal Acts - General wrongs against society.

Question 72

What is the doctrine of comparative negligence? * It states that a slight negligence on a plaintiff's part can relieve a grossly negligent defendant of responsibility for an accident. * It is a modification of the contributory negligence rule. * It states that if a plaintiff's negligence contributes to the loss, nothing may be collected if the court applies the contributory negligence rule. * It involves establishing that the plaintiff knowingly assumed the risk of injury.

Answer 72

It is a modification of the contributory negligence rule. * The contributory negligence states that even slight negligence on a plaintiff's part can relieve a grossly negligent defendant of responsibility for an accident. * The doctrine of comparative negligence is a modification and allows plaintiffs some recovery despite contributing to their own injuries.

Question 73

In some states, state laws prevent insurers from covering punitive damages. * False * True

Answer 73

True * In a few states, state laws prevent insurers from covering punitive damages as punishing an insurance company may not satisfy the courts' purpose of punishing wrongdoers.

Question 74

George, a prize fighter, stepped into the boxing ring and in the 10th round, broke Mike's nose. Mike sues George. What the most likely defense that George will provide? * That Mike assumed a risk when he entered the ring. * That under the doctrine of comparative negligence, Mike also hurt George so they are both equally at fault. * That Mike was negligent by not ducking the punch.

Answer 74

That Mike assumed a risk when he entered the ring. * As a boxer, Mike should assume that there is a risk of having his nose broken.

Question 75

# Exam 2. Evaluation and Analysis of Risk Exposures Exam 2. Evaluation and Analysis of Risk Exposures | Course 2. Insurance Planning

Question 76

Defamation includes each of the following EXCEPT: * Disrupting one’s peace of mind or right to be left alone * Libel * Slander * Communication by gestures

Answer 76

Disrupting one’s peace of mind or right to be left alone * The law recognizes two forms of defamation: libel (publication of statement by written or printed words) and slander (communication of statement by spoken words or gestures).

Question 77

What type of court awarded damages are to punish defendants for outrageously offensive acts? * Punitive damages * Personal injury * Compensatory damages * Collateral source

Answer 77

Punitive damages * Punitive damages usually imply gross negligence.

Question 78

What doctrine allows plaintiffs some recovery despite the establishment of contributory negligence as a defense? * Strict liability * Assumption of risk * Risk retention * Comparative negligence

Answer 78

Comparative negligence * Most states apply a modification of the contributory negligence rule called the doctrine of comparative negligence. * The comparative negligence doctrine allows plaintiffs some recovery despite contributing to their own injuries.

Question 79

Which of the following statements regarding the Occupational Safety and Health Act of 1970 (OSHA) is NOT correct? * OSHA provides a provision for imprisonment in some cases where employees' injuries are fatal. * OSHA requires notification of the Consumer Product Safety Commission (CPSC) by manufacturers and retailers of any product hazard of which they become aware. * OSHA requires removal of all recognized hazards from the work environment. * OSHA imposes heavy fines for noncompliance.

Answer 79

OSHA requires notification of the Consumer Product Safety Commission (CPSC) by manufacturers and retailers of any product hazard of which they become aware. * The Consumer Products Safety Act of 1972 (not OSHA) requires notification of the Consumer Product Safety Commission (CPSC) by manufacturers and retailers of any product hazard of which they become aware.

Question 80

If it is established that Bill knowingly assumed the risk of injury, he will not be awarded a judgment under the assumption of risk doctrine. Which of the following acts is considered tortious? I. Shooting fireworks toward a building II. Slander III. Libel V. Texting while driving resulting in injury to a pedestrian * All of these * None of these * II and III * I and IV

Answer 80

All of these * Each of these acts is tortious. * A person who commits a tort is known as a **tortfeasor**, and acts or omissions constituting torts are said to be **tortious**.

Question 81

What type of insurance provides wider liability insurance coverage than that found in a typical homeowners or automobile insurance policy? * Liability endorsement * Liability rider * Personal protection supplement policy * Personal liability umbrella policy

Answer 81

Personal liability umbrella policy * Personal liability umbrella policies provide wider coverage than the base policies they cover. * These umbrellas provide coverage if underlying (homeowners and automobile) policies are exhausted.

Question 82

What type of negligence defense seeks to establish that the injured party’s own negligence contributed to the injury sustained? * Risk retention * Collateral source rule * Assumption of risk * Contributory negligence

Answer 82

Contributory negligence * Establishing contributory negligence as a defense means that because both parties are at fault, neither will be allowed recovery from the other.

Question 83

Joe is at-fault in a serious automobile accident and is sued. His automobile policy has collision coverage with a $500 deductible and liability coverage in the amount of $500,000. Joe has a personal liability umbrella policy with a limit of $1,000,000. If the plaintiff is awarded $400,000, what amount is paid by the automobile policy and what amount is paid by the personal liability umbrella policy? * $200,000 will be paid by the automobile liability coverage; $200,000 will be paid by the personal liability umbrella policy. * $0 will be paid by the automobile liability coverage; $400,000 will be paid by the personal liability umbrella policy. * In this instance, Joe’s collision coverage will pay, and the automobile liability coverage and the personal liability umbrella policy will pay nothing. * $400,000 will be paid by the automobile liability coverage; $0 will be paid by the personal liability umbrella policy.

Answer 83

$400,000 will be paid by the automobile liability coverage; $0 will be paid by the personal liability umbrella policy. * $400,000 will be paid by the automobile liability coverage; $0 will be paid by the personal liability umbrella policy. * A personal liability umbrella policy does not pay until the underlying policy is exhausted. * The award is $400,000 and Joe has a $500,000 liability limit under his base automobile policy.

Question 84

Which of the following is not considered a personal risk? * Death * Liability to others * Disability * Health

Answer 84

Liability to others * **Liability to others is considered a property risk**.

Question 85

Farmer Octavio raises free-range chickens for egg production. Last night, Octavio failed to adequately secure the latch of the chicken pen. Overnight, two mountain lions escaped from the city zoo and ate several of Octavio’s chickens before Octavio shot and killed them. Which party is likely liable to the other for losses and under what doctrine? * The city zoo is liable for damages to Joe’s property under the doctrine of infliction of emotional distress. * The city zoo is liable for the loss of Octavio’s property under the doctrine of strict liability. * Neither party is liable for the loss’s sustained by the other party under the doctrine of contributory negligence. * Octavio is liable for the loss of the zoo’s property under the doctrine of assault and battery.

Answer 85

The city zoo is liable for the loss of Octavio’s property under the doctrine of strict liability. * The city zoo is liable for the loss of Octavio’s property under the doctrine of strict liability even if not found to be negligent because maintaining dangerous wild animals inherently presents a risk to the community.

Question 86

In risk management, which of the following is a form of risk control? * Risk transfer * Risk retention * Risk avoidance * Insurance

Answer 86

Risk avoidance * **Risk avoidance** is a type of risk control. * In addition, **risk reduction** is also considered a form of **risk control**.

Question 87

What type of insurance policy extends and increases the liability coverage on other policies? * Endorsement * Umbrella * Open-perils * Broad form

Answer 87

Umbrella * An umbrella policy provides additional liability coverage if the underlying policies (auto and homeowners) are exhausted.

Question 88

Which of the following statements is not correct regarding criminal conduct? * Criminal prosecution punishes a guilty defendant's conduct by imposing a fine, prison term, compensatory damages, or punitive damages. * The same conduct may be both a crime and a tort. * A crime is an intentional violation of another’s rights. * Criminal prosecution is maintained by the state or federal government.

Answer 88

Criminal prosecution punishes a guilty defendant's conduct by imposing a fine, prison term, compensatory damages, or punitive damages. * Criminal prosecution punishes a guilty defendant's conduct by imposing a fine, or prison term, but does not award compensatory or punitive damages. A civil legal proceeding may be filed to seek damages.

Question 89

A hospital being found guilty of negligence for the mistakes made by a physician that resulted in the death of a patient is an example of __ ____??____ __. * vicarious liability * errors and omissions * limited liability * absolute liability

Answer 89

vicarious liability * Vicarious liability can arise for people or organizations when parties they hire as employees or contractors injure others.

Question 90

An intentional tort in which a person confines another within fixed boundaries (for example, by being locked in a room) is called __ ____??____ __. * defamation * false imprisonment * intention infliction of emotional distress * assault and battery

Answer 90

false imprisonment * False imprisonment is an intentional tort in which a person confines another within fixed boundaries by physical force, threat of physical force, or other forms of duress.

Question 91

The use of deductibles, co-payments, and waiting periods are examples of __ ____??____ __. * Risk transfer * Risk avoidance * Risk reduction * Risk retention

Answer 91

Risk retention * Deductibles, co-payments, and waiting periods are examples of risk retention and are paid by the insured.

Question 92

Tom is driving on Main Street and drifts over the center line. Bill is driving from the opposite direction and sees Tom has crossed the center line. Bill does not take evasive action and crashes into Tom. Under what doctrine may Bill be found liable for damages incurred by Tom? * Contributory negligence * Comparative negligence * Last clear chance * Assumption of risk

Answer 92

Last clear chance * Despite Tom’s negligence, Bill had a clear chance to avoid the injury.

Question 93

Under what doctrine may an injured party seek damages from a negligent party even if the injured party is fully compensated by insurance? * Collateral source rule * Compensatory damages * General damages * Punitive damages

Answer 93

Collateral source rule * The collateral source rule allows that damages for bodily injury can be assessed against the negligent party even when the injured person recovers the amount of his or her loss from other sources.

Question 94

Which of the following can help identify potential direct property losses for a business? * An analysis of financial statements, as well as the supporting accounts, can highlight assets exposed to loss. * An analysis of past losses. * A walking tour of the business can reveal many property loss exposures. * Each of these approaches can help a risk manager to identify potential loss exposure.

Answer 94

Each of these approaches can help a risk manager to identify potential loss exposure. * Additionally, regular interviews with knowledgeable employees can be helpful in risk management.

Question 95

To settle a traffic accident dispute, Tom and Bill agree to a three-round boxing match with all proceeds raised going to a local charity. The charity widely promotes the event and considerable money is raised and provides the boxing ring and gloves for the match. During the boxing match Bill suffers a broken jaw. Bill files a lawsuit against the charity for negligence in not providing proper head gear for the fight. What doctrine may preclude Bill from collecting damages? * Assumption of risk * Comparative negligence * Last clear chance * Contributory negligence

Answer 95

Assumption of risk * A line of defense that involves establishing the plaintiff knowingly assumed the risk of injury. * If the defendant establishes assumption of the risk, the plaintiff will not be awarded a judgment.

Question 96

Jill has a homeowners insurance policy that provides $25,000 coverage for personal property. She also has a personal liability umbrella policy with a $1,000,000 limit. Jill’s home is nearly destroyed by a fire and it is determined her personal property loss is $50,000. How much will the umbrella policy pay for the property loss? * $0 * $25,000 * $50,000 * Up to $100,000

Answer 96

$0 * Personal liability umbrella policies do not coverage loss of personal property. * Umbrella policies cover liability claims in excess of the underlying policy limits.

Question 97

What type of damages award compensate the injured party for intangible losses, such as pain and suffering, disfigurement, mental anguish, and loss of consortium? * Personal injury damages * Compensatory damages * General damages * Punitive damages

Answer 97

General damages * General damages awarded compensate the injured party for intangible losses, such as pain and suffering, disfigurement, mental anguish, and loss of consortium.

Question 98

Each of the following is an indirect cost of legal liability lawsuits EXCEPT: * Hostile environment where fear of lawsuits inhibits business and personal activity. * Elimination of products and services. * Higher costs for goods and services. * Attorney fees and court costs.

Answer 98

Attorney fees and court costs. * Attorney fees and court costs are example of direct costs involving legal liability lawsuits.

Question 99

Which of the following statements regarding key person life insurance is NOT correct? * Once key employees are identified, life insurance should be considered for them. * In a key person policy, the business pays the premiums and the key employee names a beneficiary to receive the death benefit tax-free. * Key person insurance benefits can be used to recruit and train a new person. * Key person life insurance can help cover lost income to the business due to the key person’s death.

Answer 99

In a key person policy, the business pays the premiums and the key employee names a beneficiary to receive the death benefit tax-free. * The business owns and pays the premiums for a key person policy and the insurance proceeds are payable to the business.

Question 100

Which of the following is a form of risk financing? * Risk avoidance * Risk management * Insurance * Risk reduction

Answer 100

Insurance * **Risk retention and risk transfer (insurance)** are levels of **risk financing**.

Question 101

Tom is a general contractor in the construction business. He is running behind for the completion date of a major project. He will forfeit a portion of his compensation if he fails to meet the deadline. Tom contracts with a friend to help finish the job. Scaffolding used by the friend accidently collapses into the street, damaging several cars and injuring one pedestrian. Under what type of doctrine may Tom be found responsible for damages? * Joint and severable liability * Vicarious liability * Contributary negligence * Comparative negligence

Answer 101

Vicarious liability * **Vicarious liability is a form of strict liability which attaches responsibility for damages to another person in a negligence or criminal proceeding**. * An employer can be held liable for damages caused by an employee’s negligence.

Question 102

Lesson 3. Legal Aspects of Insurance | Course 2. Insurance Planning

Question 103

Describe Conditional Receipt and Errors & Omissions Insurance

Answer 103

A conditional receipt can provide temporary coverage, contingent on an applicant's ability to present evidence of insurability. Life insurance agents give applicants a conditional receipt when the applicants submit a premium payment with the application. With one common type of conditional receipt, if evidence of insurability exists, coverage begins from the date of the receipt. Evidence of insurability always includes, but is not limited to, good health. Occupation would be another factor. **Practitioner Advice: The conditional receipt affords the life insurance applicant temporary coverage during the underwriting process. Agents should always encourage an applicant to submit an initial premium payment with the application in order to receive such a receipt. If the agent does not educate the applicant of this when a conditional receipt is available, and the applicant dies in an accident after all medical testing had been completed, the agent could be sued by the deceased applicant's heirs for failure to provide advice that is expected of a licensed professional. Such mistakes of agents are why errors & omissions insurance exists and should be maintained.**

Question 104

Each of the following elements are required in acceptance of an offer EXCEPT: * Unconditional * Unequivocal * Communicated Clearly * Well-documented

Answer 104

Well-documented * The **acceptance** must be **unconditional, unequivocal, and communicated clearly**.

Question 105

What are the four elements that all valid contracts must have?

Answer 105

* Offer and acceptance * Consideration * Capacity * Legal purpose

Question 106

Match the contract-related terms with the correct definition. Void Contract Voidable Contract Binder Conditional Receipt * A temporary contract in property insurance. Often used before the issuance of the formal insurance policy. * Provides temporary life coverage, contingent on an applicant's ability to present evidence of insurability. * Not legally enforceable because it lacks one or more features of a valid contract. * A valid contract that allows one party the option of breaking the agreement because of an act or omission of an act by the other party.

Answer 106

* Void Contract - Not legally enforceable because it lacks one or more features of a valid contract. * Voidable Contract - A valid contract that allows one party the option of breaking the agreement because of an act or omission of an act by the other party. * Binder - A temporary contract in property insurance. Often used before the issuance of the formal insurance policy. * Conditional Receipt - Provides temporary life coverage, contingent on an applicant's ability to present evidence of insurability.

Question 107

What would happen if the insured were injured because of having unknowingly dealt with an unauthorized insurer? * The insured would lose money paid for premiums. * The insurer would be subject to fines and penalties by court. * The insurer would obtain a license later and avoid fines. * None of the above.

Answer 107

The insurer would be subject to fines and penalties by court. * The unauthorized insurer would be subject to fines and penalties by court if an insured were injured because of having dealt unknowingly with an unqualified insurer. They must have a license to operate in each state in which they do business.

Question 108

Which one of the following statements about conditional receipts is true? * Used only in property insurance. * Provides permanent coverage when accompanied by first premium payment. * Used only in life insurance. * Used mainly when insuring minors.

Answer 108

Used only in life insurance. * A conditional receipt is used in life insurance. Life insurance agents give applicants a conditional receipt when the applicants submit a premium payment with the application.

Question 109

How can Contracts be Discharged?

Answer 109

Contracts can be discharged on the grounds of the following conditions: * Performance * Condition precedent * Condition subsequent * Rescission * Reformed

Question 110

Which of the following are exceptions to the rule that insurance contracts are contracts of indemnity? I. Life Insurance II. Replacement-Cost Insurance III. Valued Insurance IV. Insurable Interest * I, II, and III * I only * II and III * I and IV

Answer 110

I, II, and III **The three exceptions to the rule that insurance contracts are contracts of indemnity are**: * life insurance, * replacement-cost insurance, and * valued insurance. **Indemnity seeks to establish proportionality** between the insured object and the proceeds received for its loss **so that the insured is not unduly enriched**. * This proportionality does not exist in the above exceptions.

Question 111

Each of the following are covered under valued insurance policies EXCEPT: * Marine insurance contracts * Art objects * Collector's items * Real Estate

Answer 111

Real Estate * The use of valued policies generally is limited to objects for which market value may fluctuate or be difficult to determine accurately after a loss, such as art objects and other collector's items. * **Art objects, collector's items, and some ocean and inland marine insurance contracts are covered under the valued insurance policies**.

Question 112

# Exam 3. Legal Aspects of Insurance Exam 3. Legal Aspects of Insurance | Course 2. Insurance Planning

Question 113

A contract executed with a minor would be __ ____??____ __. * invalid * voidable * breached * void

Answer 113

voidable * A minor does not possess legal capacity to enter a contract. * In this case, the **minor has the option to void the contract but could hold the other party to execute the contract**. * The contract, therefore, is considered **voidable**.

Question 114

A contract entered with a person lacking mental capacity to enter a contract is considered __ ____??____ __. * voidable * void * breached * valid and executable

Answer 114

void * If a contract is established with a **person lacking mental capacity, the contract is considered void and treated as though it never existed**.

Question 115

Which of the statements regarding a property insurance binder is NOT correct? * A binder is often used before the issuance of the formal insurance policy. * A binder must be in writing to be enforceable. * A binder is a temporary contract in property insurance. * A binder must meet all the requirements for a legal contract. It is distinguished by its temporary nature (often 30 days or less).

Answer 115

A binder must be in writing to be enforceable. * A binder may be oral or written. * An oral binder, such as one an agent may give over the telephone, should be followed by a written document.

Question 116

An insured loses an old, run-down building to a fire and insurance pays for a new building. This is an example of what type of coverage? * Valued insurance * Actual cash value (ACV) * Replacement-Cost * Indemnity

Answer 116

Replacement-Cost * Replacement-Cost Insurance is written when the insurer promises to pay an amount equal to the full cost of repairing or replacing the property without deduction for depreciation.

Question 117

Which of the following statements regarding replacement cost is correct? * Replacement cost of a building is equal to the fair market value of the property. * Location can be an important factor in property value but not in replacement cost. * Replacement cost means the dollar amount required to rebuild a similar structure meeting the building code requirements in effect at the time of original construction. * Market value does not include the value of the land and its location.

Answer 117

Replacement cost means the dollar amount required to rebuild a similar structure meeting the building code requirements in effect at the time of original construction. * **Replacement cost means the dollar amount required to rebuild a similar structure meeting the building code requirements in effect at the time of original construction**. * Replacement cost does not reflect the cost of land or impact of location.

Question 118

A proposal to exchange something of value with another person is called the __ ____??____ __. * conditional receipt * acceptance * offer * binder

Answer 118

offer * The proposal to make an exchange is called the offer. * The **offer must be reasonably definite and communicated clearly**.

Question 119

Which of the following statements regarding the owner of a life insurance policy is NOT correct? * The owner can assign the policy as collateral. * The owner can execute a loan from the policy, if available. * The owner and the insured are always the same person. * The owner of the policy is the party who can name the beneficiary.

Answer 119

The owner and the insured are always the same person. * The owner and the insured are not always the same person. * **A spouse, child, business partner, or a trust may be the owner of a policy insuring another person’s life**.

Question 120

Insurers enforce the principle of indemnity through each of the following EXCEPT: * Actual cash value settlements. * Allowing an insured to profit in an insurance transaction. * The insurable interest requirement. * The operation of subrogation clauses.

Answer 120

Allowing an insured to profit in an insurance transaction. * Insurance contracts provide compensation for an insured's losses. * The insured should not profit from an insurance transaction.

Question 121

Which of the following statements is not correct regarding valid elements of a contract? * The offer and acceptance must be in writing. * The contract must have an end or intention permitted by law. * The parties must have legal capacity to enter into the contract. * There must be an exchange of consideration to have a valid contract.

Answer 121

The offer and acceptance must be in writing. * The acceptance must be unconditional, unequivocal, and communicated clearly. * The offer and acceptance may be oral or in writing.

Question 122

Each of the following are elements of a valid contract EXCEPT: * Any purpose agreed upon by the parties * Offer and acceptance * Capacity * Consideration

Answer 122

Any purpose agreed upon by the parties * The purpose of the contract must be legal. * A contract for the purpose of committing an illegal act is not valid.

Question 123

Which of the following statements is NOT correct regarding a life insurance conditional receipt? * If evidence of insurability exists, coverage begins from the date of the conditional receipt. * An applicant must submit a premium payment with a life insurance application to receive a conditional receipt. * A life insurance agent who does not explain a conditional receipt at the time of the application could face legal action by the applicant’s heirs if the applicant dies while the application is being underwritten. * Evidence of insurability is based solely on the current health of the proposed insured.

Answer 123

Evidence of insurability is based solely on the current health of the proposed insured. * In addition to the health of the applicant, the occupation of the applicant may be an underwriting factor. A life insurance company may not be willing to insure someone who works in a very dangerous profession.

Question 124

Each of the following statements regarding insurable interest is correct EXCEPT: * In property insurance, there must be an insurable interest at the time of the loss. * In property insurance, a person may purchase insurance on property not yet owned. * In life insurance and property insurance, the policy owner must have an insurable interest at the time the policy is purchased and at the time of loss. * In life insurance, the beneficiary must have an insurable in the life of the insured at the time the policy is purchased.

Answer 124

In life insurance and property insurance, the policy owner must have an insurable interest at the time the policy is purchased and at the time of loss. * **In life insurance, the policy owner must have an insurable in the life of the insured at the time the policy is purchased but not at the time of loss**. * **In property insurance, there must be an insurable interest at the time of the loss but not at the time the insurance is purchased**.

Question 125

Each of the following statements is correct EXCEPT: * After a proposal to make an exchange is made, if the second person agrees it is called acceptance. * The acceptance may be oral. * The acceptance may include conditions from the accepting party. * The legally binding arrangement that explains the basic promise of the insurance company is known as the insuring agreement.

Answer 125

The acceptance may include conditions from the accepting party. * The **acceptance must be unconditional, unequivocal, and communicated clearly**.

Question 126

An insurance contract is what type of contract? * Unilateral contract * Bilateral contract * Voidable contract * Temporary contract

Answer 126

Unilateral contract * Insurance contracts are unilateral in that only the insurer makes a binding promise.

Question 127

Which of the following statements regarding a valued insurance policy is NOT correct? * When a loss occurs, the policy pays the stated amount without regard to the actual amount of loss. * The value of the insured property is agreed to before the policy is written. * A valued insurance policy is an exception to the rule of indemnity. * Coverage under a valued insurance policy pays an amount reflecting appreciation of the property at the time of loss.

Answer 127

Coverage under a valued insurance policy pays an amount reflecting appreciation of the property at the time of loss. * The loss may be greater than or less than the stated amount of coverage. * Nonetheless, the policy pays the stated amount.

Question 128

Several years ago, Sal purchased a piece of machine for his small business at a cost of $50,000. The machine has since depreciated by $25,000. The replacement cost of the today is $65,000. Sam’s property insurance will pay the actual cash value of the machine, with a limit of $100,000. If the machinery is destroyed by fire, how much will the insurance company pay for the loss of the machine? * $75,000 * $65,000 * $50,000 * $40,000

Answer 128

$40,000 * Actual cash Value (ACV) means replacement cost at the time of the loss, less depreciation.

Question 129

When replacement cost of a building is greater than the market value, such as is common with historic older structures, an insurer may provide coverage based on replacement cost with modern construction techniques. This is known as __ ____??____ __. * purchase price less depreciation * replacement cost less depreciation * actual cash value (ACV) * functional replacement

Answer 129

functional replacement * The provision described is known as functional replacement.

Question 130

Joe’s car has been badly damaged by another driver who was speeding and ran through a red light. The police found the speeding driver to be at fault. Joe’s insurance company paid for the repairs. Under what legal premise may Joe’s insurance company seek to collect from the at-fault driver? * Functional replacement * Subrogation * Performance * Absolute liability

Answer 130

Subrogation * Subrogation is supported by the theory that if a person must pay a debt for which another is liable, such payment should give the person a right to collect the debt from the liable party. * **In insurance, subrogation gives the insurer the right to collect from a third party after paying its insured's claim**.

Question 131

Which of the following statements is not correct regarding a contract executed by a company with a 13-year-old? * The contract is automatically void because the 13-year-old does not have legal capacity to enter into a contract. * The contract may be voided by either party at any time. * The 13-year-old may choose to void the contract, but the company may not. * At age of majority, the teenager may choose to affirm the contract.

