HS 311 Sample Exam 2 Flashcards
What is the purpose of the statistical data in a mortality table?
(A) It indicates the number of individuals exposed to the risk of illness, sickness, and disease at each age.
(B) It indicates the pure life insurance premium for an insured at any age.
(C) It shows how many persons alive at different ages are expected to die during the coming year.
(D) It shows which individuals are expected to die during the coming year.
The answer is (C). (A) is incorrect because it describes a morbidity table. (B) is incorrect because a mortality table shows probabilities, not premium. Premiums are based in part on the information in a mortality table. (D) is incorrect because it indicates aggregate probabilities, not predictions regarding specific individuals.
Every insurance policy contains one or more provisions spelling out the basic promise the insurer makes in the policy, such as the promise to pay money if a certain type of event occurs. Insurance policy provisions of this type are known as which of the following?
(A) conditions
(B) insuring agreements
(C) financial risks
(D) miscellaneous provisions
The answer is (B). (A) is incorrect because conditions are obligations that must be fulfilled for the contract to be enforceable. (C) is incorrect because financial risk is a category of risk, not an insurance policy condition. (D) is incorrect because miscellaneous provisions are policy provisions that do not qualify as declarations, definitions, insuring agreements, exclusions, or conditions.
Which of the following statements correctly describes a coverage need that can be met with an auto loan/lease coverage endorsement?
(A) The client’s outstanding obligation on a leased auto exceeds the vehicle’s current actual cash value.
(B) The client wants to trade in his or her car before the term of the lease has expired.
(C) The lender exercises an option to renegotiate the terms of an adjustable lease.
(D) The lender wants to be included as the payee on any claim check.
The answer is (A). (B), (C), and (D) are incorrect because auto loan-lease coverage applies when total loss to a leased vehicle or a financed auto results in the insured’s being required to pay the lessor or lending company an amount that exceeds the actual cash value of an insured auto; the endorsement fills that gap.
Which of the following statements concerning the typical conversion provision found in group medical insurance contracts is correct?
(A) Evidence of insurability is required.
(B) Conversion must be elected prior to the termination of the group coverage.
(C) The insurer has the right to refuse to issue a policy to anyone who is covered by Medicare.
(D) Coverage for preexisting conditions is limited for the first 6 months of coverage.
The answer is (C). (A) is incorrect because no evidence of insurability is required. (B) is incorrect because covered persons commonly have 31 days from the date of termination of the group coverage to exercise the conversion privilege. (D) is incorrect because there is no limitation of benefits for preexisting conditions.
Which of the following provisions in a long-term care insurance policy would be consistent with National Association of Insurance Commissioners (NAIC) model legislation?
(A) a nonforfeiture benefit
(B) renewability at the option of the insurer
(C) a 12-month preexisting-conditions exclusion period
(D) a 3-day hospital stay before eligibility for nursing home benefits
The answer is (A). (B) is incorrect because the NAIC model legislation requires that a long-term care insurance contract be guaranteed renewable or noncancelable. (C) is incorrect because the preexisting-conditions exclusion period cannot exceed 6 months. (D) is incorrect because eligibility for benefits cannot be based on a prior hospital confinement.
Mrs. Woods raised a wild animal, which she kept in a cage in her backyard. The animal escaped one day and mauled a professional golfer who had held the lead in a high-stakes tournament on a golf course adjacent to the Woods property. On which of the following legal bases would Mrs. Woods most likely be held liable for the claim by the injured golfer?
(A) intentional act or omission
(B) proximate cause
(C) punitive damages
(D) strict liability
The answer is (D). (A) is incorrect because Mrs. Woods did not intentionally release her tiger so that he would maul the golfer. (B) is incorrect because proximate cause is one of the elements of negligence, not a legal basis for a claim. (C) is incorrect because punitive damages might be awarded to the golfer as a result of a liability claim, but they are not a legal basis for a claim.
Which of the following is a primary reason for purchasing a variable annuity rather than a fixed annuity?
(A) protection against inflation
(B) higher interest guarantees
(C) reduced risk of outliving annuity income
(D) the absence of SEC regulation
The answer is (A). (B) is incorrect because a variable annuity contains no interest guarantees. (C) is incorrect because annuity income is provided for life, although the amount of the periodic income may vary. (D) is incorrect because the sale of variable annuities is regulated by the SEC as well as state insurance departments.
Maria is covered under her own group medical expense insurance plan as an employee and also under her husband’s plan as a dependent. If Maria is hospitalized, how will each plan respond to her medical bills if both plans have the usual coordination-of-benefits (COB) provision?
(A) Maria’s plan is primary, and her husband’s plan is excess.
(B) Her husband’s plan is primary, and Maria’s plan is excess.
(C) Her husband’s plan will pay its benefits, and Maria’s plan will deny coverage.
(D) Both plans will pay benefits on a pro rata basis.
The answer is (A). (B), (C), and (D) are incorrect because Tthe usual COB provision stipulates that coverage as an employee is primary to coverage as a dependent.
Kristina buys a homeowners policy HO-3 with a $500,000 limit on the dwelling building. The standard limit of coverage on her personal property is
(A) $50,000
(B) $150,000
(C) $250,000
(D) $500,000
The answer is (C). The standard limit of coverage on personal property under coverage C of a homeowners policy is 50 percent of the limit on the building under coverage A, and 50 percent of $500,000 is $250,000.
Robert has a personal auto policy with split limits of $250,000/$500,000/ $50,000. He negligently caused an accident that destroyed a motor home and seriously injured the couple who were riding in it. How much would Robert’s insurer pay if he is determined to be legally liable for $300,000 to the wife for her injuries, $45,000 to the husband for his injuries, and $95,000 for damage to the motor home?
(A) $345,000
(B) $390,000
(C) $395,000
(D) $440,000
The answer is (A). The insurer will pay the $250,000 per person limit for the wife’s injuries, $45,000 for the husband’s injuries, and the $50,000 property damage limit for damage to the motor home, for a total of $345,000.
Although the claims adjustment process varies by line of insurance, the first step in the process generally involves which of the following?
(A) determining what kind of adjuster to use
(B) investigating the claim
(C) negotiating the amount to be paid
(D) notifying the insurer of the loss
The answer is (D). (A), (B), and (C) are incorrect because none of the other steps in the claims adjustment process can occur until the insurer is made aware that a loss has occurred.
A property loss exposure is defined as
(A) a peril causing damage to property
(B) potential legal responsibility for damage to somebody else’s property
(C) the damaging, destruction, taking, or loss of use of property
(D) the possibility that a person or organization will sustain a property loss
The answer is (D). (A) is incorrect because a peril is a cause of loss. (B) is incorrect because potential legal responsibility for damage to somebody else’s property is a liability loss exposure; more specifically, it is a property damage liability loss exposure. (DC) is incorrect because it describes a property loss.
Many individual term life insurance policies are convertible policies. The convertibility feature does which of the following?
(A) lowers the top premium that may be charged when the policy is renewed
(B) changes the policy to an annuity at retirement
(C) permits the policyowner to exchange the individual policy for a group policy
(D) permits the policyowner to exchange the term insurance for permanent insurance
The answer is (D) by definition. Convertibility permits the policyowner to exchange term insurance for permanent insurance.
The tendency for healthy individuals to give up their insurance as its cost increases while those in poor health continue to renew it regardless of cost is referred to as
(A) morbidity
(B) risk tolerance
(C) adverse selection
(D) hedging
The answer is (C). (A) is incorrect because morbidity refers to the relative incidence of disease. (B) is incorrect because risk tolerance refers to a person’s willingness to undertake a risky course of action. (D) is incorrect because hedging refers to a procedure by which two compensating or offsetting transactions are used to enassure a position of at least breaking even.