Answer 131

The 13-year-old may choose to void the contract, but the company may not. * A contract entered into with a 13-year-old is voidable because the teen does not have legal capacity to enter into a contract. * The teen may choose to enforce the contract. * At age of majority, the teen may choose to affirm the contract.

Question 132

Mary’s car was totaled as a complete loss in an accident for which another driver was found at fault. Mary’s insurance company paid the claim. Under which doctrine may Mary’s insurance company pursue damages from the party at fault? * Subrogation * Condition precedent * Principle of indemnity * Insurable interest

Answer 132

Subrogation * In insurance, subrogation gives the insurer the right to collect from a third party after paying its insured's claim. * A typical case of subrogation arises in automobile insurance collision claims.

Question 133

Each of the following statements is correct EXCEPT: * In a binding insurance contract, the insured promises to pay the premiums in exchange for the insurance company’s promise to pay the insurance benefits. * An insurance contract is a unilateral contract. * An insurance company is limited to specific situations under which it may cancel a policy. * Insureds cannot collect for losses if they do not pay premiums.

Answer 133

In a binding insurance contract, the insured promises to pay the premiums in exchange for the insurance company’s promise to pay the insurance benefits. * The insured does not promise to pay the premiums and cannot be sued for failure to do so.

Question 134

If one party to a contract fails to perform its duties without a legal excuse, the contract is considered __ ____??____ __. * illegal * breached * void * voidable

Answer 134

breached * If a contract is breached or if disputes arise between the parties about the interpretation of the contract, the issues may be settled by a court.

Question 135

The requirement for a policyholder to pay the required premiums before the insurance company is obligated to pay a claim is called __ ____??____ __. * subrogation * a bilateral contract * a condition subsequent * a condition precedent

Answer 135

a condition precedent * A condition precedent is something that must be done by one party to activate the other party’s duty to perform. * The insured must satisfy a condition precedent before the insurer is obligated to pay the claim.

Question 136

Lesson 5. General Business Liability | Course 2. Insurance Planning

Question 137

Business liability insurance can protect firms from which of the following losses? I. Independent losses II. Contractual liability losses III. Direct liability losses IV. Vicarious liability losses * II only * I and III * II and IV * II, III, and IV

Answer 137

II, III, and IV * Risk managers may purchase liability insurance to protect their firms from direct, vicarious, and contractual liability losses.

Question 138

Each of the following may be covered under a general liability and property package policy EXCEPT: * Bodily Injury * Property Damage * Libel * Errors & Omissions

Answer 138

Errors & Omissions * **A general liability and package policy can cover accidents, bodily injury, property damage, libel, slander, and false advertising**. * An **errors & omissions (E&O) policy** is a **type of professional liability insurance** that covers negligence while providing services or advice. * E&O insurance primarily serves to protect against instances of financial harm imposed by a business professional.

Question 139

Coffee distributor, The General Bean Factory, is found responsible for injuring W. Marlowe Rose, a visiting salesperson. The jury returns a $10 million verdict in favor of Mr. Rose. The General Bean Factory’s CGL policy has a coverage limit of $1 million for injuries of this type. If The General Bean Factory had a $10 million liability umbrella policy, how much of an award would it pay in this situation? * $9 million * $10 million * $1 million * $11 million

Answer 139

$9 million * In this situation, the $1 million of CGL coverage would apply first and the liability umbrella policy would pay the remaining $9 million of the award.

Question 140

The claims-made form places the insured in a more vulnerable position than occurrence-type policies. * False * True

Answer 140

True * Because claims-made policies expose the insured to claims made after the policy expires, they place the insured in a more vulnerable position than occurrence-type policies.

Question 141

Match the term with the correct definition. Direct Liability Vicarious liability Contractual liability * A firm that accepts a liability by contract. * Also called indirect liability. * Arises out of the firm's own actions.

Answer 141

* Direct Liability - Arises out of the firm's own actions. * Vicarious liability - Also called indirect liability. * Contractual liability - A firm that accepts a liability by contract.

Question 142

Which of the following categories would the following example fall into, if an employee of an organization causes harm to a third party by actions such as assault and battery? * Vicarious Liability * Contractual Liability * Premises and Operations Exposure * Completed Operations Exposure

Answer 142

Vicarious Liability * Vicarious liability is an indirect liability that arises when a firm hires an independent subcontractor, who in turn injures a third party. * This liability can be extend to intentional wrongs acts done by employees or agents of an organization that cause harm to a third party. * These include actions such as assault and battery.

Question 143

Tail coverage would be useful, if a contractor ceased operations but wanted liability insurance for a few years in case some lawsuits were filed over previously completed work. * False * True

Answer 143

True * The tail period, also called the extended reporting period by insurers, extends the time during which a claim may be filed for a loss occurring during the policy period. * Tail coverage would be useful, if a contractor ceased operations but wanted liability insurance for a few years in case some lawsuits were filed over previously completed work.

Question 144

What are the three triggers of Triple-Trigger Theory?

Answer 144

If several insurance policies were in force when a developing injury is in progress, all the insurers would be responsible for providing coverage. This is called the triple-trigger theory. The three triggers are exposure, manifestation, and exposure-in-residence period. The three triggers defined: * **Exposure**: The insurer whose policy was in force when the first exposure to hazardous substance occurred. * **Manifestation**: The insurer whose policy was in force when the disease was first recognized. * **Exposure-in-residence period**: The insurer whose policy was in force when the disease developed.

Question 145

Cristina was an New York City firefighter with Ladder No. 10. She and her team served as first responders at the World Trade Center on September 11, 2001. In 2013, Cristina suddenly developed chronic asthma that has persisted ever since. Lab results have concluded that toxins at the World Trade Center site led to the chronic condition. At the time Cristina’s asthma was first recognized, she was covered by an Ascendant Health Insurance plan. According to the Triple-Trigger Theory, which of the three trigger types would apply to the Ascendant Health Insurance? * Exposure * Manifestation * Exposure-in-residence period

Answer 145

Manifestation * The Ascendant Health Insurance plan would be categorized as a manifestation trigger since it was the in-force policy when Cristina’s asthma was first recognized.

Question 146

Jerry is a risk manager in a shipping company, S & S Shipping Corporation. Two weeks ago one of its ships was responsible for oil spill in the North Sea. As a risk manager he needs to familiarize himself with federal and state environmental legislation. * False * True

Answer 146

True * Risk managers in organizations must be familiar with all relevant federal and state environmental legislation for two reasons. * Many corporations accept the responsibility of protecting the environment. * Second, many of these laws provide for significant fines and penalties.

Question 147

The manufacturer supplies a firearm to the retailer and encloses detailed printed instructions and warnings. An employee of the owner sells the gun without finding the original box and instructions. The buyer is injured because he does something that warnings could have prevented. The retailer could be found negligent and sued on for product liability insurance. * False * True

Answer 147

True * A manufacturer of a product has a legal liability to design and produce a product that will not injure people in normal use. * Products must be packaged carefully and accompanied by adequate instructions and warnings so consumers may use them properly and avoid injury. * Products liability arises when a manufactured item injures a consumer. * Products liability insurance traditionally has been provided to manufacturers as part of the comprehensive general liability policy. * The manufacturer as well as the vendor of a product can be named defendants in the lawsuit.

Question 148

Which of the following types of employment liability is NOT commonly accepted: * Wrongful termination * Negligent supervision * Invasion of privacy * Unfair reprimand

Answer 148

Unfair reprimand * Employers are not typically held liable for action that has not violated the legal rights of employees or has not resulted in actual harm to the employee.

Question 149

Jake bought an iron and every time he plugged it in he found that there was a leakage of electric current from the iron. After a couple of weeks of this happening repeatedly he finally sued the manufacturer of this iron. Jake can claim liability under which of the following categories? * Premises and Operations * Products Liability * Completed Operations * Vicarious Liability

Answer 149

Products Liability * **Direct liability arises out of the firm's own actions**. * **Most of these exposures fall into three subcategories. Premises and operations, products liability, completed operations**. * In the question scenario, Jake can sue the manufacturer of the iron under product liability, which is direct liability.

Question 150

# Exam 5. General Business Liability Exam 5. General Business Liability | Course 2. Insurance Planning

Question 151

Ken, a financial planner, is away on vacation. His paraplanner, Shyrah, gives advice to one of Ken's clients. Sue's information causes the client to lose money. Can Ken be held responsible? * No, he did not give the advice. * Yes, Ken can be held responsible under strict liability. * Yes, Ken can be held responsible under the doctrine of vicarious liability. * No, he was on vacation.

Answer 151

Yes, Ken can be held responsible under the doctrine of vicarious liability. * An employer or superior may be subject to vicarious liability for damages created by an employee or subordinate.

Question 152

Choose the type of insurance that will cover claims from injuries arising after a service is rendered and the property's control is returned to the owner. * Directors and Officers Liability Insurance * Completed Operations Insurance * Employment Practices Liability Insurance * Errors & Omissions Insurance

Answer 152

Completed Operations Insurance * Completed Operations Insurance covers claims from injuries arising after a service is rendered and the property's control is returned to the owner.

Question 153

Identify the correct type(s) of Commercial General Liability (CGL) format(s). I. Occurrence-based II. Claims-made * Neither I nor II * I only * II only * Both I and II

Answer 153

Both I and II CGL policies have two formats: * Occurrence-based * Claims-made

Question 154

What type of insurance pays a worker who is injured on the job? * Unemployment insurance * Commercial umbrella coverage * Directors and officers liability insurance * Worker’s compensation insurance

Answer 154

Worker’s compensation insurance * Worker's Compensation Insurance provides benefits to workers and their dependents when a worker suffers an occupational injury or disease.

Question 155

Zev owns and operates a custom furniture company. On a recent job, Zev hires Greg to install a specialized hinge system into his handcrafted cabinets. While hanging a cabinet, Greg dropped the door onto the homeowner which resulted in a broken collarbone. The homeowner filed a lawsuit against Zev’s company even though Greg was responsible for dropping the cabinet door. Select the type of liability exposure to which Zev’s company has been subjected. * Contractor Liability * Direct Liability * Contractual Liability * Vicarious Liability

Answer 155

Vicarious Liability * Vicarious liability most often arises when a firm hires an independent subcontractor. * The plaintiff would claim the firm was negligent in hiring, informing, or supervising the contractor.

Question 156

A commercial umbrella policy is considered __ ____??____ __ because it pays only for losses above the underlying limits. * long-tail liability insurance * excess liability insurance * general liability insurance * professional indemnity insurance

Answer 156

excess liability insurance * A commercial umbrella policy can be purchased to provide coverage after underlying liability policies have been exhausted. * In this case, the umbrella policy is called excess liability insurance because the umbrella policy pays only for losses in excess of the underlying limits.

Question 157

Mr. Harris serves as a director of his condo association. He is not paid for his services. During the year, the management company of the condo lost $1 million due to negligent acts. Can Mr. Harris be sued? * No, Mr. Harris is only responsible in case of mismanagement. * No, Mr. Harris is not an officer of the condo association. * No, the management company is solely responsible. * Yes, Mr. Harris can be sued.

Answer 157

Yes, Mr. Harris can be sued. * This is why Mr. Harris should require the condo association to purchase Directors and Officers coverage. * He can be sued by an association member.

Question 158

Choose the laws that have been enacted to establish a sound foundation of environmental rules and regulations. I. Clean Air Act II. The Clean Water Act III. The Toxic Substances Control Act IV. Comprehensive Environmental Response and Compensation Liability Act (CERCLA) * III and IV * I and II * I, II, and III * I, II, III, and IV The following laws have been enacted to establish a sound foundation of environmental rules and regulations: Clean Air Act The Clean Water Act The Toxic Substances Control Act Comprehensive Environmental Response and Compensation Liability Act (CERCLA) [commonly referred to as Superfund] and its amendments, including SARA of 1986.

Answer 158

I, II, III, and IV The following laws have been enacted to establish a sound foundation of environmental rules and regulations: * Clean Air Act * The Clean Water Act * The Toxic Substances Control Act * Comprehensive Environmental Response and Compensation Liability Act (CERCLA) [commonly referred to as Superfund] and its amendments, including SARA of 1986.

Question 159

A __ ____??____ __ is a highly trained person with specialized skills, education, or knowledge that is compensated to provide a service to the public. * technician * pundit * professional * consultant

Answer 159

professional * The term professional refers to a highly trained person with specialized skills, education, or knowledge that is compensated to provide a service to the public.

Question 160

Which of the following statements is not correct regarding commercial umbrella policies? * There is no standard form of commercial umbrella liability insurance and many policies have substantial differences. * Many contracts contain exclusions, such as for liabilities arising from workers compensation, unemployment compensation, and disability benefits law. * Coverage is provided on an “all-risk” basis. * Most policies provide coverage for personal injury liability, property damage liability and advertising liability.

Answer 160

Coverage is provided on an “all-risk” basis. * Coverage is generally comprehensive but is not "all-risk" since many contracts contain common exclusions for liabilities arising from workers compensation, unemployment compensation, disability benefits law and others.

Question 161

Which type of liability insurance covers a financial advisor for damages awarded a client due to advisor negligence in business dealings with the client? * Directors and officer’s liability insurance * Completed operations insurance * Errors and omissions insurance * Commercial umbrella liability insurance

Answer 161

Errors and omissions insurance * **Financial professionals should include Errors and Omissions insurance as a necessary coverage in the advisor’s personal risk management plan**.

Question 162

Each of the following may be categorized as a type of business general liability exposure EXCEPT: * Direct Liability * Contingent Liability * Vicarious Liability * Contractual Liability

Answer 162

Contingent Liability We can **categorize business general liability exposures as follow**s: * **Direct** Liability * **Vicarious** Liability * **Contractual** Liability **A contingent liability is an accounting item and is a type of potential loss that is payable following the occurrence of an event**.

Question 163

According to the triple-trigger theory, identify the category of insurer whose policy was in force when the disease developed. * Exposure * Covered perils * Exposure-in-residence period * Manifestation

Answer 163

Exposure-in-residence period * The type of exposure described is an exposure-in-residence period. * This refers to the insurer whose policy was in force when the disease developed.

Question 164

What type of liability insurance covers claims filed many years after the alleged injury? * Commercial umbrella liability insurance * Completed operations insurance * Errors and omissions insurance * Tail coverage

Answer 164

Tail coverage * Tail coverage is useful if a contractor ceased operations but wanted liability insurance for a few years in case a lawsuit is filed over previously completed work. * The tail period, which insurers also call the extended reporting period, extends the time during which a claim may be filed for a loss occurring during the policy period.

Question 165

A business insurance package policy generally insures lost or damaged property at what value? * Actual cash value * Replacement value * Actual cash value less depreciation * Replacement value less depreciation

Answer 165

Replacement value * A business insurance package policy generally insures lost or damaged property for replacement value without deducting for depreciation.

Question 166

Insurers call claims filed many years after the alleged injury __ ____??____ __ claims. * prolonged * subsequent * postponed * long-tail

Answer 166

long-tail * Insurers call claims filed many years after the alleged injury long-tail claims.

Question 167

Tile-blazers, a manufacturer of performance mall-walking sneakers, had a factory fire that caused bodily injury to several employees. A jury ruled that the injured employees were owed $15 million from Tile-blazers. The company has a general liability and property package policy with a coverage limit of $2.5 million & a commercial umbrella policy worth $20 million. How much did Tile-blazers commercial umbrella policy pay? * $20 million * $12.5 million * $2.5 million * $15 million

Answer 167

$12.5 million * In this situation, the $2.5 million of general liability coverage would apply first, reducing the $15 million to $12.5 million ($15 million - $2.5 million). * Then, the liability umbrella policy would pay the remaining $12.5 million balance.

Question 168

Joe, a CFP® practitioner, has various personal, business, and professional insurance policies. He is sued by a client for unsuitable investments recommendations. Which policy or policies will afford Joe coverage? I. Malpractice II. Errors and Omissions III. Personal Umbrella IV. Commercial Umbrella V. Business Owners Policy * II, IV, V * III, IV, V * II * I, III, IV * II, IV

Answer 168

II * Professional liability is covered only by errors and omissions. * **The personal umbrellas, the commercial umbrella, and the BOP all have exclusions for professional liability**.

Question 169

Business liability insurance can protect firms from which of the following losses? I. Independent losses II. Contractual liability losses III. Direct liability losses IV. Vicarious liability losses * II, III, and IV * II and IV * II only * I and III

Answer 169

II, III, and IV * Risk managers may purchase liability insurance to protect their firms from direct, vicarious, and contractual liability losses.

Question 170

Which of the following may have liability exposure(s) if a faulty product injures a consumer? I. Manufacturer II. Vendor * Neither I nor II * Both I and II * I only * II only

Answer 170

Both I and II * Products must be packaged carefully and accompanied by adequate instructions and warnings to ensure proper use and avoidance of injury. * If any of these duties are not fulfilled and the result is an injured user, potential for a product liability lawsuit exists with the manufacturer and/or the vendor of a product.

Question 171

Under ____________, if several insurance policies were in force when a developing injury is in progress, all the insurers would be responsible for providing coverage. * vicarious liability * comprehensive coverage * triple-trigger theory * multi-line insurance coverage

Answer 171

triple-trigger theory * If several insurance policies were in force when a developing injury is in progress, all the insurers would be responsible for providing coverage. * This is called the triple-trigger theory.

Question 172

Lesson 4. Property and Casualty Insurance | Course 2. Insurance Planning

Question 173

List the ISO Forms and their Coverages

Answer 173

* HO-2 Broad Dwelling and structures: Named peril; Contents coverage up to 50% of dwelling coverage. * HO-3 Special Losses are covered unless specifically excluded. Dwelling and structures: Open peril; Contents coverage up to 50% of dwelling coverage. * HO-4 Contents Broad Covers contents and personal liability of renters. No coverage on dwelling and other structures. * HO-5 Comprehensive Losses are covered unless specifically excluded. Open perils coverage on dwelling, structures, and contents. * HO-6 Unit Owners Property interest, contents, and personal liability of people owning a unit in a condominium or co-op. * HO-8 Modified Homes having a replacement cost greater than FMV. Typically, historic homes. Exam Tip: Work toward memorizing the type of residence that is covered by each homeowners form and the extent of the included coverage. For example, single-family, residential homes are covered by HO-2, HO-3, and HO-5 forms. The higher the number of these forms, the greater the extent of the coverage. **Audio: 6 types of homeowner's or residential types of insurance** * **HO-2, HO-3, and HO-5 forms** - covers traditional single-family, residential homes * **HO-3** - **open perils coverage for the dwelling**, but** broad form coverage for contents** * **HO-5** - **open perils coverage for the dwelling and the contents** * **HO-4** - for **renter's** personal belongings; the contents and some liability coverage * **HO-6** - for **condominium owners, wall studs in, contents and liability** * **HO-8** - **historic homes** (150yo home), replacement value would be so high that no insurer would be comfortable insuring it on a replacement basis

Question 174

Describe Sections One and Two of HO insurance

Answer 174

Section One (Property) of the HO consists of the following parts: * Coverage A: Dwelling * Coverage B: Other Structures (typically limited to 10% of Coverage A) * Coverage C: Personal Property (typically limited to 50% of Coverage A) * Coverage D: Loss of Use (typically limited to 20% of Coverage A) Section Two (Liability) of the HO consists of the following parts: * Coverage E: Personal Liability * Coverage F: Medical Payments to others * Homeowner Insurance **Exam Tip: Homeowners insurance policies are split into two major sections, Section 1, which provides insurance protection on the homeowners property, and Section 2, which provides liability coverage. Listen in for important exam-related information on the separate coverages within each Section.** Audio: * Important to know which section coverages what * A - for "**address**" - dwelling itself * B - for the barn out back, "**backyard**", shed, fence (10% of A) * C - "**contents** - clothing, couch, curtains" personal property (50% of A) * D - "**displacement**", fire in the home and uninhabitable while being (20% of A) replaced/repairs * Notice for B, C and D - all have maximum limits that pertain to Coverage A Dwelling. * Section 2 * E - personal liability "**exposure** to legal damages" * F - "**funding** for **medical fees** for others that might have been hurt on property"

Question 175

Which of the following are covered by homeowners property insurance? I. The insured's home II. A garage that is not attached to the insured's home III. The insured's summer cottage IV. Furniture in the insured's home * I, II, and IV * I only * I and III * I and II

Answer 175

I, II, and IV * Coverage A insures the home of the insured person. Coverage B applies to a garage that is not attached to the insured's home, while furniture in the insured's home comes under coverage C. * The insured's summer cottage is not covered since it does not specify that it was included in the policy declarations. Had the cottage been included, it would have also been covered.

Question 176

Match the peril with the correct description. War Ordinance Earth Movement Intentional Loss * Any act committed at the direction of the insured * Destruction, seizure or use for a military purpose * Tremors before, during or after a volcanic eruption * Enforcement of any law regulating the construction of a building

Answer 176

* War - Destruction, seizure or use for a military purpose * Ordinance - Enforcement of any law regulating the construction of a building * Earth Movement - Tremors before, during or after a volcanic eruption * Intentional Loss - Any act committed at the direction of the insured

Question 177

Household appliances, outdoor antennas and outdoor equipment are settled at actual cash value at the time of loss. * False * True

Answer 177

True * **Household appliances, outdoor antennas, and outdoor equipment are settled at actual cash value at the time of loss**. * However, this **amount is restricted to that required to repair or replace this type of property at depreciated value**.

Question 178

Which type of policy may provide more compensation to a single victim of the insured? * Single limit policy * Split limit policy

Answer 178

Single limit policy * The single limit policy may provide more compensation to a single victim than a split limit policy.

Question 179

Which of the following can be referred to as an ‘uninsured motorist’? I. Drivers with coverage provided by insolvent insurers. II. Hit-and-run drivers. III. Drivers with less insurance than the minimum required by state law. IV. Drivers without insurance. * I and II * I, III, and IV * I, II, III, and IV * IV only

Answer 179

I, II, III, and IV * Each of these driver categories can be considered uninsured motorists.

Question 180

Suppose Robert borrows Eddie's car for a day. He wants to be at his best for his date tonight. Afraid that he'll be late, he presses his foot on the accelerator. The car slides out of control as it hits a patch of grease and Robert lands in the hospital. Who will pay for his hospital bills? * Eddie's PAP * Robert's PAP

Answer 180

Eddie's PAP * The PAP provides coverage for four categories of insured that have potential liability arising from the use of an auto. * **Coverage 2 covers any person using the named insured's covered auto**. * That is, **the car owner's insurance, not the driver's insurance, would pay a claim if the owner let somebody borrow his or her auto**.

Question 181

Assume Lecter has taken a split limit ($250,000/$500,000/$5,000) coverage PAP. Suppose he causes a collision injuring four people (A, B, C, and D) and damages the property of F. Suppose they file suit in the following order: A's injuries total $300,000, B's equal $400,000, C's equal $200,000, D's equals $100,000, and F's property damage amounts to $5,000. With split limits, how much does each get from Lecter's insurer? * A gets $300,000, B gets $400,000, C gets $200,000, D gets $100,000 and F gets $5,000. * A gets $250,000, B gets $400,000, C gets $100,000, D gets none and F gets $5,000. * A gets $250,000, B gets $250,000, C gets none, D gets none and F gets $5,000. * A gets $300,000, B gets $400,000, C gets $25,000, D gets $25,000 and F gets $5,000. * A gets $250,000, B gets $300,000, C gets $200,000, D gets none and F gets $5,000.

Answer 181

A gets $250,000, B gets $250,000, C gets none, D gets none and F gets $5,000. * Assuming the claims are submitted and paid in alpha order, A=$250,000 (max per person), B=$250,000 (max per person), C & D get $0 (the maximum per accident of $500,000 was used for A & B), F=$5000 for property damage (meets the limit available).

Question 182

If fire destroys a clothing store, the loss of the building and inventory is a(n) __ ____??____ __. The income lost while the building is rebuilt and the business reestablished is the __ ____??____ __. * indirect loss, direct loss * extra expenses, physical damage * direct loss, indirect loss * physical damage, extra expense

Answer 182

direct loss, indirect loss * If fire destroys a clothing store, the loss of the building and inventory is a direct loss. * The income lost while the building is rebuilt and the business reestablished is the indirect loss.

Question 183

Consider the three scenarios given below and identify which bulleted statement is correct: 1. A car is stolen and the thief has a collision. 2. A car in Florida is under a coconut tree during a storm and a coconut falls and breaks the windshield. 3. A car hits a pheasant causing the bird to disintegrate on the windshield, in turn causing the driver to leave the road and hit a tree. * 1 is a collision * 2 is a collision * 3 is a collision * None of the three scenarios involve collisions * All three scenarios can be considered collisions

Answer 183

None of the three scenarios involve collisions * Breakage of glass and loss caused by missile, falling objects, fire, theft or larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, riot or civil commotion, or colliding with a bird or animal shall not be deemed to be loss caused by collision, according to automobile insurance policy under collision coverage.

Question 184

Which statement is true? * Ocean marine insurance is a relatively new form of coverage appearing slightly more than 100 years ago. * Ocean and inland marine insurance cover about the same losses and are used for about the same purposes. * Inland marine insurance is found mostly in Europe. * Inland marine insurance is a term used mostly in the United States.