The life insurance policy settlement option under which installment payments consisting of both death proceeds and interest are made to the beneficiary over a specified time period is referred to as the
(A) fixed-amount option
(B) fixed-period option
(C) installment option
(D) interest option
The answer is (B). (A) is incorrect because the fixed-amount option would pays periodic installments, consisting of a portion of the death proceeds and interest earnings, for as long as the funds last. How long they last depends on the level of interest earnings. (C) is incorrect because the term refers to settlements paid in installments and not to the specific settlement option described here. (D) is incorrect because, under the interest option, only interest is paid to the beneficiary in installments; death proceeds are paid at a later date.
Peter Batcheller has been totally and permanently disabled for the past 3 years. He is single and has annual investment income of $5,000 in addition to Social Security disability benefits and $6,000 in annual long-term disability benefits from his employer’s group disability income plan. While he was actively employed, he was required to pay 40 percent of the cost of his coverage under the employer’s plan. How much of Peter’s disability benefit from the employer’s plan is includible in his gross income for federal income tax purposes?
(A) $0
(B) $2,400
(C) $3,600
(D) $6,000
The answer is (C). Because Peter paid 40 percent of the cost of his coverage, 40 percent of the benefit ($2,400) is not taxable income. The remaining $3,600 is included in his gross income. Peter will not be eligible for an income tax credit because the taxable disability benefit and his investment income exceed $7,500.
Bill has a personal auto policy (PAP) providing liability coverage on his 1965 Mustang. Which of the following persons is protected by Bill’s PAP while driving his Mustang?
(A) Bill’s estranged wife Elaine, who also has her own PAP
(B) Bill’s auto mechanic, who is test-driving the Mustang
(C) a parking lot attendant who takes the Mustang for a joy ride
(D) Ray Scardriver, a friend racing the Mustang on a drag strip
The answer is (A). (B) is incorrect because an exclusion applies to persons engaged in the business of repairing or servicing an auto. (C) is incorrect because an exclusion applies to persons engaged in the business of parking an auto. (D) is incorrect because an exclusion applies to vehicles at a race track competing in an organized race or speed contest.
Violetta sells commercial real estate and works on a commission. She wants a substantial amount of permanent life insurance protection, but because of her irregular income, she is not sure she will be able to pay a fixed premium every year. Violetta should consider which of the following?
(A) a guaranteed renewable term insurance policy
(B) a modified whole life insurance policy
(C) a single-premium immediate annuity
(D) a universal life insurance policy
The answer is (D). (A) is incorrect because a guaranteed renewable term policy has a fixed premium. (B) is incorrect because, although a lower premium is charged for the first few years, a modified whole life insurance policy still has a fixed premium. (C) is incorrect because Violetta is currently interested in permanent life insurance protection, not an annuity.
For purposes of prescription drug plans, what is a formulary?
(A) a pharmacy that participates in a preferred-provider network
(B) a doctor who prescribes generic drugs
(C) a list of preferred medications for specific medical conditions
(D) an over-the-counter alternative to a prescription drug
The answer is (C). (A), (B), and (D) are incorrect because Aa formulary is a list of preferred medications.
Which of the following statements concerning individual disability income insurance policies is correct?
(A) Most states prohibit incontestability provisions to eliminate fraud.
(B) A cost-of-living (COLA) rider keeps the policy’s benefit amount in step with increases in the insured’s income prior to disability.
(C) Most individual disability income insurance policies contain a definition of disability that is comparable to that used in the Social Security program.
(D) Most insurance companies give the purchaser an option to select the duration of the waiting period.
The answer is (D). (A) is incorrect because all states require that disability income insurance policies contain an incontestability provision. (B) is incorrect because a cost-of-living (COLA) rider increases the policy’s benefit payments during periods of disability. (C) is incorrect because most individual disability income insurance policies contain a definition of disability that is much less restrictive than that used in the Social Security program.