Answer 184

Inland marine insurance is a term used mostly in the United States. * Inland marine insurance is essentially an American distinction. * Other countries have not separated the underwriting powers of insurers to the extent Americans have. In the United States, the distinction between inland marine insurance and ocean marine insurance still remains because of separation of underwriting powers. * The statement “Ocean marine insurance is a relatively new form of coverage appearing slightly more than 100 years ago” is false because ocean marine insurance is one of the earliest forms of insurance (established some time in 2000 BC) and was practiced by Roman, Babylonian and Greek sea-traders.

Question 185

Identify the section of the Commercial Package Policy (CPP) where policy cancellation, assignment of the policy, and other legal rights and duties are stated. * Declarations * Conditions * Property Covered * Perils Covered

Answer 185

Conditions * Within the CPP, the common conditions cover policy cancellation, assignment of the policy, and other legal rights and duties. * In addition to the common declarations and conditions, each component part has its own specific declarations page and conditions.

Question 186

# Exam 4. Property and Casualty Insurance Exam 4. Property and Casualty Insurance | Course 2. Insurance Planning

Question 187

Which of the following accurately describes open-peril coverage? * Provides a minimum level of protection restricted to nine basic perils. * Coverage for nine basic perils for the property section and seven additional perils. * Provides coverage for damages by any peril, except for those excluded in the policy. * Provides coverage for damages by any peril.

Answer 187

Provides coverage for damages by any peril, except for those excluded in the policy. * In open-peril coverage the insurer pays for damages by any peril, except for those excluded in the policy.

Question 188

Tom and Sarah have a HO-3 homeowners insurance policy. Currently, the property is valued at $800,000 and the replacement cost is estimated to be $500,000. The homeowners policy has $300,000 coverage for the dwelling, a $1,000 deductible, an 80% coinsurance clause, and $500,000 liability coverage. Given this information, which of the following correctly lists the typical coverage amount for Coverages A, B, C, D for this policy? * A - $300,000 B - $150,000; C - $30,000; D - $60,000 * A - $300,000; B - $30,000; C - $150,000; D - $60,000 * A - $150,000; B - $300,000; C - $500,000; D - $30,000 * A - $500,000; B - $60,000; C - $150,000; D - $30,000

Answer 188

A - $300,000; B - $30,000; C - $150,000; D - $60,000 * Coverage A is coverage for the dwelling, $300,000. * Coverage B is for other structures on the property and is typically 10% of the Coverage A amount. * Coverage C is for personal property (contents) and is typically 50% of the Coverage A amount. * Coverage D is for loss of use and is typically 20% of the Coverage A amount.

Question 189

On the 4th of July, Kent was entertaining neighbors with a fireworks show. One of the rockets malfunctioned, injuring his daughter and three of her neighborhood friends. Each child needed urgent care treatment at a cost of $3000 per person. Kent’s homeowners policy has a $500,000 limit for liability and a per person limit of $2,000 for medical payments to others. What amount will Kent’s homeowners insurance pay for this accident under Coverage F? * $9,000 * $8,000 * $12,000 * $6,000

Answer 189

$6,000 * Coverage F is Medical Payments to Others. Kent’s policy has a $2,000 per person limit, so this is the maximum payable to each eligible party under Coverage F. * However, **the coverage does not extend to Kent’s family**. * The total payable under Coverage F: 3 x $2,000 = $6,000. * It is **likely Kent’s liability insurance under Coverage E will pay the balance for the three neighbors**.

Question 190

Which coverage in a homeowners insurance policy provides coverage for the dwelling? * Coverage D * Coverage A * Coverage C * Coverage B

Answer 190

Coverage A * In Section 1, Coverage A provides coverage for the dwelling. * Coverage B covers other structures. * Coverage C covers personal property (contents). * Coverage D covers loss of use of the dwelling.

Question 191

How should high value personal property such as jewelry, guns, and antiques be insured? * A separate scheduled personal property endorsement. * A separate policy for each type of high value property. * Coverage up to 20% of the Coverage A limit is provided under Coverage D. * Coverage for the full value is provided under Coverage C up to 50% of the Coverage A limit.

Answer 191

A separate scheduled personal property endorsement. * **High value property can be covered on a Scheduled Personal Property Endorsement**. * Its **purpose is to provide open-perils coverage for specific items at higher amounts of coverage**. * This typically requires having the items professionally appraised.

Question 192

Which type of homeowners insurance is referred to as “special coverage"? * Open-perils coverage * Standard coverage * Basic coverage * Broad form coverage

Answer 192

Open-perils coverage * Special coverage provides coverage on an open-peril basis which **also includes coverage for theft**.

Question 193

Tom and Sarah had storm damage to their home. The loss was $100,000. At the time of the claim, the property was valued at $800,000 and the replacement cost was estimated to be $500,000. The homeowners policy has $300,000 Part A coverage, a $1,000 deductible and an 80% coinsurance clause. The actual cash value of the damaged portion of the home is $80,000. How much will the insurance company pay for this claim? * $100,000 * $80,000 * $99,000 * $74,000

Answer 193

$74,000 * Under a coinsurance clause of 80%, Tom and Sarah must maintain dwelling coverage of at least $400,000 (80% x $500,000). * Their current coverage is $300,000 and does not meet the 80% coinsurance requirement. * As a result, there will be partial reimbursement for the loss, calculated as follows: **([Current Coverage ÷ Required Coverage] x Loss Amount) – Deductible = Partial Reimbursement Amount** ([$300,000 ÷ $400,000] x $100,000) - $1,000 (0.75 x $100,000) - $1,000 $75,000 - $1,000 = $74,000

Question 194

Which provision in a homeowners insurance policy sets forth the coverage provided by the insurance contract and states the insurer's obligation to provide coverage as stated in the policy?. * Endorsements * Declarations * Insuring agreement * Conditions

Answer 194

Insuring agreement * The insuring agreement states the insurer's obligation to provide coverage as stated in the policy in return for the insured's compliance with all policy provisions and payment of premiums.

Question 195

In a HO-3 policy coverage for personal property is typically at what percentage of the Coverage A amount? * 20% * 50% * 10% * 100%

Answer 195

50% * Coverage C for personal property is typically 50% of the Coverage A (dwelling) amount but the insurer may allow this to be increased at the option of the insured.

Question 196

Which homeowners policy form may be offered to insure an 150 year old dwelling for which the replacement cost far exceeds the FMV? * HO-6 * HO-3 * HO-8 * HO-4

Answer 196

HO-8 * An insurer may offer a HO-8 policy for an 150 year old dwelling for which the replacement cost far exceeds the FMV.

Question 197

Scott left the front door of his apartment open and his German Shepherd dog ran out. Three blocks from home the dog attacked a postal worker which caused the postal worker to go to the hospital for stitches. Scott carries a HO-4 policy. The postal worker’s emergency room treatment costs are $3,000. Which of the following statements is correct regarding coverage for the injuries caused to the postal worker? * The policy will pay only the limit of the medical payments to others coverage. * A HO-4 policy provides coverage only for personal property and will not pay anything for the emergency costs. * The HO-4 policy will not cover any portion of the emergency costs because the attack did not occur in Scott’s apartment. * The policy may cover 100% of the emergency medical costs either through the medical payments to others coverage and/or the liability coverage.

Answer 197

The policy may cover 100% of the emergency medical costs either through the medical payments to others coverage and/or the liability coverage. * First, the policy will pay up to the limit for medical payments to others coverage. * Any remaining costs can be paid through the liability coverage provided in the policy.

Question 198

Tom and Sarah had storm damage to their home. The loss was $100,000. At the time of the claim, the property was valued at $800,000 and the replacement cost was estimated to be $500,000. The homeowners policy has $500,000 Part A coverage, a $1,000 deductible and an 80% coinsurance clause. The actual cash value of the damaged portion of the home is $80,000. How much will the insurance company pay for this claim? * $100,000 * $99,000 * $80,000 * $124,000

Answer 198

$99,000 * Under a coinsurance clause of 80%, Tom and Sarah must maintain dwelling coverage of at least $400,000 (80% x $500,000). * Their coverage meets the coinsurance requirement, therefore, the insurance company will pay the amount of the claim less the deductible, $99,000.

Question 199

While driving home through a rural area at night recently, a deer ran in front of Jill’s car. Jill swerved but could not avoid hitting the deer, causing significant damage to the front of the car and windshield. If this type of claim is covered under a personal automobile policy (PAP), which coverage applies? * Coverage D.1. Collision Loss * Coverage A: Liability for Property Damage * Coverage D.2. Other than Collision Loss * This type of claim is not covered under a PAP.

Answer 199

Coverage D.2. Other than Collision Loss * **Loss resulting from contact with an animal is covered under D.2., Other than Collision Loss**. * This coverage is sometimes referred to as “**Comprehensive**.” * Typically, a deductible applies.

Question 200

Jose’s personal automobile policy (PAP) is written with split limits of $50,000/$100,000/$5,000. What is the maximum coverage amount payable for bodily injury to one person? * $50,000 * $100,000 * $150,000 * $5,000

Answer 200

$50,000 * Under split limits of $50,000/$100,000/$5,000, the insurer pays a maximum of $50,000 to any one injured person, and a maximum of $100,000 for any one accident regardless of the number of injured people.

Question 201

Which of the following homeowners insurance policy forms covers the dwelling on an open-perils basis? * HO-8 * HO-4 * HO-3 * HO-2

Answer 201

HO-3 * A HO-3 policy provides dwelling coverage on an open-perils basis. * A HO-2 policy has broad form, named perils coverage. * HO-4 covers contents for a renter, there is no dwelling coverage. * HO-8 is for historic homes where the replacement cost value is higher than FMV. **Dwelling coverage on an HO-8 policy is named-perils**.

Question 202

Under a personal automobile policy (PAP), breakage of glass and loss caused by missile, falling objects, fire, theft or larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, or by riot or civil commotion are covered under which element the policy? * Uninsured motorist * Other than Collision Loss * Collision Loss * Liability for damage to personal property

Answer 202

Other than Collision Loss * The loss described is covered under “Other than Collision Loss (Comprehensive).”

Question 203

While driving home through a rural area at night recently, a deer ran in front of Jill’s car. Jill swerved to avoid hitting the deer but lost control of the car and hit a tree on the side of the road. Significant damage was sustained to the front of the car and windshield. If this type of claim is covered under a personal automobile policy (PAP), which coverage applies? * This type of claim is not covered under a PAP. * Coverage D.2. Other than Collision Loss * Coverage D.1. Collision Loss * Coverage A: Liability for Property Damage

Answer 203

Coverage D.1. Collision Loss * This type of loss is covered under D.1., Collision Typically, a deductible applies.

Question 204

Which homeowners insurance type of policy provides coverage for 16 named perils? * Broad form coverage * Standard coverage * Special coverage * Basic coverage

Answer 204

Broad form coverage **Broad form coverage provides coverage for 16 named perils**: * Fire and lightning, * Windstorm and hail, * Explosion, * Riot and civil commotion, * Vehicles, * Aircraft, * Smoke, * Vandalism and malicious mischief, and * Theft. * Falling objects, * Weight of ice, snow or sleet, * Accidental discharge or overflow of water or steam, * Explosion of steam or hot water system, * Freezing of plumbing, heating and air conditioning systems and domestic appliances, * Damage from artificially generated electrical currents, and * Volcanic eruption.

Question 205

Lesson 6. Health Insurance | Course 2. Insurance Planning

Question 206

Basic medical expense insurance provides each of the following EXCEPT: * Death Insurance * Surgical Insurance * Hospital Insurance * Physician Expense Insurance

Answer 206

Death Insurance * **Basic medical expense insurance** generally provides the first-dollar coverage with no deductible provision for expenses of **hospitalization, doctor’s service, and surgical procedures**.

Question 207

If Julien Fernandes incurs $5,700 in expenses having his arm set in the emergency room, what percentage of the bill would basic medical insurance cover? * 100% * 50% * 20% * 80%

Answer 207

100% * Basic medical insurance would cover the entire $5,700.

Question 208

A $10,000 surgical schedule pays __ ____??____ __ for the most difficult operation and proportionately less for all other procedures. * $10,000 * $0 * $7,500 * $5,000

Answer 208

$10,000 * Surgical schedules identify a maximum dollar amount for the most difficult procedure and provide a representative list of other procedures and their reimbursement rates. * Therefore, a $10,000 surgical schedule will pay $10,000 for the most difficult operation.

Question 209

The more the insured shares, the __ ____??____ __ the premium. The less the insured shares, the __ ____??____ __ the premium. * lower; higher * higher; lower

Answer 209

lower; higher * The more the insured shares, the lower the premium; the less shared, the higher the premium.

Question 210

J. Marshall Hendricks incurs $18,000 in medical expenses while being treated in a hospital. He has a $100,000 major medical policy with a $500 deductible and an 80/20 participation provision. Based on his policy, how much will J. Marshall collect from his major medical insurance? * $18,000 * $17,500 * $14,400 * $14,000

Answer 210

$14,000 * J. Marshall Hendricks will receive $14,000 from his major medical insurance policy, calculated as follows: $18,000 (medical expenses) - $500 (deductible) = $17,500 (covered expenses) $17,500 (covered expenses) x 0.80 (covered percentage) = $14,000 (insurance payment)

Question 211

In 2023, in the event of a hospital stay of 150 days, how much is the patient’s responsibility to pay under Medicare? * $11,968 * $52,240 * $62,800 * $61,600

Answer 211

$61,600 * In the event of a hospital stay of 150 days, the patient’s responsibility to pay under Medicare in 2023 is calculated as follows: $1,600 + (30 x $400) + (60 x $800) = $61,600

Question 212

Which of these combinations of insurance does basic health insurance include? * Doctor, Hospital, Lab * Physician, Hospital, Surgical * Hospital, Surgical, Emergency room * Surgical, Hospital, Nursing home

Answer 212

Physician, Hospital, Surgical * Most health insurance includes a combination of hospital insurance, surgical insurance, and physician insurance. * Each can be purchased separately, but they are usually combined and sold as basic medical expense insurance.

Question 213

Kasandra's husband has a long-term heart condition that requires surgery and will be covered by the Medicare supplement plan she has recently enrolled in. What is the condition covered by this provision called? * Existing * Pre-Existing * Medical * Health

Answer 213

Pre-Existing * **Medicare supplement policy states that if you have had a policy for at least six months prior to replacing it, your new policy will not have a waiting period for any pre-existing medical conditions**.

Question 214

Which of the following must an insurer adhere to when selling a Medigap policy? I. Accept individuals age 65 or older who buy Medigap policies within 6 months of enrolling in Medicare, regardless of their health status, claims experience, or medical condition. II. Accept individuals age 65 or older who buy Medigap policies within 6 months of enrolling in Medicare, but exclude benefits for conditions diagnosed within six months of issuing the policy. III. Sell policy to insured already possessing a Medigap policy. IV. Cancel a policy for nonpayment of premiums or material misrepresentation. * I and IV * II and III * I and III * II and IV

Answer 214

I and IV * The standardized Medigap policy plan states that an insurer must accept individuals age 65 or older regardless of their health status, if they buy a policy within 6 months of enrolling in Medicare. * Medigap policies can also be cancelled for non-payment of premiums or material misrepresentation. * However, an insurer can sell a policy to a person already possessing one only if it is a replacement and can exclude benefits for conditions diagnosed six months before the issue.

Question 215

Libby has a comprehensive major medical policy that has a $500 deductible and an 80% co-insurance clause that provides a maximum of $200,000 in lifetime benefits. Libby recently had minor surgery involving $2,000 of hospital room-and-board charges, $500 for the anesthetist, and $900 for the surgical fee. How much will the insurer pay for her medical expenses? * $2,000 * $2,320 * $2,900 * $3,400

Answer 215

$2,320 * Libby's total health care bill is $3,400. Her deductible reduces the bill to $2,900 ($3,400 - $500). Her insurer will pay 80% of $2,900 or $2,320 ($2,900 x 0.80 = $2,320).

Question 216

Each of the following statements concerning Blue Cross/Blue Shield plans are correct EXCEPT: * They offer basic medical insurance policies which pay first-dollar coverage. * They pay benefits directly to the participating hospital or physician after the medical bills are submitted to the insurer. * Blue Shield plans pay for almost all services provided by hospitals while the insured remains hospitalized. * The insured does not pay any deductibles for this type of policy, but will pay higher premium costs.

Answer 216

Blue Shield plans pay for almost all services provided by hospitals while the insured remains hospitalized. * Blue Cross plans pay for almost all services provided by hospitals while the insured remains hospitalized. * Examples of these services or incidental hospital expenses include X rays, drugs, anesthesia, and laboratory charges. * **Blue Cross pays the hospital a fee for each day the patient remains in the hospital, based on a pre-negotiated contract rate**.

Question 217

The Health Maintenance Act of 1973 dramatically increased the use of __ ____??____ __. * HMOs * PPOs * Blue Cross/Blue Shield * COBRA

Answer 217

HMOs * The Health Maintenance Act of 1973 (as amended) dramatically increased the use of HMOs. * **This federal law required certain employers to offer an HMO option in addition to their regular health insurance plan**.

Question 218

Identify the health insurance provider that is an association of cooperating physicians and hospitals which agrees to provide employers with health care services for their employees at discount prices. * HMOs * PPOs * Blue Cross/Blue Shield * COBRA

Answer 218

PPOs * Preferred Provider Organizations (PPOs) are another alternative to traditional health care provision. * PPOs, usually an association of cooperating physicians and hospitals, agree to provide employers with health care services for their employees at discount prices.

Question 219

COBRA continuation for a dependent child is 36 months for each of the following events EXCEPT: * Divorce or legal separation * Death of employee * Loss of “dependent child” status under the plan * Termination or reduction in hours of employment (not related to gross misconduct)

Answer 219

Termination or reduction in hours of employment (not related to gross misconduct) * Termination (for reasons other than gross misconduct) or reduction in hours of employment Employee Spouse Dependent Child 18 months * Employee enrollment in Medicare Spouse Dependent Child 36 months * Divorce or legal separation Spouse Dependent Child 36 months * Death of employee Spouse Dependent Child 36 months * Loss of “dependent child” status under the plan Dependent Child 36 months

Question 220

# Exam 6. Health Insurance Exam 6. Health Insurance | Course 2. Insurance Planning

Question 221

Basic medical expense insurance provides each of the following coverages EXCEPT: * Surgical procedure * Hospitalization * Prescription drug * Physician’s service

Answer 221

Prescription drug * Basic medical expense insurance generally provides the first-dollar coverage with no deductible provision for expenses of hospitalization, surgical procedures, and doctor’s service(s).

Question 222

Celeste maintains a major medical policy with a $2,000 deductible and a 75/25 coinsurance provision. If Celeste requires $8,000 of covered medical treatment, how much will she pay in total out-of-pocket costs? * $3,500 * $1,500 * $4,500 * $6,000

Answer 222

$3500 * A major medical insurance policy with a $2,000 deductible and 75/25 coinsurance provision would result in $3,500 of total out-of-pocket expenses when $8,000 worth of covered medical expenses is incurred. Celeste’s out-of-pocket costs are calculated as follows: $8,000 (total expenses) - $2,000 (deductible) = $6,000 $6,000 x 0.25 (Celeste’s portion of the coinsurance) = $1,500 $2,000 + $1,500 = $3,500 total out-of-pocket costs

Question 223

Laurent fell from a ladder while installing beadboard panels on the ceiling of his vacation home. He incurred $7,000 of charges from an emergency room visit and a total $4,500 spent on ten physical therapy. Laurent’s basic medical insurance covers all emergency room costs and five physical therapy sessions. What is the total dollar amount of coverage provided by Laurent’s insurance policy? * $7,000 * $11,500 * $9,250 * $5,750

Answer 223

$9,250 * Basic medical insurance policies often have no deductible provision and are called first-dollar coverage because the insurer pays covered losses from the first dollar onward. * In this situation all emergency room costs are covered, but only five of the ten physical therapy sessions are covered. The total coverage provided by Laurent’s policy is calculated as follows: $7,000 (ER costs) + [0.50 x $4,500 (PT costs)] $7,000 + $2,250 = $9,250

Question 224

Medical insurance policies generally provide coverage in the following instance(s): I. The insured is hospitalized. II. The insured receives outpatient treatment. * Both I and II * Neither I nor II * II only * I only

Answer 224

Both I and II * Medical insurance policies historically provided coverage only when the insured was hospitalized. * However, now most policies also cover outpatient treatment.

Question 225

If a patient with a surgical contract needs two procedures during one hospitalization __ ____??____ __ determines the payment. * the average cost of the procedures * the more expensive treatment * the less expensive treatment * the combined cost of the procedures

Answer 225

the more expensive treatment * Surgical contracts provide coverage for the costs of surgical procedures. * If a patient needs two procedures during one hospitalization, the more expensive treatment determines the payment.

Question 226

Which of the following individuals would NOT be covered by Medicare? * An employee that lost health coverage because of a change from full-time to part-time work. * People age 65 or older. * Individuals of any age with end-stage renal disease. * Individuals under 65 with certain disabilities.

Answer 226

An employee that lost health coverage because of a change from full-time to part-time work. * Medicare is health insurance for people age 65 or older, under 65 with certain disabilities, and individuals of any age with End-Stage Renal Disease which is permanent kidney failure requiring dialysis or a kidney transplant. * An employee that previously had health insurance which was lost due to a change from full-time to part-time work may be eligible for COBRA coverage, depending on the size of the employer.

Question 227

On major medical policies, maintaining a __ ____??____ __ deductible will result in lower premiums. * separate * lower * fixed * higher

Answer 227

higher * Major medical policies cause an insured to pay an amount of medical bills equal to a substantial deductible. * This deductible lowers the insurer’s costs since the first dollars of all losses are not covered. * Plans with lower monthly premiums have higher deductibles. * Plans with higher monthly premiums usually have lower deductibles.

Question 228

Lawrence has a health insurance policy with the following features: $500 deductible 80/20 coinsurance $10,000 maximum-out-of pocket limit Treatment for a chronic autoimmune disease has resulted in $49,500 of medical costs this year for Lawrence. How much of the incurred medical expenses will the insurance company cover? * $39,500 * $39,600 * $10,400 * $39,200

Answer 228

$39,500 * The insurance company will cover $39,500 of the $49,500 medical expenses, calculated as follows: $49,500 (total costs) - $500 (deductible) = $49,000 $49,000 x 0.20 (insured’s portion of coinsurance) = $9,800 Insured’s total out-of-pocket = $9,800 + $500 = $10,300 $10,300 exceeds the MOOP limit of $10,000 **The insurance company will pay $39,500 [$49,500 (total costs) - $10,000 (insured’s portion)]**

Question 229

Prescription drug coverage is offered primarily through Medicare __ ____??____ __. * Part B * Part C * Part D * Part A

Answer 229

Part D * Medicare Part D (Prescription Drug Coverage) is available through private companies that work with Medicare to provide prescription coverage. * There are different types of Drug Plans. * Once enrolled in a plan you may switch plans from November 15-December 31 of each year.

Question 230

After the Medicare Part B deductible is met, a patient will typically pay __ ____??____ __ of the Medicare-approved amount for qualifying services. * 50% * 30% * 20% * 40%

Answer 230

20% * After the Medicare Part B deductible is met, a client will typically pay 20% of the Medicare-approved amount for most doctor services (including most doctor services while a hospital inpatient), outpatient therapy, and durable medical equipment (DME).

Question 231

Medicare Part A covers which of the following expenses? I. outpatient care II. skilled nursing facilities III. inpatient care in hospitals IV. prescription coverage * I and IV * III and IV * II and III * I only

Answer 231

II and III * Medicare Part A helps cover inpatient care in hospitals, including critical access hospitals and skilled nursing facilities, but not custodial or long term care.

Question 232

A policy with __ ____??____ __ is one that may not pay or will pay only a portion of its benefits, if another policy is available to cover the loss. * a coordination of benefits provision * a contingent liability clause * a cost of living adjustment rider * first dollar insurance coverage

Answer 232

a coordination of benefits provision * A policy with a coordination of benefits provision is one that may not pay or will pay only a portion of its benefits if another policy is available to cover the loss. * The clause prevents an insured from collecting more than needed to provide indemnity.

Question 233

Each of the following are considered essential health services EXCEPT: * Laboratory services * Prescription drugs * Pediatric services * Dental and vision care

Answer 233

Dental and vision care **Every health plan must cover**: * Prescription drugs * Laboratory services * Pediatric services, including oral and vision care * Several other items listed here **Adult dental and vision coverage are not considered essential health benefits.**

Question 234

Each of the following are considered a ‘Qualifying Event’ under COBRA EXCEPT: * Divorce or legal separation * Termination due to company downsizing * Reduction in hours of employment * Termination for gross misconduct

Answer 234

Termination for gross misconduct ‘**Qualifying Events’ under COBRA include:** * Termination (for reasons other than gross misconduct) or reduction in hours of employment * Employee enrollment in Medicare * Divorce or legal separation * Death of employee * Loss of “dependent child” status under the plan

Question 235

__ ____??____ __ combines Medicare hospital insurance and medical insurance. * Medicare Part A * Medicare Part C * Medicare Part D * Medicare Part B

Answer 235

Medicare Part C * Medicare Part C alternative combines Part A (Hospital Insurance) and Part B (Medical Insurance). * Most Part C plans cover prescription drugs. If it does not, then it may be possible to purchase Part D (Prescription Drug Coverage).

Question 236

Hospice or home health care may be available for qualifying individuals through which part of Medicare? * Part A * Part C * Part B * Part D

Answer 236

Part A * Medicare Part A helps cover inpatient care in hospitals, including critical access hospitals and skilled nursing facilities, but not custodial or long term care. * If you meet certain conditions, Medicare Part A may cover hospice care and home health care as well.

Question 237

Select the period during which the Medicare Part A hospital inpatient coinsurance amount is $0. * Days 1-60 * Never * Days 61-90 * Days 91+

Answer 237

Days 1-60 * In 2023, Medicare Part A, the hospital inpatient coinsurance amount is $0 on days 1-60. **The complete Medicare Part A coinsurance information is as follows**: * Days 1-60: $0 coinsurance for each benefit period * Days 61-90: $400 coinsurance per day of each benefit period * Days 91 and beyond: $800 coinsurance per each "lifetime reserve day" after day 90 for each benefit period (up to 60 days over your lifetime) * Beyond lifetime reserve days: all costs

Question 238

A $25,000 surgical schedule pays __ ____??____ __ for the most difficult operation and proportionately less for all other procedures. * $12,500 * $18,750 * $0 * $25,000

Answer 238

$25,000 * Surgical schedules identify a maximum dollar amount for the most difficult procedure and provide a representative list of other procedures and their reimbursement rates. * Therefore, a $25,000 surgical schedule will pay $25,000 for the most difficult operation.

Question 239

Select the types of HMOs. I. Individual practice II. Solo practitioner III. Participating IV. Group practice * II and III * I and IV * I and II * II and IV

Answer 239

I and IV There are **two types HMOs**: * **Individual practice HMO**: Contracts with specific physicians and hospitals. * **Group practice HMO**: Offer a limited number of medical providers that a member may use.

Question 240

__ ____??____ __ operate in limited geographic areas, providing members with broad health care coverage in exchange for a set fee. * Preferred Provider Organizations (PPOs) * Blue Cross & Blue Shield Plans * None of these * Health Maintenance Organizations (HMOs)

Answer 240

* Health Maintenance Organizations (HMOs) operate in limited geographic areas, providing members with broad health care coverage in exchange for a set fee called a capitation payment.

Question 241

Lesson 7. Disability Income Insurance | Course 2. Insurance Planning

Question 242

Dr. Keats, a trauma surgeon, purchased disability income insurance several years ago. The policy had an any occupation definitiion of disability. As a result of a mountain bike accident, Dr. Keats was unable to conduct her normal surgery work and the disability policy benefit began to payout after 60-days. Three months later, Dr. Keats was still recovering from her accident and was hired to teach modern surgical techniques at a medical school. Upon Dr. Keats hiring at the medical school, her disability benefit would __ ____??____ __. * stop completely * continue until she resumes trauma surgery * continue with a prorated payout * be replaced by any group disability policy at the medical school

Answer 242

stop completely * Work at teaching at the medical school is considered gainful employment for which Dr. Keats is reasonably suited to perform based upon her training and education. * As a result, the disability benefit on her policy would stop completely. * The reason is the ‘any gainful occupation’ clause.

Question 243

Match the terms with the correct descriptions. Own occupation Presumptive disability Any occupation * The insured is always considered totally disabled, even if she is at work, if sickness or injury results in the loss of any body parts. * The insured is considered totally disabled when unable to perform the major duties of any gainful occupation for which they are reasonably suited because of education, training or experience. * The insured is unable to perform the major duties of his or her regular occupation.

Answer 243

* Own occupation - The insured is unable to perform the major duties of his or her regular occupation. * Presumptive disability - The insured is always considered totally disabled, even if she is at work, if sickness or injury results in the loss of any body parts. * Any occupation - The insured is considered totally disabled when unable to perform the major duties of any gainful occupation for which they are reasonably suited because of education, training or experience.

Question 244

Select the maximum percentage of income that insurer will cover to ensure that the total of all monthly indemnity is not exceeded. * 50% to 60% * 70% to 80% * 60% to 70%

Answer 244

60% to 70% * Insurers limit the amount of disability income coverage they will sell to an applicant so that the total of all monthly indemnity will not exceed about 70% of income for insureds with low incomes, grading downward to about 60% or less for those individuals in the highest income brackets.

Question 245

Why is individual disability income insurance also referred to as loss-of-time insurance? I. Due to occupational definitions used to qualify the insured as disabled. II. Definitions are not premised on the inability of the insured to perform certain occupational tasks. III. Policies presume that the disabled suffers loss of income, as he cannot work. IV. Policies do not presume hazardous jobs. * I and III * II and IV * I and II * III and IV

Answer 245

I and III * Traditionally, individual disability income policies have been called loss-of-time insurance because of the occupational definitions used to qualify the insured as disabled. * A disabled person under these types of policies is presumed to have suffered a loss of income because he or she cannot work. * The definitions of total disability and partial disability are premised on the inability of the insured to perform certain occupational tasks.

Question 246

John works as a field engineer for one of the major automotive manufacturers. Recently he had a minor accident that has left him unable to make site visits. However, he is able to work part time at a desk job in a surveyor's office during his disability period. John is entitled to policy benefits. Which type of clause did John have on his policy? * Own occupation * Any occupation * Residual disability * Partial disability

Answer 246

Own occupation * An own occupation clause deems insured to be totally disabled when they cannot perform the major duties of their regular occupations. Under this definition, insured can be at work in some other capacity and still be entitled to policy benefits if they cannot perform the important tasks of their own occupations in the usual way.

Question 247

The purpose of the rehabilitation benefit is to support one's recovery and return to work without the fear of being punished by having benefits reduced. * False * True

Answer 247

True * The purpose of this benefit is to support one's recovery and return to work without the fear of being punished by having benefits reduced. * While the rehabilitation benefit costs the insurer, in the long run it helps people to reduce the cost of long-term claims.

Question 248

Match the term with the correct description. Transplant Benefit Rehabilitation Benefit Non-disabling Injury Benefit Principal Sum Benefit * Provides lump-sum amount payable if the insured dies accidentally. * Provides a specific sum to cover costs not paid by other insurance or public funding. * Provides a specific sum to reimburse medical expenses incurred for treatment of an injury. * Provides benefit due to transplant of an organ or for cosmetic surgery.

Answer 248

* Transplant Benefit - Provides benefit due to transplant of an organ or for cosmetic surgery. * Rehabilitation Benefit - Provides a specific sum to cover costs not paid by other insurance or public funding. * Non-disabling Injury Benefit - Provides a specific sum to reimburse medical expenses incurred for treatment of an injury. * Principal Sum Benefit - Provides lump-sum amount payable if the insured dies accidentally.

Question 249

Assume Juan, who is residually disabled, is receiving current income of $1,000 per month. He had a prior income of $3,000 each month. In addition, monthly indemnity is $2,000. How much could Juan collect under the residual benefit? * $3,000 * $1,000 * $2,118 * $1,333

Answer 249

$1,333 * Juan could collect $1,333 under the residual benefit, calculated as follows: **[(Prior Income – Current Income) ÷ Prior Income] x Monthly Indemnity = Residual Indemnity** [($3,000 - $1,000) ÷ $3,000] x $2,000 = $1,333

Question 250

Each of the following are common optional or supplemental disability income insurance benefits or riders EXCEPT: * Social Insurance Supplement * Guaranteed Insurability Option * Inflation-Protection * Cost of Living Adjustment * Increased Future Benefit * Guaranteed Minimum Withdrawal

Answer 250

Common optional or supplemental benefits included in disability income insurance policies may include: * Residual Disability Benefit * Partial Disability Benefit * Social Insurance Supplement * Inflation-Protection Benefit * Increased Future Benefit * Guaranteed Insurability Option **A Guaranteed Minimum Withdrawal Benefit (GMWB), is an annuity rider that can be added to a policy to guarantee a consistent income stream to the policyholder, irrespective of current market conditions**.

Question 251

Bonnie is allowed to stop paying her disability premium since she was disabled in a mining accident at work. Which feature of Bonnie's policy is allowing this? * Cost-of-living adjustment rider * Waiver of premium rider * Social insurance supplement * Partial disability

Answer 251

Waiver of premium rider * The waiver of premium benefit under disability income policies characteristically waives any premiums that fall due after the insured has been totally disabled for shorter of 90 consecutive days or the elimination period, and it allows for a refund of any premiums paid during this period.

Question 252

If an insured works at reduced earnings as a result of sickness or injury, and is paid proportionate benefits, then which provision is being adhered to? * Total Disability * Partial Disability * Residual Disability * Occupational Disability

Answer 252

Residual Disability * The definitions of total disability and partial disability are premised on the inability of the insured to perform certain occupational tasks. * In recent years, the concept of residual disability has largely replaced the partial disability provision as a means of paying proportionate benefits to an insured that works at reduced earnings as a result of sickness or injury.

Question 253

# Exam 7. Disability Income Insurance Exam 7. Disability Income Insurance | Course 2. Insurance Planning

Question 254

The purpose of a __ ____??____ __ benefit in a disability income insurance policy is to encourage insureds to participate in a program to help them recover or retrain to be able to return to work without fear of having benefits reduced. * rehabilitation * residual * recovery * development

Answer 254

rehabilitation * The purpose of a rehabilitation benefit in a disability income insurance policy is to encourage insureds to participate in a program to help them recover or retrain to be able to return to work without fear of having benefits reduced.

Question 255

If an insured has lost the sight in both eyes and is able to work at a different job with her employer but still is eligible to collect benefits from his disability income insurance policy, which of the following is true regarding the disability insurance policy? * The policy has a presumptive disability clause. * The policy has a partial disability clause. * The policy has a modified own occupation definition of disability. * The policy has an own occupation definition of disability.

Answer 255

The policy has a presumptive disability clause. * **Under a presumptive disability clause, an insured is always considered totally disabled, even if he is at work, if sickness or injury results in the loss of the sight of both eyes, the hearing of both ears, the ability to speak, or the use of any two limbs**.

Question 256

Which definition of disability is considered to be the most lenient? * Any occupation * Own occupation * Modified own occupation * Alternative occupation

Answer 256

Own occupation * Under this definition, the insured can be at work in some other capacity and still be entitled to policy benefits if they cannot perform the important tasks of their own occupations in the usual way.

Question 257

XYZ Corporation participates in a disability income insurance benefit for key employees. Insurance is provided through individual policies. The company pays 75% of the premium and the key employee pays 25%. Sally’s share of the monthly premium is $500. The policies have a ninety-day elimination period. Sally’s disability insurance benefit is $6,000 per month. Her policy includes a waiver of premium feature. If Sally is disabled for four months, what is the total amount she will receive due to the disability? * $4,500 * $6,000 * $0 * $7,500

Answer 257

$7,500 * Sally met the elimination period and received one month of benefits at $6,000. * Additionally, because of the waiver of premium she received an additional $1,500 which is the amount of premium she paid during the elimination period.

Question 258

“Total disability is defined as the inability of the insured to perform the major duties of their regular occupation for a period of two years. Thereafter, total disability is defined as the insured’s inability to perform the major duties of any gainful occupation for which they are reasonably suited because of education, training, or experience.” This is known as a __ ____??____ __ definition of disability. * Any occupation * Own occupation * Partial disability * Modified own occupation

Answer 258

Modified own occupation * The statement is the typical definition of disability under modified own occupation.

Question 259

The concept of residual disability is to __ ____??____ __. * pay partial benefits to an insured who continues to be unable to work but has entered a physical therapy program and is expected to recover 100% within 30 days * pay a portion of the residual benefits remaining in the insurance policy when the insured has recovered to assist with subsequent medical bills because of the disability * pay proportionate benefits to an insured that can work, but at reduced earnings as a result of sickness or injury * eliminate the requirement of satisfying a new elimination period if the insured suffers a recurring disability in the same year

Answer 259

pay proportionate benefits to an insured that can work, but at reduced earnings as a result of sickness or injury * In recent years, the concept of residual disability has largely replaced the partial disability provision as a means of paying proportionate benefits to an insured that is able to work, but at reduced earnings as a result of sickness or injury.

Question 260

Sharon has been a practicing dentist for 10 years. She has suffered a crippling hand injury and can no longer practice but she will be teaching at the university dental school. Her income is expected to decrease by 50%. If Sharon is not able to claim benefits through her disability income insurance policy, what is the definition of disability on her policy? * Own occupation * Modified own occupation * Residual disability * Any occupation

Answer 260

Any occupation * Under the any occupation definition of disability, insureds are considered totally disabled when they cannot perform the major duties of any gainful occupation for which they are reasonably suited because of education, training or experience.

Question 261

Joe Doctor, age 45, is a brain surgeon who suffered a broken back requiring multiple surgeries to repair. Joe has an own-occupation individual disability income insurance policy with a ninety-day elimination period and benefits to age 65. The policy includes a waiver of premium, SSI benefit, and a residual disability benefit. He received disability insurance benefits of $10,000 per month for eight months. He has returned to work but instead of performing surgeries three days a week Joe is limited to performing surgery one day per week. As a result, his income has decreased by 60%. What benefit amount per month, if any, will Joe continue to receive from his disability insurance policy? * $10,000 * $6,000 * $0 * $4,000

Answer 261

$6,000 * The residual disability benefit provides reduced monthly indemnity in proportion to the insured’s loss of income when he or she has returned to work at their own occupation at reduced earnings. * Joe’s income has decreased by 60% so he will receive 60% ($6,000) of his monthly disability insurance benefit.

Question 262

Under which clause in a disability insurance policy is an insured always considered totally disabled, even if he is at work, if sickness or injury results in the loss of the sight of both eyes, the hearing of both ears, the ability to speak, or the use of any two limbs? * Modified own occupation * Own occupation * Partial disability * Presumptive disability

Answer 262

Presumptive disability * Under the presumptive disability clause, an insured is always considered totally disabled, even if he is at work, if sickness or injury results in the loss of the sight of both eyes, the hearing of both ears, the ability to speak, or the use of any two limbs.

Question 263

Which of the following is NOT one of the common definitions of disability in a disability insurance policy? * Own occupation * Partially unable to perform any occupation * Modified own occupation * Any occupation

Answer 263

Partially unable to perform any occupation * Own occupation, modified own occupation, and any (gainful) occupation are the most common definitions used.

Question 264

XYZ Corporation participates in a disability income insurance benefit for key employees. Insurance is provided through individual policies. The company pays 75% of the premium and the key employee pays 25%. If Sally receives 6 months of disability insurance benefits at $6,000 per month this year what is the tax-free total? * $0 * $27,000 * $9,000 * $36,000

Answer 264

$9,000 * Sally pays 25% of the premium, therefore, 25% of her disability benefits are tax-free. * The total tax-free amount for the year is $9,000. (25% x $36,000).

Question 265

XYZ Corporation participates in a disability income insurance benefit for key employees. Insurance is provided through individual policies. The company pays 75% of the premium and the key employee pays 25%. The policies have a ninety-day elimination period. Sally’s disability insurance benefit is $6,000 per month. If Sally is disabled for six months, what is her total taxable benefit? * $36,000 * $9,000 * $13,500 * $0

Answer 265

$13,500 * Sally will receive three months of disability benefits which is $18,000. * The employer pays 75% of the premium, therefore, 75% of the benefits received are taxable. (0.75 x $18,000 = $13,500).

Question 266

Which of the following changes to a disability income insurance plan would result in a lower policy premium? * Changing the benefit period from age 60 to age 65. * Changing to a modified own occupation definition of disability policy from an any occupation definition of disability policy. * Changing the elimination period from 60 days to 90 days. * Changing the waiting period for policy benefits from 360 days to 180 days.

Answer 266

Changing the elimination period from 60 days to 90 days. * Increasing the elimination period (waiting period) will generally lower policy premiums, all other things being equal. * A modified own occupation definition of disability is more liberal than an any occupation definition and raises the policy premium. * Extending the benefit period increases the premium.

Question 267

XYZ Corporation participates in a disability income insurance benefit for key employees. Insurance is provided through individual policies. The policies have a ninety-day elimination period and a benefit period to age 65. Sally’s disability insurance benefit is $6,000 per month. Her policy includes a waiver of premium feature. Sally’s policy includes an $1,000 per month Social Security Supplement (SIS) benefit. Sally’s health condition satisfies the definition of disability under both her private policy and under Social Security and she has met the respective elimination periods of both. What is Sally’s total monthly benefit currently from her private policy? * $7,000 * $5,000 * $6,000 * $8,000

Answer 267

$6,000 * The SIS benefit is paid when the insured meets the policy’s definition for total disability but is not receiving benefits from any social service plan. * It is payable as a fixed amount of indemnity that ceases when the insured begins to receive any income from a social insurance plan.

Question 268

Which optional feature of an individual disability income insurance policy allows for a larger amount of additional coverage to be added to a policy at a specified age, after a specified number of years, or at after specific life event, such as marriage? * Automatic Benefit Increase * Cost-of-Living Adjustment * Guaranteed Insurability Option * Principal Sum Benefit

Answer 268

Guaranteed Insurability Option * The Guaranteed Insurability Option allows for a larger amount of additional coverage to be added to a policy at a specified age, after a specified number of years, or at after specific life event, such as marriage. * **The insured does not have to prove health insurability but must qualify financially for the increased benefit**.

Question 269

XYZ Corporation participates in a disability income insurance benefit for key employees. Insurance is provided through individual policies. The company pays 100% of the premium and reports the premium as compensation under Section 162 of the Internal Revenue Code. The policies have a ninety-day elimination period with benefits to age 65. Sally’s disability insurance benefit is $6,000 per month. Her policy includes a waiver of premium feature. If Sally is disabled for six months, what is her total taxable benefit? * $9,000 * $0 * $13,500 * $36,000

Answer 269

$0 * Sally must pay taxes on the premiums paid by her employer, therefore, the disability benefits received are tax-free.

Question 270

Which of the following is NOT one of the three basic components that establish the premium and define the payment of benefits under a disability income insurance policy? * The elimination period * The amount of the monthly indemnity * The cause of the disability (sickness or injury) * The benefit period

Answer 270

The cause of the disability (sickness or injury) * The cause of the disability is not a factor in determining the premium and the payment of benefits.

Question 271

Lesson 8. Long-Term Care Insurance | Course 2. Insurance Planning

Question 272

Identify the essential elements of Long-Term Care. I. Services that assist individuals in performing ADLs. II. The need for medical, personal, or social services. III. Needs resulting from an accident, illness, or frailty. IV. Services provided in the home or a nursing home. * I only * I, III, and IV * II and IV * I, II, III, and IV

Answer 272

I, II, III, and IV * All of these are essential elements of LTC.

Question 273

Each of the following are common Activities of Daily Living (ADLs) EXCEPT: * Continence * Walking * Dressing * Transferring

Answer 273

Walking * Walking is not considered a basic Activity of Daily Living (ADL). **The common ADLs include**: * Bathing * Eating * Dressing * Continence * On-Off the Toilet (Toileting) * Transferring

Question 274

In the United States, Medicaid is reserved for the impoverished. * False * True

Answer 274

True * In the U.S., Medicaid is solely for the benefit of the poor. * Beneficiaries of this policy must have very few assets.

Question 275

Which of the following complement nursing care? * Medicaid * Assisted Living Facilities (ALF) * Hospice care * Cognitive Impairment

Answer 275

Assisted Living Facilities (ALF) * ALFs provide supervision and limited health services to relatively healthy senior citizens. * They provide less medical care than nursing homes, but more care than that rendered by common living arrangements.

Question 276

Which of the following LTC policy benefits help patients in need of constant medical attention? * Nursing Home Care * Intermediate Nursing care * Custodial Care * Community Care

Answer 276

Nursing Home Care * Nursing home care is the only kind of LTC that provides for required round-the-clock medical supervision prescribed by a doctor. * Custodial and community care do not provide medical services, but are more for assistance with ADLs. * Intermediate nursing care generally is for those who need a little more care than with just ADLs, but not full-time medical attention.

Question 277

Calculate the maximum lifetime payout if a Long-Term Care benefit on a policy is $100 per day and the stated benefit period is four years. * $146,000 * $36,500 * $26,000 * $104,000

Answer 277

$146,000 * The maximum lifetime payout would be $146,000, calculated as follows: $100 (daily benefit) x 365 days = $36,500 $36,500 (annual maximum) x 4 years = $146,000

Question 278

Each of the following items may contribute to pay long-term care costs for the average American EXCEPT: * Medicaid * Medicare * Individually-owned LTCi * Personal savings

Answer 278

Medicare * All options except Medicare may be relied upon by the average American for funding of long-term care expenses. * Medicare offers long-term care coverage only in the narrowest of circumstances and eligibility depends upon the client having a full rehabilitation from treatment. * Any individual with a substantial cognitive impairment, such as dementia or Alzheimer’s disease, would not be eligible because deterioration is progressive and ongoing.

Question 279

Virtually all individually issued LTCi policies are guaranteed renewable. * False * True

Answer 279

True * In most cases LTCi policies are guaranteed renewable.

Question 280

Which of the following is(are) the minimum standard(s) that the Long-Term Care Insurance Model Act requires of long-term care insurance? I. Waivers denying coverage for specific health conditions are prohibited. II. The individual policy-owner must have a free-look period during which the policy can be canceled and premiums returned. III. Insurers who offer substantially greater benefits for skilled nursing care than for intermediate or custodial care are prohibited. IV. Policies must be guaranteed renewable. * I, II, III, and IV * II and IV * I and III * IV only

Answer 280

I, II, III, and IV * The Long Term Care Insurance Model Act specifies all of the above as minimum standards for long-term care policies.

Question 281

Nonforfeiture benefits carry higher premiums. * False * True

Answer 281

True * Policies with a nonforfeiture benefit will always carry higher premiums than otherwise similar policies.

Question 282

# Exam 8. Long-Term Care Insurance Exam 8. Long-Term Care Insurance | Course 2. Insurance Planning

Question 283

Choose the commonly accepted Activities of Daily Living (ADLs): I. Eating II. Walking III. Dressing IV. Toileting * I, II, III, and IV * I, III, and IV * II and III * I and II

Answer 283

I, III, and IV **The common activities of daily living (ADLs) include**: * Eating * Bathing * Dressing * Toileting * Continence * Transferring

Question 284

Rank the Long-Term Care Facilities from lowest to highest-level of support. I. Adult Day Health Care (ADC) II. Nursing Home Care III. Assisted Living Facility (ALF) IV. Home Health Aide Services

Answer 284

IV, I, III, II **Long-Term Care Facilities from lowest to highest-level of support**. * Home Health Aide Services (lowest) * Adult Day Health Care (ADC) * Assisted Living Facility (ALF) * Nursing Home Care (highest)

Question 285

According to statistics compiled by the American Association of Long-Term Care Insurance (AALTCi), __ ____??____ __ of individuals age 80+ seeking to purchase long-term care insurance are denied coverage. * 22.9% * 44.8% * 13.9% * 69.8%

Answer 285

69.8% * Percentage of Applicants Declined Coverage (Individual Policies) Age of Applicant, Average Declined Coverage Under 50 7.9% 50 to 59 13.9% 60 to 69 22.9% 70 to 79 44.8% 80 and Over 69.8% Source: American Association of Long-Term Care Insurance (AALTCi)

Question 286

To be categorized as a qualified LTCi policy, which of the following features must be included? I. The policy must be noncancelable II. Must provide a cash value for any reason III. Dividends or refunds may only be reinvested into the policy. IV. Generally, policies must not pay for services that would be covered by Medicare, unless Medicare is specified as a secondary payer. * II and III * I, II, III, and IV * IV only * I and IV

Answer 286

IV only **To be tax-qualified, a LTCi policy must**: * Be guaranteed renewable * Not provide a cash value for any reason other than upon full surrender or death of the insured * Other than at full surrender or death, any dividends or refund may only be used to reduce future premiums or increase future benefits. * Generally, policies must not pay for services that would be covered by Medicare, unless Medicare is specified as a secondary payer.

Question 287

Calculate the maximum lifetime payout if a Long-Term Care benefit on a policy is $200 per day and the stated benefit period is three years. * $73,000 * $219,000 * $146,000 * $292,000

Answer 287

$219,000 * The maximum lifetime payout would be $219,000, calculated as follows: $200 (daily benefit) x 365 days = $73,000 $73,000 (annual maximum) x 3 years = $219,000

Question 288

Each of the following are reasons to purchase long-term care insurance (LTCi) EXCEPT: * To generate gains to offset purchasing power risk. * Constantly inflating LTC costs for all levels of care. * The higher risks of individuals age 65+ having an LTC need. * To offset the risk of depleting personal savings.

Answer 288

To generate gains to offset purchasing power risk. * Long-term care insurance (LTCi) benefits may be protected from purchasing power risk with an inflation protection rider, however, the policy cannot be used as an investment vehicle to generate gains.