John is the only named insured under his homeowners policy. Which of the following persons is classified as an insured under John’s policy?
(A) John’s wife, from whom he is separated and who lives elsewhere
(B) John’s 65-year-old mother, who lives with him
(C) John’s 19-year-old son, who lived with him until he went to State University where he is a part-time student and an aspiring rock musician
(D) John’s 44-year-old childhood friend, who resides in John’s household and who is cared for by John and his mother because of the friend’s mental illness
The answer is (B). (A) is incorrect because a spouse of the person listed in the policy declarations qualifies as an insured only if he or she is a resident of the same household. (C) is incorrect because John is not a full-time student. (D) is incorrect because the friend is not a relative of the named insured or under the age of 21.
Charley, a college professor, is a client who often spends the summer in a remote part of the world where mail service is limited. Although he wants to buy a whole life insurance policy with his grandchildren as beneficiaries, he is concerned that the policy’s protection could lapse if he does not receive a premium notice in time to make payment before the end of the grace period. Which of the following options would address Charley’s concerns?
(A) an automatic premium loan option
(B) a late remittance option
(C) a nonforfeiture option
(D) a policy loan option
The answer is (A). (B) is incorrect because late remittance refers to an offer an insurer may make to the owner of a lapsed policy inviting the policyowner to pay the premium and reinstate coverage without having to provide evidence of insurability. (C) is incorrect because nonforfeiture options are choices regarding how a life insurance policyowner can use the policy’s cash value. (D) is incorrect because a policy loan option gives a policyowner the right to borrow money from the policy’s cash value.
The terms net rate and gross rate are used in connection with insurance rates developed by the pure premium method of rate making. Which of the following statements concerning these terms is correct?
(A) The gross rate is the net rate plus a loading for profit and contingencies.
(B) The gross rate is the insurer’s estimated loss costs per unit of coverage.
(C) The net rate is the charge for profit and contingencies.
(D) The net rate is multiplied by the number of units of coverage to arrive at a gross rate.
The answer is (A). (B) and (C) are incorrect because the net rate is the insurer’s estimated cost per unit of coverage. (D) is incorrect because the gross rate is determined by adding the net rate and the loading.
Tom currently earns $5,000 per month. He has an individual disability income policy that will pay $3,000 per month if he is totally disabled. The policy also provides residual disability benefits. If Tom becomes disabled and earns only $2,000 per month, how much will he collect each month under his disability income policy?
(A) $1,000
(B) $1,800
(C) $2,000
(D) $3,000
The answer is (B). Tom is able to earn $2,000 per month during the current period of residual disability. Subtracting the $2,000 in residual earnings from his predisability income of $5,000 per month results in a lost income of $3,000 per month for Tom. The lost income ratio ($3,000/$5,000) is then multiplied by the stated monthly benefit for total disability ($3,000) to determine the per month residual-disability benefit ($1,800). (Lost Income/Predisability income) x Total disability benefit = Residual-disability benefit
Small Mutual Insurance Company, incorporated in Harrisburg, Pennsylvania, is licensed to write property and liability insurance in the states of Pennsylvania and Maryland. When doing business in Pennsylvania, Small is classified as which of the following?
(A) an alien insurer
(B) an all-lines insurer
(C) a domestic insurer
(D) a foreign insurer
The answer is (C). (A) is incorrect because an alien insurer is incorporated in another country. (B) is incorrect because an all-lines insurer sells all lines of insurance, not just property and liability insurance. (D) is incorrect because a foreign insurer is one doing business in a state other than its state of incorporation.
Which of the following is one of the six activities of daily living (ADLs) that is permitted in a qualified long-term care insurance policy?
(A) managing medication
(B) using the telephone
(C) using the toilet
(D) preparing meals
The answer is (C). (A), (B), and (D) are incorrect because Tthe ADLs permitted in a qualified long-term care policy are eating, bathing, dressing, transferring from bed to chair, using the toilet, and maintaining continence.
Reinsurance involves which of the following?
(A) coverage that duplicates other coverage
(B) an insurer transferring risk to another insurer
(C) keeping a client’s insurance in effect year after year
(D) restoring a policy that has lapsed
The answer is (B). (A) is incorrect because reinsurance does not duplicate other coverage. (C) is incorrect because it describes renewal, not reinsurance. (D) is incorrect because it describes reinstatement, not reinsurance.
A peril is defined as which of the following?
(A) a cause of loss
(B) an item of clothing
(C) the result of a loss
(D) the result of a hazard
The answer is (A) by definition. A peril is a cause of loss.
The rider to a life insurance policy that excuses the policyowner from paying the premium during the insured’s disability is referred to as
(A) accelerated benefits
(B) disability income
(C) guaranteed purchase
(D) waiver of premium
The answer is (D). (A) is incorrect because accelerated benefits involve death benefits paid to a policyowner before the death of a terminally ill insured. (B) is incorrect because disability income insurance partially replaces a disabled person’s lost income. (C) is incorrect because the guaranteed purchase option gives a policyowner the right to buy additional insurance without providing evidence of insurability.
Which of the following statements concerning the uncertainty of investment gains or losses in a variable life insurance policy is correct?
(A) It is jointly borne by both policyowner and insurer.
(B) It is nonexistent.
(C) It is borne by the policyowner.
(D) It is borne by the insurer.
The answer is (C). (A), (B), and (D) are incorrect because iIn a variable life insurance policy, the policyowner bears the risk of investment gains or losses.
Which of the following statements concerning the formation of an insurance contract is correct?
(A) An enforceable insurance contract requires either offer or acceptance.
(B) An offer to buy insurance usually originates in a request from the person applying for insurance.
(C) A life insurance agent is usually permitted to bind coverage on behalf of an insurer.
(D) A property-liability insurance agent rarely has the insurer’s permission to bind coverage.
The answer is (B). (A) is incorrect because an enforceable contract requires both offer and acceptance. (C) is incorrect because life insurance agents usually are not permitted to bind coverage. (D) is incorrect because property-liability insurance agents commonly have the insurer’s permission to bind coverage.
In a cash value life insurance policy, the difference between the death benefit and the reserve is referred to as the
(A) disappearing premium
(B) face amount
(C) loss reserve
(D) net amount at risk
The answer is (D). (A) is incorrect because disappearing premium refers to a concept in which projected dividends and cash values may become sufficient to fund future benefits without further premium payments. (B) is incorrect because the face amount is the amount of insurance provided. (C) is incorrect because a property and liability insurer’s loss reserve is the insurer’s liability for losses that have already occurred but have not yet been paid or otherwise settled.
Long-term care insurance policies provide benefits for care to handle personal needs that can usually be provided by someone without professional skills or training. This type of care is referred to as
(A) intermediate care
(B) care coordination
(C) custodial care
(D) respite care
The answer is (C). (A) is incorrect because intermediate care involves occasional nursing and rehabilitative care that must be based on a doctor’s orders and can be performed only by, or under the supervision of, skilled medical personnel. (B) is incorrect because care coordination requires the services of a care coordinator with specialized skills to work with the insured, his or her family, and licensed health care practitioners to assess the person’s condition, evaluate care options, and develop an individualized plan of care that provides the most appropriate services. (D) is incorrect because respite care is occasional full-time care at home, for a person who is receiving home health care, to provide a break for family members or other caregivers.
Both Joe and his friend have personal auto policies (PAPs). If Joe is involved in an auto accident while driving his friend’s car, how do the two PAPs coordinate their liability coverage (Part A)?
(A) Each PAP will pay its pro rata share of any loss.