Question 289

When applicable, the Medicaid “look back” period for calculation of assets lasts for __ ____??____ __ months. * 60 * 48 * 36 * 12

Answer 289

60 * Property transferred to individuals, charities, or a trust within 60 months of application for Medicaid is considered as owned by the applicant and must be disclosed. * Applicants must provide five years of financial records to satisfy the "look back" period, regardless of whether transfers were made to a trust or to others.

Question 290

A __ ____??____ __ LTCi elimination period warrants a __ ____??____ __ premium, when all other policy provisions remaining the same. I. shorter; lower II. shorter; higher III. longer; higher IV. longer; lower * I only * II and III * I and III * II and IV

Answer 290

II and IV * A longer elimination period warrants a lower premium; a shorter elimination period creates a higher premium when all other policy provisions remaining the same.

Question 291

The __ ____??____ __ guarantees that the insured does not have to pay any premiums due while they are receiving benefits. * waiver of premium provision * noncancelable renewability provision * inflation protection rider * convertibility clause

Answer 291

waiver of premium provision * Nearly all LTC policies provide for a waiver of premium, usually after 60, 90, or 180 days of confinement or days of benefits paid. * Waiver of premium provision guarantees that the insured does not have to pay any premiums due while they are receiving benefits.

Question 292

A client purchases a long-term-care policy without inflation protection for $325 per day and a 5-year term. Inflation for long-term-care costs is expected to be a constant 3.5% over the next 20 years. Twenty years later, the client is a resident in a nursing home, receiving a $325 per day benefit. Calculate the actual cost of nursing home services per day. * $336 * $647 * $385 * $663

Answer 292

$647 * The actual cost of nursing home services per day is $647, calculated as follows: n = 20 I/YR = 3.5 PV = ($325) Solve for FV = $647

Question 293

In general, to qualify for Medicaid an individual cannot have more than __ ____??____ __ countable assets. * $10,000 * $4,000 * $7,500 * $2,000

Answer 293

$2,000 * Though specific thresholds vary from state-to-state, in general, individuals cannot have more than $2,000 in countable assets to apply to Medicaid. * Certain assets are not counted, such as household goods, personal possessions, clothing, furniture, jewelry, a car, and up to $500,000 or $750,000 of home equity, depending on the state.

Question 294

Choose the basic components that establish the premium and define the payment of benefits under LTCi policies. I. The elimination period II. The benefit period III. The amount of daily benefit IV. The face value amount * I and III * I, II, III, and IV * II and IV * I, II, III

Answer 294

I, II, III The three basic components that establish the premium and define the payment of benefits under LTCi policies are: * the elimination period * the benefit period, and * the amount of daily benefit.

Question 295

Most individually issued LTCi policies are __ ____??____ __, meaning the insured has a contractual right to renew the policy to some specified age, such as 79. * conditionally renewable * optionally renewable * noncancelable * guaranteed renewable

Answer 295

guaranteed renewable * Virtually all individually issued LTCi policies are guaranteed renewable, meaning the insured has a contractual right to renew the policy to some specified age, such as 79. * The insurer can neither cancel nor refuse to renew the policy prior to the policy expiration unless the insured fails to pay a premium.

Question 296

Each of the following statements about tax treatment of employer-provided long-term care insurance is correct EXCEPT: * Employers can deduct the premiums paid for LTC coverage for employees as an ordinary and necessary business expense. * Employer contributions to an employee's LTC premium are excluded from the employee's taxable income. * Long term care coverage cannot be offered as part of an employer's cafeteria plan. * When the employer covers LTC premium payments, the employee can take an income tax deduction for the premiums paid.

Answer 296

When the employer covers LTC premium payments, the employee can take an income tax deduction for the premiums paid. **Tax treatment of employer-provided long-term care insurance is as follows**: * Employer contributions to an employee's LTC premium are excluded from the employee's taxable income. Consequently, the employee cannot take an income tax deduction for the premiums paid. * Employers can deduct the premiums paid for LTC coverage for employees as an ordinary and necessary business expense. * Long term care coverage cannot be offered as part of an employer's cafeteria plan.

Question 297

When substantial services are required to protect the individual due to Alzheimer’s, dementia, or cognitive deterioration, 2 of the 6 ADL requirement must be met for LTC benefits to begin. * False * True

Answer 297

False * When substantial services are required to protect the individual due to Alzheimer’s, dementia, or cognitive deterioration **LTC benefits can start without the 2 of 6 ADL requirement**. * This special coverage is referred to as the **cognitive impairment clause**.

Question 298

Identify the organization that developed model legislation to govern long-term care insurance. * American Association of Retired People * American Health Care Association (AHCA) * American Association of Long-Term Care Insurance (AALTCi) * NAIC (National Association of Insurance Commissioners)

Answer 298

NAIC (National Association of Insurance Commissioners) * As the long-term-care market developed, the NAIC (National Association of Insurance Commissioners) wrote model legislation that has been adopted in many states.

Question 299

Identify the level of LTC service that has the following characteristics: Periodic care with activities of daily living (ADLs) As-needed basis Provided by non-licensed caregivers * Adult Day Health Care * Skilled Nursing Care * Custodial Care * Intermediate Care

Answer 299

Custodial Care * Custodial Care involves periodic care with activities of daily living (ADLs) provided by non-licensed caregivers on an as-needed basis.

Question 300

Common inflation protection rider provisions include each of the following EXCEPT: * Increasing the benefit amount by 3% compounded annually. * Increasing the benefit amount by 3% of the original amount per year. * Adjusting the benefit amount annually according to increases in a price index (e.g., CPI) * Adjusting the benefit amount quarterly according to performance of an investment index.

Answer 300

Adjusting the benefit amount quarterly according to performance of an investment index. **Common inflation protection benefit rider options**: * Increase the benefit amount by 3% of the original amount per year. * Increase the benefit amount by 3% compounded annually. * Adjust the benefit amount annually according to increases in a price index, such as the consumer price index in the United States.

Question 301

Skilled Nursing Care involves which of the following? I. Medically required care II. 24-hour oversight III. Support provided by nurses/nurse’s aides under supervision of a licensed physician IV. Care on an as-needed basis * II and III * I only * IV only * I and II

Answer 301

I and II **Skilled Nursing Care is the highest level of LTC service and has the following features**: * Medically required care * 24-hour oversight * Provided by licensed medical practitioner

Question 302

Lesson 9. Life Insurance | Course 2. Insurance Planning

Question 303

Match the term with the correct description. Death Retirement Incapacity Injury or incurring a disease * Health insurance, accident insurance, and medical expense insurance. * Endowments, annuities, and pensions. * Life insurance or life assurance. * Disability income insurance or long-term care insurance.

Answer 303

* Death - Life insurance or life assurance. * Retirement - Endowments, annuities, and pensions. * Incapacity - Disability income insurance or long-term care insurance. * Injury or incurring a disease - Health insurance, accident insurance, and medical expense insurance.

Question 304

Describe Group Life Insurance

Answer 304

Individual consumers purchase individual life insurance on their own accord, whereas group insurance is provided to members of a well-defined group of people who are associated for some purpose other than purchasing insurance. Some contracts contain a conversion privilege, which allows the employee to convert the group policy to individual coverage when they leave their employer. Without this provision, the coverage ends when the employment terminates. Group Insurance is a means through which a group of individuals who usually have a business or professional relationship can gain access to insurance more easily than individual coverage, but usually with less flexibility or reduced optional benefits. The group entity (such as an employer or professional association) is the contract owner and each member is provided with an insurance certificate outlining his or her coverage. **Practitioner Advice: While many employers offer group life insurance coverage, it is important to understand the differences between group and individually purchased policies. Group policies are sold based on group rates, accounting for volume and a mixed risk assessment. Individual policies, on the other hand, are priced according to the cost of marketing to the individual and based on their specific risk factors. Typically, a healthy non-smoker will find an individual policy to be less costly, though it may require a more extensive application process. On the other hand, a person whose health condition limits his or her ability to purchase life insurance individually may find group coverage to be the only option.**

Question 305

Ordinary insurance includes individual life insurance and health insurance policies whose benefit amounts are smaller than industrial insurance. * False * True

Answer 305

False * Ordinary insurance includes individual life insurance and health insurance policies whose benefit amounts are larger than industrial insurance.

Question 306

Group insurance is a means through which a group of individuals who usually have a business or professional relationship can gain access to insurance more easily than individual coverage, usually with greater flexibility or increased optional benefits. * False * True

Answer 306

False * Group insurance is a means through which a group of individuals who usually have a business or professional relationship can gain access to insurance more easily than individual coverage, but **usually with less flexibility or reduced optional benefits**.

Question 307

Ownership rights in life insurance policies include the following rights (select all that apply). * Change ownership of the policy * Assign the policy as security for a loan * Name beneficiaries * Receive dividends * Take out cash surrender value

Answer 307

Change ownership of the policy Assign the policy as security for a loan Name beneficiaries Receive dividends Take out cash surrender value **Ownership rights in life insurance policies include the right to**: * Change ownership of the policy * Assign the policy as security for a loan * Name beneficiaries * Receive dividends * Take out cash surrender value * Borrow against the policy

Question 308

Generally, the __ ____??____ __ beneficiary has no rights in the policy while the insured is alive, while a(n) __ ____??____ __ beneficiary has a vested or guaranteed interest in the death benefit. * revocable; irrevocable * irrevocable; revocable * revocable; contingent * irrevocable; contingent

Answer 308

revocable; irrevocable * Generally, the revocable beneficiary has no rights in the policy while the insured is alive, while an irrevocable beneficiary has a vested or guaranteed interest in the death benefit.

Question 309

Each of the following are correct statements regarding a beneficiary EXCEPT: * A beneficiary receives the life insurance proceeds when the insured dies. * A person can be both the insured and a beneficiary. * A person, trust, estate or a business may be a beneficiary of a policy. * Contingent beneficiaries will only have death benefit rights if the primary beneficiary predeceases the insured.

Answer 309

A person can be both the insured and a beneficiary. * A beneficiary receives the life insurance proceeds when the insured dies. * A person, trust, estate or a business may be a beneficiary of a policy. * A person cannot be both the insured and a beneficiary, however. * Contingent beneficiaries will only have death benefit rights if the primary beneficiary predeceases the insured.

Question 310

With an annual renewable term insurance policy, the amount of coverage __ ____??____ __ and the premiums __ ____??____ __ as the insured ages. * remains constant; decrease * decreases; remains constant * remains constant; increase * decreases; increase

Answer 310

remains constant; increase * With an annual renewable term insurance policy, the amount of coverage remains constant and the premiums increase as the insured ages. * This reflects the rising cost of insuring actual risk at a specific risk.

Question 311

Julia pays a premium of $1,000 per year on her whole life insurance policy. After two consecutive years of timely payments, the cash value of Julia’s policy will equal $2,000. * False * True

Answer 311

False * Julia’s cash value does not equal $2,000 in year three. * The insurer deducts a number of costs from the premiums paid, such as the cost of selling and underwriting the policy, taxes paid to the government, mortality charges, and administrative costs. * In addition, the government requires that certain cash reserves be set aside to ensure that future death claims can be paid.

Question 312

Match with correct description: Features Premiums Monthly Cost * Subtracted from the fund value. * Premium, cash value, and death benefit can be adjusted as the insured's needs change. * Less administrative costs are deposited into a fund which is credited with a declared interest rate that can change monthly, on a tax-deferred basis.

Answer 312

* Features - Premium, cash value, and death benefit can be adjusted as the insured's needs change. * Premiums - Less administrative costs are deposited into a fund which is credited with a declared interest rate that can change monthly, on a tax-deferred basis. * Monthly Cost - Subtracted from the fund value.

Question 313

James Gordon asked his insurance agent whether he would receive the full-face amount of his insurance policy next year when it reaches the end of its term. The agent's reply was negative. Which type of insurance policy does James Gordon have? * Whole Life Insurance * Term Life Insurance * Endowment Insurance * Tenure Life Insurance

Answer 313

Term Life Insurance * Term life insurance terminates with no maturity value and therefore nothing is paid to the insured at the end of the term.

Question 314

Match the elements with the correct definition. Dividend Illustration Dividend History Contribution Principle * Surplus received in proportion to contribution. * Provided by insurers to prospective purchasers. * Schedule of dividends actually paid.

Answer 314

* Dividend Illustration - Provided by insurers to prospective purchasers. * Dividend History - Schedule of dividends actually paid. * Contribution Principle - Surplus received in proportion to contribution.

Question 315

Which feature(s) of term life insurance do not require evidence of insurability? * Renewability * Endowment * Convertibility * Re-Entry

Answer 315

Renewability Convertibility * Renewability and convertibility are two features provided in term life insurance without reference to the insured's insurability status. * The **re-entry option** is available only if the insured can demonstrate that they meet certain insurability criteria. * Endowment is not a feature of term life insurance; it is another type of insurance.

Question 316

Each of the following conditions must be met to reinstate a life insurance policy EXCEPT: * Evidence of insurability. * Payment of all defaulted premiums without interest. * Repayment of any loans secured by the policy. * No engagement in dangerous occupations or hobbies.

Answer 316

Payment of all defaulted premiums without interest. **Evidence of insurability, beyond the good health of the insured, means, among other things, that the insured must**: * Not be engaged in any dangerous occupations or hobbies, * Not be awaiting execution for a crime, * Pay all defaulted premiums with compound interest, and * Repay any outstanding loans with interest.

Question 317

Select the way(s) in which a life insurance policy may be terminated or contested. I. Non-payment of premiums by the insured. II. Fraudulent claims are suspected. * I only * II only * Both I and II * Neither I nor II

Answer 317

Both I and II * A life insurance policy may be terminated or contested due to premium non-payment and/or submission of fraudulent claims by the insured.

Question 318

According to the commonly used suicide clause, a life insurance company may exclude payment for death by suicide if the suicide occurs within __ ____??____ __ from the policy issue date. * 6 months * 12 months * 18 months * 24 months

Answer 318

24 months * The suicide clause allows a life insurer to exclude payment for death by suicide if the suicide occurs within two years (24 months) from the policy issue date.

Question 319

When a policyowner does not choose a non-forfeiture option following the lapse of their life insurance contract, the insurer will automatically select the __ ____??____ __ option as a default. * extended term * reduced paid-up * cash surrender value

Answer 319

extended term * If a policyowner does not select a non-forfeiture option after lapsing a policy, the insurer automatically chooses an option. * Frequently, the extended term option is utilized as the default choice.

Question 320

Select all the basic settlement options. * Life income * Stock * Interest only * Cash * Fixed amount * Fixed Period

Answer 320

Life income Interest only Cash Fixed amount Fixed Period * All of the listed items are considered settlement options except stock. The **basic settlement options include**: * Life income * Interest only * Cash * Fixed Amount * Fixed Period **More than 95% of all life insurance proceeds are taken in cash. In addition, if no settlement option is selected, insurers pay the proceeds in cash by default**.

Question 321

Which policy feature allows you to pay the premium late but still retain coverage? * Incontestable clause * Non-Forfeiture clause * Grace Period * Reinstatement clause

Answer 321

Grace Period * A **grace period** provides a period of 31 days to pay the premium without forfeiting any contractual rights. * **Incontestable clause** prevents the insurer from contesting the policy to void it after a certain period. * **Reinstatement clause** provides the opportunity to renew a lapsed policy. * **Non-forfeiture clause** prevents the life insurance company from canceling a policy for nonpayment of premiums.

Question 322

If an incontestable clause is included in the policy contract, the policy cannot be ended even if the insured has not paid premiums. * False * True

Answer 322

False * The incontestable clause states that the insurer may not contest the policy to void it after it has been in force for a one or two-year period. * However, a life insurance policy may be ended if the insurer has not paid the premiums.

Question 323

Identify the dividend payout options available on a participating whole life insurance policy (Select all that apply). * Cash * Reduced premium * Left to accumulate interest * Used to purchase flexible-premium insurance. * Used to purchase one-year term insurance

Answer 323

Cash Reduced premium Left to accumulate interest Used to purchase one-year term insurance **Dividends on participating life insurance policies may be**: * taken in cash. * used to pay a portion of the next premium (reduced premium). * left to accumulate interest. * used to purchase single-premium, paid-up insurance. * used to purchase one-year term insurance (fifth dividend option).

Question 324

Brenda's husband Bob died last week. Her agent told her she would receive a monthly check until her death. Which settlement option is the agent describing? * Cash * Fixed Amount * Fixed Period * Life-Income

Answer 324

Life-Income * Life-Income option guarantees for a lifetime a series of regular payments to the beneficiary. * Cash settlement is lump sum amount paid at the death of the insured. * Fixed amount and fixed period options pay only for a certain period of time.

Question 325

If life insurance death proceeds are taken as a series of payments over a period of time, federal income tax is applied to the whole payment. * False * True

Answer 325

False * **Federal income tax is only applied to the interest part the payment of death proceeds** which are taken as a series of payments that include interest earned.

Question 326

Angelina purchased a whole life insurance policy when she was 30 years old. Twenty-five years later she withdraws $20,000 in cash value of her insurance. She has paid a total amount of $30,000 as premiums and has received $16,000 as dividends to date. How much is subject to federal income tax at the time of withdrawal? * $14,000 * $10,000 * $6,000 * $4,000

Answer 326

$6,000 * If the insured withdraws the savings value of a whole life policy, and if this value exceeds the insured's adjusted basis, the excess is subject to federal income tax. * The **insured's adjusted basis is calculated as premiums paid less dividends received**. In Angelina's case the calculation would be: Premiums paid = $30,000 Dividends received = $16,000 Adjusted basis = $14,000 [$30,000 (premiums paid) - $16,000 (dividends received)] Savings value = $20,000 Adjusted basis = $14,000 Excess subject to tax = $6,000

Question 327

Why do business firms purchase life insurance? (Select all that apply) * To provide benefits for employees. * To protect the firm against loss of a key person. * To protect the firm from bankruptcy. * To aid in transferring business ownership.

Answer 327

To provide benefits for employees. To protect the firm against loss of a key person. To aid in transferring business ownership. * Business firms purchase life insurance to benefit employees, protect themselves against financial problems caused by loss of a key person and for smooth transfer of ownership. * Life insurance does not cover a business going bankrupt.

Question 328

Adam, age 32, contributed $13,000 to a variable annuity. After 12 years, the value of the contract had increased to $25,000. If Adam withdraws $20,000 from the contract, what will he owe in taxes and/or penalities? * $20,000 will be taxable and subject to penalty. * $13,000 will be taxable and subject to penalty. * $5,000 will be taxable and subject to penalty. * $7,000 will be taxable and subject to penalty. * $12,000 will be taxable and subject to penalty.

Answer 328

$12,000 will be taxable and subject to penalty. * $12,000 represents the gain from the contract which must be withdrawn first. * It will be taxable and subject to penalty.

Question 329

During the distribution phase, the amount of income derived is based on the life expectancy of the: * Owner * Annuitant * Beneficiary * Combination of the Annuitant and Beneficiary * Combination of the Owner and the Beneficiary

Answer 329

Annuitant * The amount of income is based on the life expectancy of the annuitant.

Question 330

Transfers between separate accounts in a variable annuity may result in taxation to the owner. * False * True

Answer 330

False * Activity within an annuity of any type is tax-sheltered.

Question 331

# Exam 9. Life Insurance Exam 9. Life Insurance | Course 2. Insurance Planning

Question 332

Each of the following parties has a distinct interest in a life insurance policy EXCEPT: * Owner * Insured * Contingent beneficiary * Primary beneficiary

Answer 332

Contingent beneficiary * A contingent beneficiary has a distinct interest in the policy only if the primary beneficiary predeceases the insured.

Question 333

Ownership rights in life insurance policies include each of the EXCEPT: * Assign the policy as security for a loan. * Change ownership of the policy. * Name beneficiaries. * Change the insured.

Answer 333

Change the insured. * An owner may not change the insured. * In addition to the rights above (i.e., change ownership, assign the policy to secure a loan, and name beneficiaries), the owner may receive dividends, withdraw cash value, and borrow against the policy.

Question 334

Select the criteria to determine if an individual may receive an accelerated death benefit: I. The policy owner and insured may not be the same individual. II. The insured must be chronically ill. III. The reduction of the remaining face value of coverage is limited. IV. The cash value of the remaining death benefit may not be reduced. * I, II, III, and IV * III and IV * I and III * II and IV

Answer 334

III and IV * Many insurers allow an accelerated death benefit or the early withdrawal of death benefits in cases where the insured is terminally ill. * The IRS issued a regulation applying to the taxation of these early payments in June 1993. These regulations provide that payments meeting a **three-part test will be identified as a qualified accelerated death benefit**: * The insured must be terminally ill. * The reduction of the remaining face value of coverage is limited. * The cash value of the remaining death benefit may not be reduced.

Question 335

Following a prolonged market downturn, Jesse transferred funds within his annuity from a moderately aggressive subaccount to a guaranteed interest rate account. Identify the type of annuity owned by Jesse. * Index Annuity * Fixed Annuity * Universal Annuity * Variable Annuity

Answer 335

Variable Annuity * A variable annuity contract provides a variety of separate subaccounts which allow assets to be invested in securities such as stocks, bonds, money market accounts, etc. * The account owner can transfer assets between subaccounts. * Variable annuities usually contain a fixed account which provides a guaranteed interest rate account.

Question 336

Which of the following is not one of the categories of individually issued life insurance? * Credit insurance * Term insurance * Ordinary insurance * Industrial insurance

Answer 336

Term insurance * Term life insurance is a specific type of policy, whereas industrial, ordinary, and credit are general classification categories.

Question 337

Each of the following are features commonly included in an index annuity EXCEPT: * Participation rate * Floor * Separate accounts * Cap

Answer 337

Separate accounts * Index annuities provide a return on the assets invested that is tied to a market index. * There is often a participation rate and cap on these contracts. For example, the contract will pay interest equal to a stated percentage of whatever the index achieves over a certain period but the overall return may be capped. * Also, there may be a floor, limiting potential losses associated with the index.

Question 338

A client has a guaranteed renewable 20-year term life insurance policy which allows the policy to be renewed for an additional 20 years at the end of the initial term. What premium does the insurance company typically charge for renewal? * The company’s current rate offered based on the initial age of purchase. * The same premium as the initial 20-year term. * The company’s current rate based on the attained age at renewal. * The maximum premium stated in the policy.

Answer 338

The company’s current rate based on the attained age at renewal. * Usually the insurance company charges a rate lower than that stated in the policy. * The stated maximum premium is there as a safety valve for the insurer.

Question 339

Each of the following are dividend payout options available on participating life insurance policies EXCEPT: * cash * purchase single-premium immediate annuity * accumulate interest * purchase one-year term insurance

Answer 339

purchase single-premium immediate annuity **Dividends on participating life insurance policies may be**: * taken in cash. * used to pay a portion of the next premium. * left to accumulate interest. * used to purchase single-premium, paid-up insurance. * used to purchase one-year term insurance (fifth dividend option).

Question 340

What is a term life insurance policy conversion credit? * A conversion credit is a specific amount credited against the first-year premium of the cash value policy to which the term insurance policy is converted. * A conversion credit is a specified deposit into a new policy’s cash value as an incentive to convert. * A conversion credit is a specific amount credited against the term insurance renewal premium. * A conversion credit allows an insured to convert a term life insurance policy to a cash value type of policy based on the original age at which the term insurance was purchased.

Answer 340

A conversion credit is a specific amount credited against the first-year premium of the cash value policy to which the term insurance policy is converted. * A conversion credit is a credit against the new policy’s premiums. * These credits may include a stated dollar amount, such as $2 per $1,000 of insurance, an amount equal to the previous year’s term premium paid, or a fixed percentage of the new policy’s premium.

Question 341

The opportunity to renew a lapsed policy is called the __ ____??____ __. * grace period * incontestable clause * entire contract provision * reinstatement provision

Answer 341

reinstatement provision * After a policy lapses, the insured has an opportunity to reinstate it if specified conditions are met. * The opportunity to renew a lapsed policy is called the reinstatement provision.

Question 342

Which type of life insurance combines the low-cost nature of term and the cash value features of whole life? * Universal Life * Variable Universal Life * Guaranteed Issue Life * Variable Life

Answer 342

Universal Life * Universal life insurance was created to meet the interests of those consumers who liked the low-cost nature of term insurance and the cash value features of whole life insurance. * This new hybrid product was to be more flexible than its predecessors with features that allowed the insured to determine whether it would function more like term or more like a whole life policy.

Question 343

If the insured forgets to pay the premium or decides to end the contract, the grace period provides __ ____??____ __ to pay the premium without forfeiting any contractual rights and no questions asked. * 120 days * 60 days * 270 days * 31 days

Answer 343

31 days * If the insured forgets to pay the premium or decides to end the contract, the grace period provides 31 days to pay the premium without forfeiting any contractual rights and no questions asked.

Question 344

An annuity purchased with a five years certain distribution provision __ ____??____ __. * guarantees that the annuitant dies before the five-year period, their successor beneficiary will continue to receive the remaining payments. * ensures that payments are made to the beneficiary over time equal to the amount of premiums the annuitant contributed. * provides a refund if the annuitant dies before receiving payments equal to the amount of premiums paid. * offers the successor beneficiary life income after five years elapse.

Answer 344

guarantees that the annuitant dies before the five-year period, their successor beneficiary will continue to receive the remaining payments. * An annuity, five years certain guarantees that the annuity will be paid out for five years. * If the annuitant dies before the five-year period, their successor beneficiary will continue to receive the remaining payments.

Question 345

Rosalita has elected to annuitize her flexible premium deferred annuity this year to generate an income stream for retirement. Over the course of 25 years, Rosalita had paid $150,000 of premium payments into the contract. The expected annual annuity payment is $22,500 for 16 years. Calculate the amount of this the annuity payment this year that will be considered a tax-free return of basis. * $19,125 * $13,125 * $9,375 * $3,375

Answer 345

$9,375 * Use the exclusion ratio to determine the portion of each annuity payment that represents a return of basis (tax-free amount). **Exclusion Ratio: (Basis in Contract ÷ Expected Total Payments) x Annuity Payment Amount = Return of Basis.** ($150,000 ÷ [$22,500 x 16]) x $22,500 ($150,000 ÷ $360,000) x $22,500 = $9,375 (tax-free return of basis)

Question 346

Modified Endowment Contract withdrawals I. are taxed on a FIFO basis. II. have a 10% penalty if the contract owner is age 65 or younger. * Both I and II * II only * Neither I nor II * I only

Answer 346

Neither I nor II **A Modified Endowment Contract (MEC) means**: * Any funds withdrawn are subject to **LIFO** (i.e., "last-in, first-out") taxation so investment income is withdrawn first * a **10% penalty applies to cash withdrawal or loan before age 59½**.

Question 347

A conversion option in a term life insurance policy typically allows a conversion to any of the following policies EXCEPT: * Universal life insurance * Level premium term for a longer term than the original policy * Variable life insurance * Whole life insurance

Answer 347

Level premium term for a longer term than the original policy * Most term insurance policies include a convertible feature. * This feature permits the policy owner to exchange the term policy for a cash-value insurance contract, without evidence of insurability.

Question 348

Which of the following statements is correct regarding credit life insurance? * Credit life insurance is much less expensive than traditional life insurance. * Credit life insurance has an increasing death benefit. * Credit life insurance premiums increase each year over the term of the loan. * Credit life insurance is often packaged and sold when a client is making an expensive purchase, such as a car.

Answer 348

Credit life insurance is often packaged and sold when a client is making an expensive purchase, such as a car. * Credit life insurance is often sold in conjunction with a major purchase. * It typically is **much more expensive than traditional term life insurance**. * The premium does not increase each year and the **benefit decreases each year to coincide with the outstanding loan balance**.

Question 349

Choose the correct phases of an annuity. I. The deferral phase II. The accumulation phase III. The gifting phase IV. The distribution phase * I and IV * I and III * II and III * II and IV

Answer 349

II and IV **Annuities have two phases**: * the accumulation phase, and * the distribution phase.

Question 350

Which of the following types of life insurance is often referred to as “pure protection?” * Term life insurance * Variable life insurance * Whole life insurance * Universal life insurance

Answer 350

Term life insurance * Term life insurance is often referred to as "pure protection" or "pure insurance" because it pays a death benefit only and has no savings component.

Question 351

Identify the type(s) of policy illustrations. I. proposed II. vetted III. active IV. in-force * III only * I and IV * II and III * I only

Answer 351

I and IV There are two types of policy illustrations: * proposed * in-force

Question 352

In general, the incontestable clause states that, if there is a valid contract between the insurer and insured, the insurer may not contest the policy to void it after the policy has been in force for __ ____??____ __ during the lifetime of the insured. * 18 months * 6 months * 24 months * 12 months

Answer 352

24 months * The incontestable clause states that, if there is a valid contract between the insurer and insured, the insurer may not contest the policy to void it after the policy has been in force for two years (24 months) during the lifetime of the insured.

Question 353

Art, age 70, purchases an annuity to generate additional income for his retirement. A lump sum of $50,000 was used to buy the annuity and income distributions started 9 months from the date of purchase. Based on these facts, select the type of annuity purchased by Art. * Single Premium Immediate Annuity * Level Premium Deferred Annuity * Single Premium Deferred Annuity * Flexible Premium Deferred Annuity

Answer 353

Single Premium Immediate Annuity * A single-premium immediate annuity is funded with one payment and the annuitant begins to receive income distributions between 1 month and 1 year from the date of purchase.

Question 354

In a guaranteed renewable term life insurance policy, as the premium rate increases with each renewal, mortality experience increasingly reflects __ ____??____ __. * client's age * actuarial tables * life expectancy * adverse selection

Answer 354

adverse selection * Resistance to the higher premiums and lower-cost product opportunities cause many insureds in good health to fail to renew. * The **majority of those in poor health will renew even in the face of higher premiums**.

Question 355

The taxable portion of an annuity distribution will be subject to a 10% penalty unless the owner I. is older than 59 ½ II. is disabled III. has died IV. transfers funds to an IRA * I, II, and III * II and III * I and IV * I only

Answer 355

I, II, and III * When the contract owner receives a distribution, the date that the original annuity was purchased will determine the appropriate accounting treatment used to calculate ordinary income, if any. * Then, unless the owner of the contract is older than 59-1/2, has suffered a disability, or has died, the taxable portion will be subject to a 10% penalty.

Question 356

Scoots, Inc., a scooter rental company would like to set up a buy-sell arrangement using a cross-purchase plan. There are 6 partners at Scoots, Inc. that will need to be covered. How many life insurance policies must be purchased? * 12 * 36 * 30 * 6

Answer 356

30 * With a **cross-purchase plan**, the number of policies needed is equal to: **n x (n - 1), where n equals the number of partners or shareholders**. The number of policies for the partners at Scoots, Inc. is calculated as follows: 6 x (6 – 1) = 6 x 5 = 30

Question 357

Select the life insurance policy rider that exempts an insured from paying premiums while they are totally disabled. * Double indemnity * Reinstatement rider * Guaranteed insurability * Waiver of premium

Answer 357

Waiver of premium * The waiver of premium option exempts an insured from paying premiums while they are totally disabled. * Despite non-payment of premiums, the disabled insured maintains all policy rights and can receive participating dividends and increases in cash values. * Usually, there is a six-month waiting period that applies to this benefit.

Question 358

Lesson 10. Viatical Settlements | Course 2. Insurance Planning

Question 359

A life insurance policy cannot be treated like other types of property and therefore its ownership rights cannot be transferred. * False * True

Answer 359

False * The assignment provision treats life insurance policies like other types of property and allows ownership rights to be transferred by the current owner to another person.

Question 360

James owns different types of property. Which of the following would be classified as "personal property?" (Select all that apply) * Beach-Front Mansion in Florida * Life Insurance Policy * A Yacht

Answer 360

Life Insurance Policy A Yacht * James' life insurance policy and his yacht are both classified as "personal property." * His beach-front mansion in Florida, however, is classified as "real property."

Question 361

What are the features of an absolute assignment? (Select all that apply) * It is the complete transfer of all ownership rights. * It is a temporary transfer of ownership rights. * It is used with viatical settlements. * It is a partial transfer of ownership rights. * It requires the consent of an irrevocable beneficiary.

Answer 361

It is the complete transfer of all ownership rights. It is used with viatical settlements. It requires the consent of an irrevocable beneficiary. * Absolute assignment is the complete transfer of all ownership rights and requires the consent of an irrevocable beneficiary. It is commonly used with viatical settlements. * Collateral assignment is a temporary transfer of only some ownership rights.

Question 362

Yves has been diagnosed with terminal cancer. He is 36 years old and is expected to live for fewer than six months. Yves owns a life insurance policy that would pay $100,000 upon his death. Based on his circumstances, Yves approaches a viatical settlement firm and they offer him $80,000 for the life insurance policy. Around the same time, Colette, who is also 36, is diagnosed with advanced cancer. Her life expectancy is fewer than two years. Colette owns a life insurance policy with a face amount of $100,000 as well. Compared to the offer to Yves, the viatical settlement firm will offer Colette __ ____??____ __ for her policy. * an equal amount * a greater amount * a lower amount * nothing

Answer 362

a lower amount * The viatical settlement firm will offer Colette a lower amount for her policy than was offered to Yves. * The reason for the lower amount is that Yves has a far shorter life expectancy.

Question 363

Jamie has needed substantial supervision to safeguard him from threats to health and safety due to severe cognitive impairment. Under the guidance of his family and financial planner, a decision has been made to enter a viatical settlement to cover the supervision costs and other housing expenses unrelated to his health. Prior to finalizing the viatical settlement, Jamie’s financial planner noted that only qualified long-term care costs, such as the personal supervision, would be tax-free. Jamie’s unrelated housing expenses would be taxable, if taken from the pool of viatical settlement proceeds. Based on this situation identify the most likely certified diagnosis for Jamie. I. Chronically ill II. Terminally ill * I only * II only * Both I and II * Neither I nor II

Answer 363

I only A chronically ill individual is someone who has been certified (at least annually) by a licensed health care practitioner as: * Being unable to perform, without substantial assistance from another individual, at least two daily living activities (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity; or * Requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment. Jamie’s state aligns with the second definition listed above. Since Jamie is considered chronically ill, the only viatical settlement proceeds that will receive tax-free treatment are those used for qualified long-term care expenses.

Question 364

Arrange the following events in the correct sequence. * Henry received cash payment from the viatical settlement firm. * The viatical settlement firm received the death proceeds of Henry's life insurance policy from the insurance company. * Submitted answer: The viatical settlement firm received the death proceeds of Henry's life insurance policy from the insurance company. * Henry purchased a life insurance policy. * Henry died. * Henry approached a viatical settlement firm and sold his life insurance to them. * Henry was diagnosed with a fatal form of cancer. * The viatical settlement firm continued paying Henry's life insurance premiums.

Answer 364

Henry purchased a life insurance policy when he was 25 years old and was diagnosed with a fatal form of cancer when he was 33. He approached a viatical settlement firm and sold his life insurance to them in exchange for cash payment. The firm continued paying his life insurance premiums. A year later, upon Henry's death, the viatical settlement firm claimed the death proceeds of his life insurance policy from the insurance company. * Henry purchased a life insurance policy. * Henry was diagnosed with a fatal form of cancer. * Henry approached a viatical settlement firm and sold his life insurance to them. * Henry received cash payment from the viatical settlement firm. * The viatical settlement firm continued paying Henry's life insurance premiums. * Henry died. * The viatical settlement firm received the death proceeds of Henry's life insurance policy from the insurance company. * The viatical settlement firm received the death proceeds of Henry's life insurance policy from the insurance company.

Question 365

On which of the following factors does a viatical settlement offer NOT depend? * Future premium payments * The insured's life expectancy * The policy face amount * The beneficiary's relationship to insured * Outstanding policy loans

Answer 365

The beneficiary's relationship to insured * The viatical settlement offer depends on the following factors: the insured's life expectancy, the policy face amount, future premium payments, outstanding policy loans and prevailing interest rates. * It does not depend on the beneficiary's relationship to insured because a viatical settlement is an absolute assignment that requires the prior consent of an irrevocable beneficiary to the policy.

Question 366

Which legal regulation requires that certain disclosures must be made to the viator by the viatical settlement firm? * The Viatical Fair Disclosure Act * The Insurance Disclosure Model Act * The Viatical Settlement Model Act * The National Insurance Act

Answer 366

The Viatical Settlement Model Act * The Viatical Settlement Model Act requires that disclosures regarding government benefits, tax implications, rescission rights and alternatives must be made to the viator. * The other Acts are non-existent.

Question 367

John has been diagnosed with cancer and has a life expectancy of 18 months. The proceeds John receives from a viatical settlement are income tax free. * False * True

Answer 367

True * The proceeds of a viatical settlement are income tax free if the viator meets the legal definition of terminally ill, that is, he or she has a life expectancy of less than two years.

Question 368

Satisfactory evidence that an insured suffers from a terminal illness may be provided by each of the following EXCEPT: * Medical examination paid for by the insurer. * Certification from a legally qualified physician. * Hospital or nursing home records. * Letter from the policy owner’s sister, a medical practitioner in the policy owner’s home state.

Answer 368

Letter from the policy owner’s sister, a medical practitioner in the policy owner’s home state. The **insurer requires satisfactory evidence that the insured suffers from a terminal illness**. Satisfactory evidence would include: * **Medical examination paid for by the insurer**. * **Certification from a legally qualified physician**. * **Hospital or nursing home records**. The letter from the policy owner’s sister, a medical practitioner in the policy owner’s home state would not serve as satisfactory evidence. **According to the SEC’s guidelines on Accelerated Benefits for Terminal Illness Riders**, * A legally qualified physician must be someone other than the Owner or the Insured, or a spouse, mother-in-law, father-in-law, step-parent, or natural or adoptive brother, sister, parent, grandparent, or child of the Owner or the Insured. Although the policy owner’s sister is a physician, she is not considered “legally qualified” and cannot attest to the policy owner’s terminal illness.

Question 369

# Exam 10. Viatical Settlements Exam 10. Viatical Settlements | Course 2. Insurance Planning

Question 370

A life insurance policy cannot be treated like other types of property and therefore its ownership rights cannot be transferred. * False * True

Answer 370

False * The assignment provision treats life insurance policies like other types of property and allows ownership rights to be transferred by the current owner to another person.

Question 371

A terminally ill individual is someone who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in __ ____??____ __ or less after the date of certification. * 6 months * 24 months * 12 months * 36 months

Answer 371

24 months * A terminally ill individual is someone who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 24 months or less after the date of certification.

Question 372

Esperanza has been diagnosed with metastatic brain cancer and her physicians predict that her life expectancy is approximately 18 months. To afford palliative care, Esperanza elects to secure a viatical settlement for $120,000 using her life insurance policy with a face value of $200,000. Following distribution of the viatical settlement cash payment, Esperanza’s breakdown expenses is as follows: $100,000 palliative care $20,000 non-medical expenses Assuming that Esperanza is in the 24% marginal tax bracket, what is the tax owed on the viatical settlement proceeds? * $0 * $24,000 * $4,800 * $28,800

Answer 372

$0 * Recent federal legislation makes all proceeds of a viatical settlement income tax-free for terminally ill individuals, irrespective of subsequent use. * Therefore, the entire $120,000 cash balance received by Esperanza is tax-free.

Question 373

Orin owns the following items: A farm in Western Massachusetts, An apartment in Jersey City, New Jersey, Investment grade corporate bonds, Custom-made furniture, An antique set of china, and A Tesla Model X automobile. Select the correct property category for the bonds, furniture, china, and automobile. * Intellectual property * Public property * Personal property * Real property

Answer 373

Personal property * If the ownership rights concern movable property, such as automobiles, furniture, stocks, and insurance policies, the property is classified as personal property.

Question 374

In legal terminology, ownership rights evidenced by something tangible or intangible is called __ ____??____ __. * possession * chose * personalty * corporeal

Answer 374

chose * In legal terminology, ownership rights evidenced by something tangible or intangible is called chose. There are **two types of choses**: * Choses in possession * Choses in action

Question 375

Ernesto has been unable to transfer from his bed to a chair or bathe independently for 4 months. During his annual physical, a physician determined that Ernesto is chronically ill. To afford the daily expenses associated with extra at-home assistance, Ernesto elected to secure a viatical settlement for $120,000 using his life insurance policy with a face value of $200,000. Throughout the year, Ernesto’s breakdown of expenses for which the viatical funds were used is as follows: $80,000 home health care $40,000 non-medical expenses Assuming that Ernesto is in the 24% marginal tax bracket, what is the tax owed on the viatical settlement proceeds? * $19,200 * $28,800 * $0 * $9,600

Answer 375

$9,600 * Individuals that are considered chronically ill may benefit from tax-free treatment of viatical settlements only if the funds received are used for qualified long-term care services. * Of the $120,000 viatical settlement amount, $80,000 was used for long-term care services (i.e., home health support) and would be tax-free. * The $40,000 used for non-medical expenses would be considered ordinary income and would be taxed at Ernie’s marginal tax rate of 24%: $40,000 x 0.24 = $9,600.

Question 376

Under which Viatical Settlements Model Act disclosure must a viator be made aware of their ability to cancel certain types of transactions or policies? * Government Benefits * Tax Implications * Rescission Rights * Other Alternatives

Answer 376

Rescission Rights * Under the Rescission Rights disclosure, the viator must know the available rescission rights (i.e., the right of a consumer to cancel certain types of transactions or policies).

Question 377

Choose the variables that a viatical settlement firm takes into consideration when determining a settlement offer. I. The policy face amount. II. The insured’s life expectancy. III. Outstanding policy loans. IV. Prevailing interest rates. * II only * I, II, III, and IV * I, II, and IV * I and III

Answer 377

I, II, III, and IV The settlement offer amount depends primarily upon: * The policy face amount, and * The insured’s life expectancy. The viatical settlement firm also takes into consideration several other factors before making the offer, such as: * Likely future premium payments that the viatical settlement firm will have to make, * Outstanding policy loans, and * Prevailing interest rates.

Question 378

Transfers of valuable consideration to each of the following parties are exempt from transfer-for-value rules EXCEPT: * A family member of the insured * A corporation in which the insured is a shareholder or officer * A partnership in which the insured is a partner * The insured’s partner

Answer 378

A family member of the insured **There are exceptions to the transfer-for-value rule when the insurance policy is transferred to the following individuals or entities**. * The insured * The insured’s partner * The transferor’s spouse incident to a divorce * A new owner who takes the transferor’s basis in the contract * To a partnership in which the insured is a partner * To a corporation in which the insured is a shareholder or officer

Question 379

A chronically ill individuals condition must be certified by a licensed health care practitioner at least __ ____??____ __. * Quarterly * Annually * Semi-annually * Monthly

Answer 379

Annually A chronically ill individual is someone who has been certified (at least annually) by a licensed health care practitioner as: * Being unable to perform, without substantial assistance from another individual, at least two daily living activities (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity; or * Requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

Question 380

Identify the tax treatment of proceeds from a viatical settlement for a terminally ill individual. * Tax-free * Long-term capital gain * Ordinary income * FIFO

Answer 380

Tax-free * All proceeds of a viatical settlement income tax-free when disbursed to a terminally ill individual, irrespective of subsequent use. * This is of great benefit to the terminally ill viator in dire need of the money.

Question 381

Property ownership rights include each of the following EXCEPT: * Rights of rescission * Rights of possession * Rights of control * Rights of disposition

Answer 381

Rights of rescission **Property ownership rights include**: * Rights of possession * Rights of control * Rights of disposition Right of rescission refers to the right of a consumer to cancel certain types of loans.

Question 382

Catastrophic illness coverage provides for accelerated death benefit payments towards each of the following catastrophic illnesses EXCEPT: * Stroke * Heart Attack * Renal Failure * Undiagnosed Cancer

Answer 382

Undiagnosed Cancer * Catastrophic illness coverage provides for accelerated death benefit payments on approximately the same terms and conditions as terminal illness coverage. * The difference is the insured must have been diagnosed as having one of several listed catastrophic illnesses. * As a result, undiagnosed cancer would not qualify for catastrophic illness coverage.

Question 383

The viatical settlement firm becomes the beneficiary to the policy, pays the premiums, and collects the __ ____??____ __ after the original policyholder dies. * face value * settlement offer * capital gains * cash value

Answer 383

face value * The viatical settlement firm or the investor becomes the beneficiary to the policy. * They pay the premiums and collect the face value of the policy after the original policyholder dies.

Question 384

Individuals that are considered chronically ill may benefit from tax-free treatment of viatical settlements only if the funds received are used for qualified long-term care services. * False * True

Answer 384

True * When chronically ill individuals receive viatical settlement proceeds, they may use the funds for qualified long-term care services on a tax-free basis.

Question 385

Transfer of property through collateral assignment is: I. Partial II. Complete III. Temporary IV. Permanent * II and IV * I and IV * I and III * II and III

Answer 385

I and III A collateral assignment is a temporary transfer of only some policy ownership rights to another person. * They are partial, meaning only some policy rights are transferred, in contrast to absolute assignments where all policy rights are transferred. * They are temporary, in that the transferred partial rights revert to the policyowner upon debt repayment.

Question 386

Orin owns the following items: A farm in Western Massachusetts, An apartment in Jersey City, New Jersey, Investment grade corporate bonds, Custom-made furniture, An antique set of china, and A Tesla Model X automobile. Select the correct property category for the farm and apartment. * Intellectual property * Personal property * Real property * Public property

Answer 386

Real property * If the ownership rights are associated with land and objects permanently attached to land, such as buildings, the property is referred to as real property.

Question 387

Lesson 11. Insurance Needs | Course 2. Insurance Planning

Question 388

Select the liabilities that are typically paid at death. I. Credit card balances II. Tax obligations III. Personal loans IV. Auto loans * II only * III and IV * I, II, III, and IV * I and III

Answer 388

I, II, III, and IV * Each of these liabilities is typically paid at death.

Question 389

The death or incapacity of a parent or spouse causes a disruption in savings. Select the most common areas of financial concerns surrounding savings shortfalls. I. College education II. Emergencies III. Retirement IV. A home * I and III * II and IV * I and II * II and III

Answer 389

I and III * The most common areas of financial concern when a parent is incapacitated or dies prematurely are funding for college education and retirement.

Question 390

The current living standard may translate into a survivor income need of at least __ ____??____ __% of the pre-death family income need. * 45 * 50 * 60 * 75

Answer 390

60 * The current living standard may translate into a survivor income need of at least 60% of the pre-death family income. * The amount would typically be less than the current total family income, as the deceased spouse’s self-maintenance expenses would end.

Question 391

From the following items, select all liquid assets: * Jewelry * Stocks * Automobiles * Household goods * Individual Retirement Accounts

Answer 391

Stocks Individual Retirement Accounts * Liquid assets are those assets available to be liquidated with reasonable price certainty. * These would be available to meet income or other monetary needs on an individual's death, loss of health, or incapacity. * Illiquid assets are those assets not available to meet income or other monetary needs because they are not easily liquidated. These assets are usually passed intact to heirs.

Question 392

Which types of insurance are very important for single individuals to obtain? * Health Insurance * Disability Insurance * Life Insurance * Long-Term Care Insurance

Answer 392

Health Insurance Disability Insurance Long-Term Care Insurance * The greatest personal risk for single individuals is their loss of health and incapacity. * Life insurance is not needed unless someone is financially dependent upon them.

Question 393

Rudolph is a business tycoon with a large net worth. On his death, which one of the following final expenses would be the major final expense? * Probate costs * Executor fees * Estimated final illness expenses * Funeral expenses * Death-related taxes

Answer 393

Death-related taxes * Death-related taxes can constitute a major final expense for those whose net worth is large. * **These taxes can equal 50 percent or more of an estate**. * All the other final expenses given above aren't as high as death-related taxes, especially for an individual whose net worth is high. * For example, probate costs vary significantly by jurisdiction and as a function of the estate size. Such costs in the United States commonly range from 2 to 5 percent of the gross estate. * A well-designed and implemented financial plan should provide for health insurance or other means for meeting estimated final illness expenses.

Question 394

Each of the following are reasons to purchase long-term care insurance (LTCi) EXCEPT: * To offset the risk of depleting personal savings. * The higher risk for individuals age 65+ having an LTC need. * Constantly inflating LTC costs for all levels of care. * To generate gains to offset purchasing power risk.

Answer 394

To generate gains to offset purchasing power risk. * Long-Term Care Insurance benefits may be protected from purchasing power risk with an inflation protection rider, however, the policy cannot be used as an investment vehicle to generate gains.

Question 395

Disability income policies are designed to provide __ ____??____ __ benefits to replace lost income when the insured is disabled as a result of sickness or injury. * weekly * monthly * semi-annual * annual

Answer 395

monthly * Disability income policies are designed to provide monthly benefits to replace lost income due to prolonged sickness or injury.

Question 396

John earns a $100,000 salary. Several years ago he purchased two 80% disability policies from ABC and XYZ insurance companies, both with 90-day elimination periods. If John is disabled on April 1st of the current year and is still disabled on December 31st, what will be paid by each insurance company if ABC receives his notice first? * $40,000 from ABC Insurance Co. only * $60,000 from ABC Insurance Co. only * $40,000 from ABC Insurance Co. and $40,000 from XYZ Insurance Co. * $20,000 from ABC Insurance Co. and $20,000 from XYZ Insurance Co.

Answer 396

$20,000 from ABC Insurance Co. and $20,000 from XYZ Insurance Co. First, determine the benefit received for the year: * When John becomes disabled on April 1st the next 90 days (three months for simplicity), April – June, will serve as his elimination period. Next, determine the length of benefit payout: * The policy will pay for July – December, a total of 6 months. Then, calculate the dollar amount to be received: * ($100,000 x 0.80) x 6/12 months = $40,000 Finally, coordinate the benefits equally between the two insurance companies. **Because 80% is the maximum the insured will receive in a disability policy, John is over insured, creating a total payout of $40,000**. This will be **prorated between the two companies equally**, as they both offer an 80% benefit amount.

Question 397

Select the most common optional or supplemental benefit(s). I. Social Insurance Supplement II. Residual Disability Benefit III. Inflation-Protection Benefit IV. Partial Disability Benefit * I, III, and IV * I, II, and IV * III only * I, II, III, and IV

Answer 397

I, II, III, and IV * All of these are commonly purchased additional benefits.