(B) Joe’s PAP is primary coverage while the friend’s PAP is excess.
(C) The friend’s PAP is primary coverage while Joe’s PAP is excess.
(D) Each PAP will deny coverage because of the existence of other insurance.
The answer is (C). (A), (B), and (D) are incorrect because the other insurance provision in Part A of a PAP states that any insurance we provide for a vehicle that the insured does not own shall beis excess over any other collectible insurance.
Which of the following statements concerning an installment refund annuity is correct?
(A) If the annuitant dies during the accumulation period, the annuity company’s obligation to provide a refund ceases.
(B) If the annuitant dies during the liquidation period before receiving monthly payments equal to the annuity’s purchase price, payments continue until the full cost is recovered.
(C) Periodic annuity payments will be made to the annuitant until all premiums have been returned, and beyond that point no further benefits will be paid.
(D) The annuitant is entitled to request a refund at any time during the 20-day free-look period after purchasing the annuity, but the refund will be paid in installments rather than a lump sum.
The answer is (B). (A) is incorrect because annuities almost always promise to return all premiums if the annuitant dies during the accumulation period. (C) is incorrect because annuity payments are made to the annuitant for life. If the annuitant dies before receiving monthly payments equal to the annuity’s purchase price, installment payments will continue to be paid to the beneficiary or beneficiaries until the full cost is recovered. (D) is incorrect because the installment refund feature has to do with the annuity’s liquidation period, not the purchase transaction.
An agent uses misrepresentation to induce a policyowner to cancel an old life insurance contract and purchase a new contract. This transaction turns out to be to the policyowner’s detriment. The agent’s actions are an example of
(A) misappropriating
(B) rebating
(C) refinancing
(D) twisting
The answer is (D). (A), (B), and (C) are incorrect because Tthe described practice is known as twisting.
Katy, who recently retired, no longer wants to pay the premiums on her whole life insurance policy, which has been in force for the past 40 years. However, she expects to live a long time and would like to keep some coverage in force until her death to help pay her estate costs. Which of her policy’s nonforfeiture options would be most appropriate?
(A) annuity option
(B) cash surrender option
(C) extended term insurance option
(D) reduced paid-up insurance option
The answer is (D). (A) is incorrect because using the policy’s cash surrender value to purchase an annuity would discontinue Katy’s life insurance coverage. (B) is incorrect because surrendering the policy for cash would discontinue Katy’s life insurance coverage. (C) is incorrect because the extended term insurance option would keep Katy’s life insurance coverage in force for a shorter time than the reduced paid–up insurance option.
Which of the following statements concerning the operation of a life insurance policy is correct?
(A) If the insured dies during the grace period, the insurer refunds only the premiums paid.
(B) If, after the insured’s death, it is discovered that the insured’s age has been misstated, the amount payable is the amount the premiums paid would have purchased at the correct age.
(C) Generally, a policy can be reinstated after it has been surrendered for its cash value as long as evidence of insurability is provided to the insurer.
(D) Once a life insurance policy has been issued, it is incontestable on the basis of material misrepresentation or concealment.
The answer is (B). (A) is incorrect because if the insured dies during the grace period, full policy benefits are paid, but the insurer may deduct the overdue premium. (C) is incorrect because reinstatement applies to policies that have lapsed. (D) is incorrect because the insurer can contest the validity of a policy during the contestable period.
Which of the following methods of dealing with substandard life insurance risks is (are) used when the extra risk is an increasing one? I. extra percentage tables II. flat extra premium
(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II
The answer is (A). II is incorrect because the flat extra premium method is normally used when the hazard is thought to be constant or decreasing.
Which of the following statements concerning group life insurance is (are) correct? I. To qualify for group coverage, employees who have completed a probationary period must usually provide evidence of insurability. II. Covered employees may be required to pay a portion of the premium.
(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II
The answer is (B). I is incorrect because most group life insurance plans require no evidence of insurability.