Question 398

Health insurance only consists of medical expense insurance and long-term care insurance. * False * True

Answer 398

False * Health insurance consists of three types: medical expense insurance, long-term care and disability income insurance. * These policies cover the cost of injuries or sickness and sometimes also pay benefits because of physical or mental incapacity.

Question 399

The basic benefit arrangement of disability income policies consists of two components: * Benefit for Total Disability * Longer Benefit Period * Benefit for Waiver of Premium * Shorter Elimination Period

Answer 399

Benefit for Total Disability Benefit for Waiver of Premium * These two components are common to all insurers, regardless of any additional coverage that may be included directly in the policy form.

Question 400

Match the term with the correct description: The Elimination Period The Benefit Period The Benefit Amount * The longest period of time for which benefits are paid under the disability policy. * The benefit of the personal disability income policy, almost always payable as a fixed amount of monthly. * The number of days at the start of disability during which no benefits are paid.

Answer 400

* The Elimination Period - The number of days at the start of disability during which no benefits are paid. * The Benefit Period - The longest period of time for which benefits are paid under the disability policy. * The Benefit Amount - The benefit of the personal disability income policy, almost always payable as a fixed amount of monthly.

Question 401

Which of the following can be classified under legal liability insurance? * Automobile Liability * Business General Liability * Homeowners Liability * General Industrial Liability * Commercial General Liability

Answer 401

Automobile Liability Business General Liability Commercial General Liability * **Legal liability insurance is categorized as automobile liability, business general liability and commercial general liability**. * Automobile Liability Insurance covers damage done to others sought through the Tort liability system. * Business general liability arises out of the firm's actions. Business firms have insured their liability exposures using the comprehensive general liability policy (CGL).

Question 402

Suppose homeowner Phil's home along with many home appliances were completely destroyed by a severe earthquake. Surprisingly, his garage, which is detached from his home, was left intact! Assuming Phil had purchased the optional earthquake coverage, under which of the following coverages can he get payment? * Coverage A * Coverage B * Coverage C

Answer 402

Coverage A Coverage C * Coverage A deals with dwelling, and covers the insured's home. * Coverage C, unscheduled personal property, applies to property usually found in homes such as furniture, clothes, appliances, and other personal property. * Phil will not be compensated under Coverage B, as it applies to other structures such as an unattached garage or shed. Phil's garage was left intact by the earthquake.

Question 403

Jim rents an apartment in Boston, parking his car on a city street overnight. He works weekends as a DJ and owns an extensive collection of CDs along with sound equipment. Often, he leaves this equipment in his car rather than lugging it all to the apartment after a long night. Jim is concerned about this expensive equipment being stolen. If Jim were to purchase insurance coverage for the equipment, which policy would be involved? * Renters Insurance * Auto Insurance * Commercial Liability Insurance

Answer 403

Renters Insurance * **Personal property is always covered under a homeowners / renters policy, regardless of where it is being stored**. * Therefore, if the equipment is stolen from Jim's car, his renters policy would be the appropriate policy to cover the loss. * Property coverage on the auto policy refers only to the vehicle itself, and all permanently attached items such as an installed stereo system.

Question 404

# Exam 11. Insurance Needs Exam 11. Insurance Needs | Course 2. Insurance Planning

Question 405

The HO-4 form covers the property interest, contents and personal liability of people owning a unit in a condominium or a cooperative building. * False * True

Answer 405

False * The HO-4 form covers the contents and personal liability of renters. * The HO-6 form covers the property interest, contents and personal liability of people owning a unit in a condominium or a cooperative building.

Question 406

Which of the following objectives are easiest to estimate when determining life insurance needs? * Income Objectives * Cash Objectives

Answer 406

Cash Objectives * Cash objectives require a single-sum cash amount to fulfill. * They are the easiest to estimate.

Question 407

Identify the approach for determining income objectives that requires a smaller capital sum to provide a given income level. * Capital Liquidation Approach * Capital Retention Approach

Answer 407

Capital Liquidation Approach * The Capital Liquidation Approach assumes that both principal (capital) and interest are liquidated over the relevant time period to provide the desired income. * This approach requires a smaller capital sum to provide a given income level than the retention approach.

Question 408

Each of the following statements concerning the elimination period on disability income insurance policies are correct EXCEPT: * It is meant to exclude the inconsequential illness or injury that disables the insured for only a few days and that is more economically met from personal funds. * Premiums are higher for policies with longer elimination periods. * It is a limitation on benefits, somewhat like a deductible in medical expense and property insurance policies. * They range from 30 days to one year, with three months being a common elimination period.

Answer 408

Premiums are higher for policies with longer elimination periods. * The elimination period is also called a waiting period and refers to the number of days at the start of disability during which no benefits are paid. * Premiums are lower for policies with longer elimination periods.

Question 409

A transplant benefit, a rehabilitation benefit, a non-disabling injury benefit, and a principal (capital) sum benefit are considered __ ____??____ __. * benefit amount * elimination provisions * waiver-of-premium provisions * supplemental benefit provisions

Answer 409

supplemental benefit provisions * The basic policy often contains a number of minor but competitively necessary provisions that are not appropriate as optional benefit riders because they do not carry a significant premium consideration. * Supplemental Benefit Provisions include: a transplant benefit, a rehabilitation benefit, a non-disabling injury benefit, and a principal (capital) sum benefit.

Question 410

Point out the step of the risk management process that involves gathering relevant quantitative and qualitative information to permit a sound identification of financial loss exposures arising from the individual's death or loss of health. * Identify Loss Exposure * Develop Plan * Implement Plan * Establish Objectives

Answer 410

Identify Loss Exposure * Identifying loss exposes involves gathering relevant quantitative and qualitative information to permit a sound identification of financial loss exposures arising from the individual's death or loss of health. * It also includes identification and valuation of the individual's assets and liabilities, as well as the person's income and expenditures. The information is often gathered through a fact-finding questionnaire.

Question 411

Which life insurance needs approach is based on the person's income earning ability? * Lifetime Earnings Approach * Human Life Value * None of these * Needs Analysis Approach

Answer 411

Human Life Value * The Human Life Value formula is based on the person's income earning ability. * **Human life value is the present value of income lost as a result of the person's death**. * This approach is still the most popular method of measuring economic value of human life in situations like wrongful death lawsuits.

Question 412

The family's house, automobiles, and personal possessions such as clothing, jewelry and household goods are considered: * Operating Assets * Intangible Assets * Liquid Assets * Illiquid Assets

Answer 412

Illiquid Assets * Illiquid assets are those assets not available to meet income or other monetary needs because they are not easily liquidated. * They include the family's house, automobiles, and personal possessions such as clothing, jewelry, and household goods. * These assets are usually passed intact to heirs or kept for personal use.

Question 413

Health insurance can be classified into each of the following categories EXCEPT: * Medical expense insurance * Accident insurance * Disability income insurance * Long-term care insurance

Answer 413

Accident insurance * Health insurance policies fall into categories where the cost of injuries or sickness is covered, and those that pay benefits because of physical or mental incapacity. Health insurance can be classified into three categories: * Medical expense insurance, * Long-term care insurance, and * Disability income insurance.

Question 414

Identify the correct statements regarding probate. I. Probate is the process of filing, validating, and executing a will by a court. II. Probate costs vary significantly by jurisdiction and as a function of the estate's size. III. Probate costs commonly range from 2% to 5% of the gross estate and can be higher. IV. Executor fees may be considered a part of probate costs. * I and II * II, III, and IV * II and IV * I, II, III, and IV

Answer 414

I, II, III, and IV * Probate is the process of filing, validating, and executing a will by a court. * These costs vary significantly by jurisdiction and as a function of the estate's size. * Such costs commonly range from 2% to 5% of the gross estate and can be higher. * Executor fees may also be incurred in final expenses and may be considered part of the probate costs.

Question 415

Lesson 12. Taxation of Insurance | Course 2. Insurance Planning

Question 416

If an insured with a $100,000 life insurance policy died after $3,000 of premiums had been paid, what amount of the death proceeds would be received tax-free by the beneficiary? * $30,000 * $50,000 * $3,000 * $100,000

Answer 416

$100,000 * The entire $100,000 would be received income tax free by the beneficiary. * With exceptions, this result applies irrespective of the cash value of the amount of premiums paid and regardless of who was listed as the policy owner, insured, beneficiary, or premium payor.

Question 417

Assume Kuramo names his son, Abeo, the beneficiary of his $1 million life insurance policy and transfers the policy to him six years before his death. If Kuramo retained the right to change the beneficiary, the $1 million death benefit will be included in which estate? * Kuramo's * Abeo's * Neither estate

Answer 417

Kuramo's * At Kuramo’s death the $1 million in death proceeds are included in Kuramo’s estate since he retained the right to change the beneficiary. * Although Kuramo transferred the policy to Abeo more than three years before his death, this incident of ownership causes the death benefit to be included in Kuramo’s estate.

Question 418

Death proceeds include the policy face amount and may which of the following? * Any additional insurance amounts paid by reason of the insured's death. * Accidental death benefits. * The face amount of any paid-in-full additional insurance. * The face amount of any term rider.

Answer 418

Any additional insurance amounts paid by reason of the insured's death. Accidental death benefits. The face amount of any paid-in-full additional insurance. The face amount of any term rider. * Death proceeds include the policy face amount and any additional insurance amounts paid by reason of the insured's death, such as accidental death benefits and the face amount of any paid-in-full additional insurance or any term rider.

Question 419

If the insured withdraws the savings value of the insurance and if this value exceeds the insured's adjusted basis, the excess is subject to federal income tax in the year of the withdrawal. * False * True

Answer 419

True * if the insured withdraws the savings value of the insurance and if this value exceeds the insured's adjusted basis, (premiums paid less dividends received), the excess is subject to federal income tax in the year of the withdrawal.

Question 420

Under the transfer for value rule the death benefit amount that exceeds the new policy owner-beneficiary’s adjusted basis is subject to income tax at __ ____??____ __ rates when the insured dies. * ordinary income * capital gains * estate tax * generation skipping transfer tax

Answer 420

ordinary income * Under the transfer for value rule the death benefit amount that exceeds the new policy owner-beneficiary’s adjusted basis is subject to income tax at ordinary income rates when the insured dies. * The transfer for value rule cannot be avoided by cancelling the transaction at a later time.

Question 421

Under Section 1035(a), no gain or loss shall be recognized on the exchange of a life insurance policy to which of the following: (Select all that apply) * Life insurance contract * Endowment contract * Annuity policy * Appreciable property

Answer 421

Life insurance contract Endowment contract Annuity policy Under Section 1035(a), no gain or loss shall be recognized on the exchange of the following insurance policies: * A contract of life insurance for another contract of life insurance or for an endowment or annuity contract; or * A contract of endowment insurance (A) for another contract of endowment insurance which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or (B) for an annuity; or * An annuity contract for an annuity contract.

Question 422

If Brashad gives $9,000 to Jamal and $11,000 to Omar, then he can exclude __ ____??____ __ for gift tax purposes. * $15,000 * $20,000 * $30,000 * $11,000

Answer 422

$20,000 * The $17,000 (2023) gift tax exclusion is the maximum gift tax-free amount, applied on a per person basis. * A $9,000 gift to Jamal and a $11,000 gift to Omar are each below the $17,000 limit. * Therefore, a total of $20,000 ($9,000 + $11,000) in gifts are tax-free to Brashad.

Question 423

Robert Brown is married. He has a wife, Sarah, and a daughter, Jenny. He buys a policy in his name, and insures his wife and names his daughter as a beneficiary. At Sarah's death, Jenny receives the life insurance death proceeds as a gift from Robert. * True * False

Answer 423

True * Gifts occur when one person owns a policy, a second is insured, and the third is a beneficiary. * Life insurance policies are not gifts under ordinary circumstances. * **A gift usually occurs from a policy owner to the beneficiary at the insured's death**.

Question 424

Premiums paid by an insured are gifts if the insured: * Does not own the policy and proceeds of the policy are payable to a beneficiary other than his estate. * Does not own the policy but proceeds of the policy are payable to his estate. * Owns the policy but proceeds of the policy are not payable to his estate. * Owns the policy but wishes to pass on the proceeds of the policy to some charity.

Answer 424

Does not own the policy and proceeds of the policy are payable to a beneficiary other than his estate. * Premiums paid by an insured are gifts if the insured has no incidents of ownership in the policy and proceeds of the policy are payable to a beneficiary other than his or her estate. * Premiums paid by a beneficiary on a policy that he or she owns are not gifts.

Question 425

The federal gift tax is incurred if: * A mother gifts a teddy bear worth $10 to her son on his birthday. * If one sends a Christmas card worth $2 to a friend for Christmas. * If a mother gifts her daughter a watch worth $19,000, in a specific year. * If a mother gifts her son a watch worth $9,000, in a specific year.

Answer 425

If a mother gifts her daughter a watch worth $19,000, in a specific year. * The federal gift tax law is not aimed at the usual exchange of gifts associated with birthdays, holidays and similar occasions. * The law permits a donor to make a gift without tax by excluding the first $16,000 (2022) of outright gifts in any one specific year to any one recipient.

Question 426

The __ ____??____ __ can be applied to offset the taxable estate. * unified credit * generation skipping transfer tax * adjusted gross estate * annual exclusion

Answer 426

unified credit * The gross estate, the starting point for estate tax computation, consists of the value of the decedent's interest in all property. * Allowable deductions are then subtracted from the gross estate, which results in the taxable estate. * The unified credit is a tax credit that can be applied to offset the taxable estate.

Question 427

If an owner gifts their life insurance policy to another person, or transfers their policy into an Irrevocable Life Insurance Trust (ILIT) within three years of their death, the death benefit proceeds will also be excluded in their gross estate. * False * True

Answer 427

False * If an owner gifts their life insurance policy to another person, or transfers their policy into an Irrevocable Life Insurance Trust (ILIT) within three years of their death, the death benefit proceeds will also be included in their gross estate.

Question 428

Allowable deductions are subtracted from the gross estate, to arrive at the adjusted gross estate include which of the following? (Select all that apply) * Funeral and administration expenses * Debts of the decedent * Certain taxes * Casualty or theft losses * Unrealized appreciation of property

Answer 428

Funeral and administration expenses Debts of the decedent Certain taxes Casualty or theft losses * Allowable deductions are subtracted from the gross estate, which results in the adjusted gross estate. * Allowable deductions include funeral and administration expenses, debts of the decedent, certain taxes, and casualty or theft losses.

Question 429

# Exam 12. Taxation of Insurance Exam 12. Taxation of Insurance | Course 2. Insurance Planning

Question 430

Under Section 1035(a), no gain or loss shall be recognized on the exchange of the following insurance policies EXCEPT: * A life insurance contract for an endowment contract. * An endowment contract for an annuity contract. * An annuity contract to life insurance contract. * An annuity contract to an annuity contract.

Answer 430

An annuity contract to life insurance contract. Under Section 1035(a), no gain or loss shall be recognized on the exchange of the following insurance policies: * A contract of life insurance for another contract of life insurance or for an endowment or annuity contract; or * A contract of endowment insurance (A) for another contract of endowment insurance which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or (B) for an annuity; or * An annuity contract for an annuity contract.

Question 431

If an owner gifts their life insurance policy to another person or transfers their policy into an Irrevocable Life Insurance Trust (ILIT) within __ ____??____ __ of their death, the death benefit proceeds will be included in their gross estate. * 1 year * 3 years * 2 years * 6 months

Answer 431

3 years * If an owner gifts their life insurance policy to another person or transfers their policy into an Irrevocable Life Insurance Trust (ILIT) within three years of their death, the death benefit proceeds will be included in their gross estate.

Question 432

If an insured with a $400,000 life insurance policy died after $52,000 of premiums had been paid, what amount of the death proceeds would be received tax-free by the beneficiary? * $400,000 * $52,000 * $200,000 * $0

Answer 432

$400,000 * The entire $400,000 would be received income tax free by the beneficiary. * With exceptions, this result applies irrespective of the cash value of the amount of premiums paid and regardless of who was listed as the policy owner, insured, beneficiary, or premium payor.

Question 433

Assume the previous policy owner of a life insurance contract: Transferred policy to spouse 4 years prior to death Had no ability to change beneficiaries or alter the policy at death Choose the correct tax treatment of the death proceeds. * Death proceeds will be taxed as ordinary income to the beneficiary. * Death proceeds will transfer to the beneficiary tax-free. * The face value of the policy will be included in the decedent’s gross estate. * The death proceeds will be subject to estate taxes.

Answer 433

Death proceeds will transfer to the beneficiary tax-free. * A life insurance policy owner has incidents of ownership in the policy that may include the right to borrow against the policy, assign or transfer the policy, receive cash values and dividends, or change the beneficiaries. * By transferring all ownership rights in the life insurance policy, the life insurance proceeds would not be included in decedent’s estate. This is due to the fact that there were no incidents of ownership at death and the policy transferred more than three years before the date of death.

Question 434

Wyatt and Winona would like to provide their 6 grandchildren with annual gifts to help them build their savings. Identify the maximum amount the couple can gift to all the grandchildren, tax-free. * $34,000 * $68,000 * $204,000 * $102,000

Answer 434

$204,000 * By gift-splitting, Wyatt and Winona can combine their annual exclusion amounts and gift $34,000 ($17,000 x 2) each year to an unlimited number of individuals. * The couple can gift a maximum of $204,000 [($34,000 (split gift) x 6)] to the 6 grandchildren on an annual basis. * **Form 709, United States Gift Tax Return, must be submitted when the gift-splitting approach is implemented, even if half of the split gift is less than the annual exclusion**.

Question 435

An individual is permitted to use the annual exclusion amount to gift up to $17,000 (2023) to __ ____??____ __ on a tax-free basis. * one’s spouse * an unlimited number of recipients * one individual * qualified relatives

Answer 435

an unlimited number of recipients * This annual $17,000 exclusion applies to gifts made to each recipient, irrespective of the number. * Moreover, it is available year after year. * An individual could give $17,000 to unlimited recipients each year without any gift tax liability.

Question 436

Assume Noreen names her daughter, Adrienne, the beneficiary of her $7 million life insurance policy and transfers the policy to her five years before her death. If Noreen retained the right to borrow against the policy, the $7 million death benefit will be included in which estate? * Adrienne’s * Noreen’s * None of these * The contingent beneficiary’s

Answer 436

Noreen’s * At Noreen’s death the $7 million in death proceeds are included in Noreen’s estate since she retained the right to borrow against the policy. * Although Noreen transferred the policy to Adrienne more than three years before her death, this incident of ownership causes the death benefit to be included in Noreen’s estate.

Question 437

Each of the following are tax characteristics associated with Long-Term Care insurance (LTCi) EXCEPT: * Employer contributions to an employee's LTC premium are excluded from taxable income of the employee. * Self-employed individuals who are sole proprietors can deduct LTC insurance premiums up to 50% of the premium. * Qualified LTCi premiums are deductible as an itemized deduction to the extent they collectively exceed 7.5% of the taxpayer's AGI. * Benefits paid by per diem-based LTCi policies are tax-free up to a specified amount that annually adjusts for inflation.

Answer 437

Self-employed individuals who are sole proprietors can deduct LTC insurance premiums up to 50% of the premium. * Self-employed individuals who are sole proprietors can deduct LTC insurance premiums up to 100% of the premium.

Question 438

Each of the following is an available deduction from the gross estate to arrive at the adjusted gross estate EXCEPT: * Attorney fees deducted on the estate’s income tax return * Debts of the decedent * Casualty or theft losses * Funeral and administration expenses

Answer 438

Attorney fees deducted on the estate’s income tax return * Allowable deductions are subtracted from the gross estate, which results in the adjusted gross estate. Allowable deductions include funeral and administration expenses, debts of the decedent, certain taxes, and casualty or theft losses. * **Attorney fees are an available deduction from the gross estate, however, if the executor of the estate deducted the expenses on the estate’s income tax return (Form 1041), the same expenses cannot also be deducted on the federal estate tax return (Form 706) to determine the adjusted gross estate**.

Question 439

To keep the death proceeds out of their estate, the policy owner who is the insured may transfer the policy to I. another individual. II. an irrevocable trust. * Neither I nor II * I only * Both I and II * II only

Answer 439

Both I and II * The policy owner who is the insured may transfer the policy to someone else or to an irrevocable trust, to keep the death proceeds out of his estate. * However, the owner must outlive that transfer for three years, or the death benefit amount will be brought back into his gross estate for estate tax purposes.

Question 440

Assume the previous policy owner of a life insurance contract: Transferred policy to spouse 2 years prior to death Retained the ability to change beneficiaries Choose the correct tax treatment of the death proceeds. * Death proceeds will be taxed as ordinary income to the beneficiary. * All death proceeds will be subject to estate taxes. * The face value of the policy will be included in the decedent’s gross estate. * Death proceeds will transfer to the beneficiary tax-free.

Answer 440

The face value of the policy will be included in the decedent’s gross estate. * A life insurance policy owner has incidents of ownership in the policy that may include the right to borrow against the policy, assign or transfer the policy, receive cash values and dividends, or change the beneficiaries. * By transferring all ownership rights in the life insurance policy, the life insurance proceeds would not be included in decedent’s estate. * However, this policy transferred fewer than three years before the date of death. As a result, the face value of the policy would be included in the decedent’s gross estate.

Question 441

Each of the following are characteristics of a life insurance policy that becomes a Modified Endowment Contract (MEC) EXCEPT: * A 10% penalty is applied to any amounts withdrawn from the policy that exceed adjusted basis for individuals younger than age 59 ½. * Any policy loans or withdrawals will have Last In-First Out (LIFO) treatment. * The death proceeds received above the adjusted basis (premiums paid – dividends) are taxable. * The premiums paid for the policy during the first seven years exceeded seven annual, net level premiums.

Answer 441

The death proceeds received above the adjusted basis (premiums paid – dividends) are taxable. * People who decide to use their life insurance as a place to accumulate and then withdraw funds risk having it treated as a MEC and incurring negative income tax ramifications such as funds being subject to Last In-First Out (LIFO) treatment and a 10% penalty that applies on any taxable gains withdrawn before age 59½. * However, the death benefit from a MEC will remain income tax-free to the beneficiary.

Question 442

The annual exclusion amount applies to __ ____??____ __. * future interest gifts * testamentary transfers * bequests * present interest gifts

Answer 442

present interest gifts * The annual exclusion is available only when the gift is one of a present interest. * A present interest is a situation in which the recipient must have possession or enjoyment of the property immediately. * An example is a gift of cash or property that can be used immediately by the recipient.

Question 443

Assume that Julia works for XYZ Incorporated and that the yearly premium for disability coverage is $6,000, paid entirely by XYZ, Inc. Julia is unable to work due to a chronic illness and receives $25,000 of disability benefits for the year. Choose the tax treatment and character of the disability benefits to Julia. * $6,000 tax-exempt, $19,000 ordinary income * $25,000 ordinary income * $19,000 ordinary income * $25,000 tax-free

Answer 443

$25,000 ordinary income * If XYZ Incorporated pays 100% of the $6,000 premium, Julia does not report this $6,000 as income and the company is able to deduct this amount as an expense. * Because Julia did not pay any of the premiums, the entire $25,000 of benefit received is taxable to him as ordinary income.

Question 444

Each of the following parties to a transfer represent an exception to the ‘transfer-for-value’ rules EXCEPT: * A new owner who takes the transferor’s basis in the contract. * The insured’s qualified relative. * The insured. * The transferor’s spouse incident to a divorce.

Answer 444

The insured’s qualified relative. * A life insurance policy that is sold or exchanged for valuable consideration may cause the death benefit to be taxed in certain situations. This is known as a transfer-for-value. There are exceptions to the transfer for value rule which will not cause the death benefit to be subject to income taxes at the insured’s death. This occurs when the insurance policy is transferred to the following individuals or entities. * The insured. * The insured’s partner. * The transferor’s spouse incident to a divorce. * A new owner who takes the transferor’s basis in the contract. * To a partnership in which the insured is a partner. * To a corporation in which the insured is a shareholder or officer.

Question 445

The value for estate tax purposes is the fair market value of the property at I. the date of death. II. six months after death. * Neither I nor II * II only * I only * Both I and II

Answer 445

Both I and II * The value for estate tax purposes is the fair market value of the property at the date of death or, if a lower estate value would result (e.g., due to investment losses), six months after death, known as the alternate valuation date.

Question 446

Brody purchased a whole life insurance policy 15 years ago when he was 45 years old. He decides to retire at age 60 and he withdraws cash value from his life insurance to buy a custom acoustic guitar. Assume Brody's total premiums were $70,000. Over 15 years, he received $35,000 in dividends. Calculate the amount subject to tax when Brody withdraws $45,000 in cash value from the policy. * $45,000 * $10,000 * $35,000 * $0

Answer 446

$10,000 * If the insured withdraws the savings value of the insurance and if this value exceeds the insured's adjusted basis, the excess is subject to federal income tax in the year of the withdrawal. Given these facts, $10,000 of the withdrawal would be subject to tax, calculated as follows: Adjusted basis = Premiums paid – Dividends received $70,000 - $35,000 = $35,000 (adjusted basis) $45,000 (withdrawal) - $35,000 (adjusted basis) = $10,000 (subject to taxation)

Question 447

Identify the correct statement about the generation-skipping transfer tax (GST). * The GST is a part of the federal estate tax and gift taxes paid on transfers of assets. * The GST is levied when a property interest is transferred to persons who are two or more generations younger than the transferor. * A grandmother may gift property directly to her granddaughter without incurring GST. * The value of transferred property in excess of the exemption is subject to the maximum prevailing transfer tax rate of 37%.

Answer 447

The GST is levied when a property interest is transferred to persons who are two or more generations younger than the transferor. * The tax is in addition to any federal estate or gift taxes owed because of the transfer. * The value of transferred property in excess of the exemption is subject to the maximum prevailing transfer tax rate of 40%. * **A grandmother may gift property directly to her granddaughter, however, the granddaughter would be considered a skip person and the transfer would be subject to the GST**.

Question 448

Select the correct statement(s) regarding life insurance dividends. I. Dividends are paid on participating insurance policies. II. Dividends are paid on non-participating policies. III. Dividends received from a mutual life insurance company are not subject to federal income tax. IV. Dividends received from a mutual life insurance company are a taxable return on investment, subject to federal income tax. * II and IV * II and III * I only * I and III

Answer 448

I and III * A dividend is an amount paid on participating insurance policies. * The dividends received from a mutual life insurance company are not subject to federal income tax. The IRS views these dividends as a return of part of the premium and not as earned income.

Question 449

Lesson 13. Insurance Policy Selection | Course 2. Insurance Planning

Question 450

The government expects taxes to be paid in cash within a reasonable time period. How many months from the date of death are taxes normally due? * One month * Six months * Nine months * Twelve months

Answer 450

Nine months * The government expects taxes to be paid in cash and within a reasonable time period, normally nine months from the date of death. * This payment often requires selling estate assets. However, the heirs may prefer to retain these assets, either because of a depressed price due to a down market or because of a desire to avoid loss of ownership.

Question 451

Identify the characteristics of a good insurance policy. I. Meets the client's individual needs. II. Provides required amount of coverage. * I only * II only * Both I and II * Neither I nor II

Answer 451

Both I and II * A good insurance policy is defined as one that meets the consumer's needs without providing more insurance than is required.

Question 452

What rules can be applied in choosing the proper amount of insurance? (Select all that apply.) * Insure first exposures to loss * Never over expose * Never risk great loss * Follow your heart

Answer 452

Insure first exposures to loss Never over expose Never risk great loss * The three rules that may be applied when choosing the proper amount of insurance are: (1) Insure first exposures to loss; those that are most likely to cause the greatest amount of damage, (2) never over expose to loss more than you can afford to lose, (3) never risk great loss in exchange for a small gain.

Question 453

Which of the following are features NOT applicable to life annuity? * It is a contract made with an insurance company. * It guarantees a specified minimum income every year for as long as the individual lives. * It pays out only the interest on the capital sum. * Payment ceases on death, unless a refund feature had been selected.

Answer 453

It pays out only the interest on the capital sum. * The life insurance company is able to liquidate both the capital sum and the interest in making these payments.

Question 454

A savings program can yield only a small amount at the start, whereas an insurance policy guarantees the full face value or other benefit from the beginning. * False * True

Answer 454

True * An insurance policy guarantees the full face value or other benefit from the beginning, even if early death or incapacity befalls the person. * On the other hand, a successful savings program depends totally upon the survival of the person and his or her ability to continue saving.

Question 455

The most important choice a consumer must make when purchasing insurance is: * The lowest price. * The most coverage available. * Coverage from a company of unquestioned solvency. * Coverage from a company with the widest array of policy alternatives.

Answer 455

Coverage from a company of unquestioned solvency. * The right price for insurance is not necessarily the lowest price. * The guidelines are that the company must be financially strong, not frequently deny legitimate claims, have adequately trained agents and offer coverage as valuable as that offered by other companies.

Question 456

Debbie was planning to purchase insurance. She decided to purchase a policy that gave the most coverage and with the widest array of policy alternatives, even though she did not really need all of it. We can be sure that she purchased a good insurance policy. * False * True

Answer 456

False * A good insurance policy meets the consumer's needs without providing more insurance than is required. * The extra amount of cash resources spent on this policy is no longer available to be used for other financial needs.

Question 457

If a policy has a $250 deductible and there is a covered loss amounting to $10,000 the insured collects __ ____??____ __ from the primary insurer. * $9,750 * $10,000 * $1,950 * $7,800

Answer 457

$9,750 * The insured collects $9,750. Since there is no coinsurance provision provided on this policy, the insurer will cover all post-deductible covered expenses. $10,000 (total covered expenses) - $250 (deductible) = $9,750

Question 458

If a company is using a fully depreciated but functional printing press, because the press is fully depreciated, the company would not be allowed a tax deduction if it were destroyed in a fire. On the other hand, the company may be able to purchase __ ____??____ __ insurance coverage for this equipment. * replacement cost * actual cost value * straight-line * MACRS

Answer 458

replacement cost * Purchasing replacement cost insurance will cover the loss.

Question 459

Which of the following are social and ethical concerns that may affect retention and policy decisions? (Select all that apply) * Tax implications * A polluted environment * Ability to pay for losses * Under-compensated employees * Unemployed workers

Answer 459

A polluted environment Under-compensated employees Unemployed workers * Tax implications and ability to pay for losses can be calculated when deciding on deductibles and policy limits. * Under-compensated employees, a polluted environment, and unemployed workers are social and ethical concerns, or the non-financial effects, of uninsured losses that cannot be factored into the deductible and policy limit decisions, however, these factors continue to affect the decisions of companies.

Question 460

When choosing an appropriate deductible a risk manager should consider each of the following except: * Tax implications * Investor preference * Stability of cash flow * Liquidity of assets

Answer 460

Investor preference * The risk manager should consider tax implications and the firm's ability to pay for losses, which is determined by stability of cash flow, liquidity of assets and amount of net worth. * The investors' preferences are irrelevant here.

Question 461

Which of the following is not a responsibility of a risk manager using RMIS? * Recording, tracking and analyzing losses. * Ensure that the company makes enough profit to recover from its losses. * Maintaining records of how assets are protected from loss. * Statistically analyzing past losses and to forecast losses.

Answer 461

Ensure that the company makes enough profit to recover from its losses.

Question 462

Loss data only indicate financial losses in the business. * False * True

Answer 462

False Loss records are the foundation of a RMIS. They include details of: * Injuries to workers, * Liability claims, and * Asset losses.

Question 463

Luke is a risk manager in large firm that uses RMIS. What are the steps he takes to perform statistical analysis of his firm's loss? * Draw logical conclusions from the data by making intelligent comparisons. * Compare the current year's data to historical data of the company. * Comparing the company's data to national averages. * Evaluate the effectiveness of the risk management program. * Prepare a comprehensive report for senior management.

Answer 463

Draw logical conclusions from the data by making intelligent comparisons. Compare the current year's data to historical data of the company. Comparing the company's data to national averages. Evaluate the effectiveness of the risk management program. Prepare a comprehensive report for senior management. * A risk manager follows all of the above-mentioned steps mentioned.

Question 464

# Exam 13. Insurance Policy Selection Exam 13. Insurance Policy Selection | Course 2. Insurance Planning

Question 465

The government expects taxes to be paid in cash within a reasonable time period. How many months from the date of death are taxes normally due? * One month * Six months * Nine months * Twelve months

Answer 465

Nine months * The government expects taxes to be paid in cash and within a reasonable time period, normally nine months from the date of death. This payment often requires selling estate assets. However, the heirs may prefer to retain these assets, either because of a depressed price due to a down market or because of a desire to avoid loss of ownership.

Question 466

In general, commercial insurance premiums are deductible when __ ____??____ __, while losses are deductible when __ ____??____ __. * billed; incurred * paid; incurred * submitted; itemizing * incurred; paid

Answer 466

paid; incurred * In general, commercial insurance premiums are a tax-deductible expense, as are uninsured losses. * The main difference between the two is the timing of the expense. * Insurance premiums are deductible when paid, while losses are deductible when incurred.

Question 467

A firm's ability to absorb uninsured losses is a function of its __ ____??____ __. * net income * net worth * capitalization * size

Answer 467

net worth * A firm's ability to absorb uninsured losses is a function of its net worth. * Net worth measures the undistributed operating profits of preceding periods. * It is not a measure of available cash. * If a large uninsured loss occurs, the accounting result will be a reduction of net worth, that is, reduced profits for the current period, from what otherwise would have been reported.

Question 468

Select purchase selection rules that are recommended when selecting an insurance policy: I. Insure first exposures to loss II. Never overexpose III. Never risk great loss IV. Be sure to cover high probability, low cost risks * IV only * I, II, and III * II and IV * I and III

Answer 468

I, II, and III Despite the difficulty in choosing the proper amount of insurance, some commonsense rules apply: * Insure first exposures to loss * Never overexpose * Never risk great loss **Risk retention is a recommended strategy** for **high probability, low cost risks**.

Question 469

To achieve maximum effectiveness, Risk Management Information Systems (RMIS) must be I. tailored to the needs of individual organizations. II. standardized. * I only * II only * Both I and II * Neither I nor II

Answer 469

I only * To achieve maximum effectiveness, RMIS must be tailored to the needs of individual organizations. * As each organization faces different physical hazards, different liability exposures, and differences in property value fluctuations, a standard RMIS cannot be as useful as a system carefully designed to solve a particular organization's specific problems.

Question 470

If a policy has a $750 deductible and there is a covered loss amounting to $20,000 the insured collects __ ____??____ __ from the primary insurer. * $750 * $20,000 * $19,250 * $20,750

Answer 470

$19,250 * The insured collects $19,250. Since there is no coinsurance provision provided on this policy, the insurer will cover all post-deductible covered expenses. $20,000 (total covered expenses) - $750 (deductible) = $19,250

Question 471

Identify the characteristics of a good insurance policy. I. Meets the client's individual needs. II. Provides required amount of coverage. * II only * Neither I nor II * I only * Both I and II

Answer 471

Both I and II * A good insurance policy is defined as one that meets the consumer's needs without providing more insurance than is required.

Question 472

Identify the potential benefit(s) of insurance. (Select all that apply) * Encourages thrift * Assists with savings * Provides assured income in the form of annuities * Helps preserve an estate

Answer 472

Encourages thrift Assists with savings Provides assured income in the form of annuities Helps preserve an estate Potential Advantages of Insurance: * Assists with savings * Furnishes a safe and profitable investment * Encourages thrift * Minimizes worry * Provides assured income in the form of annuities * Helps preserve an estate

Question 473

__ ____??____ __ determine the maximum insurance recovery. * Actuarial tables * Policy retentions * Statistical analyses * Policy limits

Answer 473

Policy limits * Policy limits determine the maximum insurance recovery.

Question 474

Risk managers use Risk Management Information Systems (RMIS) to do the each of the following EXCEPT: * Enroll in a risk management program from the RMIS marketplace. * Maintain records of plant, property, and equipment and record how they are protected from loss. * Perform statistical analysis of past losses and to forecast losses. * Record, track and analyze losses.

Answer 474

Enroll in a risk management program from the RMIS marketplace. Many risk managers now use Risk Management Information Systems (RMIS) to do the following: * Record, track and analyze losses * Maintain records of plant, property, and equipment and record how they are protected from loss * Perform statistical analysis of past losses and to forecast losses Some companies have their RMIS tied to national networks that track: * Occupational Safety and Health Act (OSHA) bulletins * relevant court decisions, and * proposed state and federal legislation.

Question 475

Lesson 14. Insurance Company Selection | Course 2. Insurance Planning

Question 476

Which of the following must a consumer decide on, besides a company, when they want to buy a policy? * Agent * Policy * Amount * Price * Location

Answer 476

Agent Policy Amount Price * The consumer must decide on the company, agent, policy, amount, and price of the policy he wants to buy. * There are different rating firms that help consumers choose the right insurance company.

Question 477

Dean Jones wants to buy an insurance policy. He makes his purchase decision based only on the insurer's financial rating. Should Dean consider other information? * Yes * No

Answer 477

Yes

Question 478

What did the Armstrong Investigation (1905) reveal? (Select all that apply) * Unethical fire insurance practices. * Unjustifiable home-office expenses. * Unethical business acquisition methods. * Unethical political influence.

Answer 478

Unjustifiable home-office expenses. Unethical business acquisition methods. Unethical political influence. * The Armstrong Investigation revealed abuses such as unethical business acquisition methods, unjustifiable home-office expenses, unethical political influence, and other problems.

Question 479

The McCarran-Ferguson Act provides a limited exemption to the insurance industry from the federal antitrust laws. Which of the following Acts must apply to the business of insurance “to the extent that such business is not regulated by state law?” (Select all that apply) * Sherman Act * Investment Company Act of 1940 * Federal Trade Commission Act * Clayton Act

Answer 479

Sherman Act Federal Trade Commission Act Clayton Act * The McCarran-Ferguson Act a limited exemption to the insurance industry from the federal antitrust laws. The Act provides that the Sherman Act, the Clayton Act, and the Federal Trade Commission Act apply to the business of insurance “to the extent that such business is not regulated by state law.”

Question 480

The Gramm-Leach-Bliley Act also established the concept of functional regulation of subsidiaries of financial holding companies and established the __ ____??____ __ as the umbrella supervisor. * SEC * Federal Reserve * NAIC * FINRA

Answer 480

Federal Reserve * **The Act established two new corporate vehicles for the conduct of financial service activities: the financial holding company & the financial subsidiary**. * In addition, **the Federal Reserve was established as the umbrella supervisor**.

Question 481

Who conducts the administration of a state's insurance laws? * Insurance agent * Insurance Commissioner * Federal official * Federal judge

Answer 481

Insurance Commissioner

Question 482

Promoting insurer solvency is the most important goal of insurance regulation. * False * True

Answer 482

True

Question 483

What are the steps to regulate price in the insurance sector? * Prior approval before pricing * Open rate option * Fixed rate * Promotion of social goals while pricing

Answer 483

Prior approval before pricing Open rate option Promotion of social goals while pricing

Question 484

The insurance marketplace is regulated by: * IRS * Federal government * State government * Stock Exchange

Answer 484

State government * The Congress passed a law giving the states the power to regulate the insurance marketplace.

Question 485

Which of these states have adopted the Appleton rule? * California * Texas * New York * Alaska

Answer 485

New York * In 1939, New York made the Appleton rule part of its insurance code. The rule states that insurance companies doing any business in New York State must be in substantial compliance with all of New York's rules in whatever state they do business. * No other state has adopted the Appleton rule as part of its insurance code.

Question 486

An insurer needs __ ____??____ __ that is in excess of assets over liabilities, as a cushion against poor underwriting results (more losses than predicted) and poor investment results (lower earnings than projected). * surplus * savings * a separate account * reserves

Answer 486

surplus * An insurer needs surplus that is in excess of assets over liabilities, as a cushion against poor underwriting results (more losses than predicted) and poor investment results (lower earnings than projected).

Question 487

Identify the items that would be considered non-admitted assets of an insurer. (Select all that apply) * Supplies * Equipment * Office buildings * Office furniture

Answer 487

Supplies Equipment Office furniture * Examples of non-admitted assets include items such as office furniture, supplies, and equipment.

Question 488

Consider two insurers similar in size. One company operates very conservatively while the other operates in an aggressive manner. Under previous rules, both insurers might have the same minimum capital requirement. Based on RBC rules, the aggressive insurer may have to maintain what percentage of capital and surplus relative to a conservative insurer. * 100% more * 150% more * 150% less * 50% more

Answer 488

150% more * Under the previous rules, both insurers might have the same minimum capital requirement. * **Based on the RBC rules, the aggressive insurer would, perhaps, have to maintain 150% more capital and surplus than the conservative insurer**.

Question 489

Match the category of risk with the correct definition. Asset Risk Credit Risk Underwriting Risk Catastrophe Risk * The potential that premiums or reinsurance will not be collected. * The potential for default or decline in the market value of investments. * The potential for a catastrophe to reduce profitability or capital. * The potential that rates will be inadequate to cover future losses.

Answer 489

* Asset Risk: The potential for default or decline in the market value of investments. * Credit Risk: The potential that premiums or reinsurance will not be collected. * Underwriting Risk: The potential that rates will be inadequate to cover future losses. * Catastrophe Risk: The potential for a catastrophe to reduce profitability or capital.

Question 490

An U.S. insurance company having interests in 30 states must comply with: * 50 potentially different rules and regulations applying to all 50 states. * 30 potentially different rules and regulations. * One universal set of rules and regulations. * Two sets of rules and regulations - one for the Federal Government and one for the state.

Answer 490

30 potentially different rules and regulations. * A U.S. insurance company having interests in 30 states must comply with 30 potentially different rules and regulations.

Question 491

How do states regulate to help maintain insurer solvency? * By setting conditions for minimum reserve requirements for insurers. * By maintaining minimum reserves on the liability side of the balance sheets of insurers. * By setting conditions for surplus requirements. * By setting investment requirements for reserve and surplus accounts.

Answer 491

By setting conditions for minimum reserve requirements for insurers. By maintaining minimum reserves on the liability side of the balance sheets of insurers. By setting conditions for surplus requirements. By setting investment requirements for reserve and surplus accounts. * The reserve, surplus, and the investment requirements serve an important purpose, as tools, for promoting insurer solvency. * The insurer is expected to maintain minimum reserves on the liability side of the balance sheet.

Question 492

# Exam 14. Insurance Company Selection Exam 14. Insurance Company Selection | Course 2. Insurance Planning

Question 493

The __ ____??____ __ expressed the intent of Congress to allow the states to continue to regulate and tax the business of insurance. * McCarran-Ferguson Act * Investment Company Act of 1940 * South-Eastern Underwriters Association (SEUA) * Gramm-Leach-Bliley Act

Answer 493

McCarran-Ferguson Act * The **McCarran-Ferguson Act** expressed the intent of Congress to **allow the states to continue to regulate and tax the business of insurance**. * It found such continued state regulation to be in the public interest.

Question 494

The McCarran-Ferguson Act provides a limited exemption to the insurance industry from the federal antitrust laws. Which of the following Acts must apply to the business of insurance “to the extend that such business is not regulated by state law?” (Select all that apply) * Clayton Act * Sherman Act * Federal Trade Commission Act * Investment Company Act of 1940

Answer 494

Clayton Act Sherman Act Federal Trade Commission Act * The McCarran-Ferguson Act a limited exemption to the insurance industry from the federal antitrust laws. * The Act provides that the Sherman Act, the Clayton Act, and the Federal Trade Commission Act apply to the business of insurance “to the extent that such business is not regulated by state law.”

Question 495

Identify the firm(s) that provide(s) financial ratings of insurance companies. (Select all that apply) * NAIC * Weiss Research * Dow Jones Inc. * Duff & Phelps * Standard & Poors * A.M. Best Company * Moody’s Investor’s Services

Answer 495

Weiss Research Duff & Phelps Standard & Poors A.M. Best Company Moody’s Investor’s Services The following five **firms provide financial ratings of insurance companies**: * A.M. Best Company, * Standard & Poors, * Moody’s Investor’s Services, * Duff & Phelps, and * Weiss Research.

Question 496

Through which legislation did the U.S. Supreme Court reverse its historical position rendered in Paul v. Virginia on interstate regulation of insurance? * South-Eastern Underwriters Association (SEUA) * Gramm-Leach-Bliley Act * McCarran-Ferguson Act * Securities Act of 1934

Answer 496

South-Eastern Underwriters Association (SEUA) * In 1944, in the South-Eastern Underwriters Association (SEUA) case, the U.S. Supreme Court reversed its historical position rendered in Paul v. Virginia. * It now concluded that insurance was indeed interstate commerce.

Question 497

Each of the following reasons explain why the insurance marketplace is extensively regulated EXCEPT: * Guarantee financially strong companies. * Assure high profit margins for insurers. * Provide fair contracts at fair prices. * Prevent unfair treatment of consumers.

Answer 497

Assure high profit margins for insurers. The following three reasons explain **why the insurance marketplace is regulated so extensively**: * Guarantee financially strong companies. * Prevent unfair treatment of consumers. * Provide fair contracts at fair prices.

Question 498

According to provisions of the Gramm-Leach-Bliley (GLB) Act supervise banks, which regulator(s) would provide supervision of banks? I. Securities and Exchange Commission II. State insurance commissioners III. Federal Reserve IV. Treasury Department * III and IV * III only * I only * I and II

Answer 498

III and IV * The core provisions of the GLB allow the combination of **banks, insurance companies and securities dealers** into **financial service holding companies.** * **The Federal Reserve & the Treasury Department continued to supervise banks**, * **the federal Securities and Exchange Commission continued to supervise securities dealers**, and * **state insurance commissioners continued to supervise insurance companies**.

Question 499

__ ____??____ __ allow(s) an insurer to use whatever rate it chooses after filing the rate and the supporting statistics with the regulator. * Supply-side pricing * Promotion of social goals * Open rating * Prior approval

Answer 499

Open rating * Open rating allows an insurer to use whatever rate it chooses after filing the rate and the supporting statistics with the regulator. * Open rating, the more popular scheme, allows the regulator to disapprove any rates being used.

Question 500

Choose the investigation(s) that revealed many unethical and undesirable characteristics associated with the fire insurance industry. I. Merritt Committee Investigation II. Armstrong Investigation * I only * Neither I nor II * Both I and II * II only

Answer 500

I only * New York investigated its fire insurers in the Merritt Committee Investigation. * The results again revealed many unethical and undesirable characteristics.

Question 501

Select the criteria should be considered when choosing an insurance company: Financial strength. Fairness and promptness in processing claims. The ability and willingness to provide service before and after a loss. Market share. I, II, and III I and IV I and II II and III Three criteria should be considered when choosing an insurance company: Financial strength. Fairness and promptness in processing claims. The ability and willingness to provide service before and after a loss.

Answer 501

I, II, and III **Three criteria should be considered when choosing an insurance company**: * Financial strength. * Fairness and promptness in processing claims. * The ability and willingness to provide service before and after a loss.

Question 502

The forces underlying the passage of Gramm-Leach-Bliley (GLB) Act included each of the following EXCEPT: * Technology * Fiduciary duty * International competition * Banks wanting to expand the scope of the financial services they could offer

Answer 502

Fiduciary duty * The **overriding purposes of the Gramm-Leach-Bliley (GLB) Act were to modernize the U.S. financial services markets, to formalize the regulation of these markets, and to make the markets more competitive, thereby providing benefits to consumers**. The forces underlying the passage of GLB included the following: * Consumer needs * Banks wanting to expand the scope of the financial services they could offer * International competition * Technology

Question 503

Which of the following statements is NOT correct regarding the rights of an irrevocable life insurance beneficiary? * An irrevocable beneficiary may name others as additional beneficiaries to share in the policy proceeds at the death of the insured. * An irrevocable beneficiary can prevent the policy owner from pledging a life insurance policy as collateral for a loan. * An irrevocable beneficiary has a guaranteed interest in the death benefit of a life insurance policy. * An irrevocable beneficiary can prevent the policy owner from borrowing from a life insurance policy.

Answer 503

An irrevocable beneficiary may name others as additional beneficiaries to share in the policy proceeds at the death of the insured. * Once named, an irrevocable beneficiary cannot be changed. * An irrevocable beneficiary does not have the right to add beneficiaries.

Question 504

Identify the type of direct liability exposure that involves maintenance of business buildings and grounds. * Work Liability * Oversight Liability * Premises and Operations * Products Liability

Answer 504

Premises and Operations * Premises and operations liabilities result from the ownership, use, and maintenance of business buildings and grounds.

Question 505

# 43 Each of the following is among the first tools utilized to manage risk EXCEPT: * Risk avoidance * Risk reduction * Insurance * Retention of risk

Answer 505

Insurance * Proper risk management will utilize all other tools (avoidance, reduction, retention of risk) first, leaving insurance as a last option when sufficient loss potential still exists.

Question 506

Calculate the stop-loss limit on a health insurance policy with the following information: $1,500 deductible 80/20 coinsurance $17,500 maximum-out-of-pocket limit * $80,000 * $16,000 * $81,500 * $87,500

Answer 506

$80,000 * The stop-loss limit is the amount of total expenses after payment of the deductible to which the insured's portion of the coinsurance will result in reaching the MOOP. The following calculation to determine the stop-loss limit: (MOOP - Deductible) ÷ Insured's Coinsurance Percentage ($17,500 - $1,500) ÷ 0.20 = $80,000

Question 507

# 5 A commercial umbrella policy can be purchased which provides for coverage in the following ways EXCEPT: * Complete replacement of underlying policies. * More comprehensive coverage for losses and exposures left uncovered by underlying policies. * Drop-down coverage if the insured absorbs the first dollars of the loss. * Excess coverage over underlying liability coverage is available when those policy limits are not sufficient to pay for judgments against the insured.

Question 508

# 33 Which of the following is typically covered under a commercial umbrella policy? * Damage to the insured’s personal property when the limit of the underlying policy has been exhausted * Damage caused by lightning strike or flood * Replacement cost coverage for inventory lost due to a covered peril * Libel, slander, and defamation of character