Insurance Flashcards
(45 cards)
Which of the following is an insurable risk?
a) Objective Risk.
b) Pure Risk.
c) Subjective Risk.
d) Speculative Risk.
Answer: B
Pure risk involves the risk of loss or no loss and is the only insurable risk.
The underwriter of an insurance company is charged with the responsibility of achieving a profit within the risk parameters of the company. Which of the following is the underwriter’s greatest challenge?
a) Setting premiums.
b) Motivating salespeople.
c) Making sure that profit margins are correct.
d) Managing adverse selection.
Answer: D
Managing adverse selection may be accomplished before the contract is issued by using credit scores, physicals, claims history, etc., or on the back-end of property, automobile, health, and dental insurance by raising annual premiums.
What is an insurable risk?
Insurable Risks are CHAD - not Catastrophic, Homogeneous exposure units, Accidental, and measurable and Determinable.
Which of the following is not a requisite for an insurable risk from an insurer’s perspective?
a) Law of Large Numbers.
b) Losses must be accidental, measurable, and determinable.
c) Losses must not pose a catastrophic risk for the insured.
d) The premiums must be affordable.
Answer: C
The losses must not pose a catastrophic risk for the insurer. The insured wants to transfer catastrophic risks.
What’s required for an insurance contractto be valid?
A legal contract requires COALL! -> Competent parties, Offer and Acceptance, Legal consideration, and Lawful purpose
Eric walks into his insurance agent’s office, signs a life insurance application, and gives his agent the first month’s premium. As Eric is leaving his insurance agent’s office, he is hit by a bus. Will Eric’s wife be able to collect under the life insurance policy?
a) Yes, as long as Eric was insurable (no terminal illnesses or life threatening pre-existing conditions).
b) No, the policy was not delivered.
c) Yes, regardless of whether Eric was insurable.
d) No, because signing the application and paying the first month’s premium is not con-sidered offer and acceptance.
Answer: A
By signing the application and making the first month’s premium payment, Eric is insured as long as he is insurable. This is an example of a conditional acceptance by the insurer.
Mike is injured in an auto accident caused by Tim. Mike collects bodily injury payments from his insurance company and sues Tim to recover as well. Tim’s insurance company also pays Mike for the same injuries. Which of the following principles has been violated?
a) Subrogation.
b) Subjective Risk.
c) Adverse Selection.
d) Adhesion.
Answer: A
The Subrogation clause in an insurance contract prevents Mike collecting from both his insurance company and a third party for the same claim.
Dave is 42 years old and applying for a life insurance policy. In order to receive a lower pre-mium, Dave indicates that he is 34 on the insurance application. Which of the following is the insurance company most likely to do when they determine Dave’s right age?
a) Avoid the contract.
b) Void the contract.
c) Refund the premiums and deny any claim by Dave’s beneficiary.
d) Pay Dave’s beneficiary a lesser face value that is based upon the premiums paid and Dave’s correct age.
Randy’s house slid down a hill in California after a heavy rain storm and is a total loss. The rel-evant part of the insurance contract states, “earthquake is a general exclusion.” Which party is likely to win in court and why?
a) The insurance company because of the stated exclusion.
b) The insurance company because homeowner’s policies do not cover mudslides.
c) Randy because of the aleatory principle.
d) Randy because the contract is adhesive.
Answer: D
Randy will most likely win because ambiguities are decided in favor of the insured under the principle of adhesion.
Scott is 22 and just started his first job with Rest in Peace Life Insurance Company. Scott is scheduled to take the State insurance exam at 9:00 a.m. on Saturday. The exam is computerized and if passed, automatically issues the State License. Scott has an important appointment with his Uncle Carlos at 1:00 p.m. on Saturday to sell Carlos $10M of universal variable life insur-ance. On Friday, just before 5:00 p.m. Scott’s boss gives him a wrapped gift and tells him not to open it until after he passes the exam, which she is confident he will do. Scott goes ahead and opens the present on Friday night and calls his friends to celebrate getting his “Rest in Peace” business cards. Scott goes out with his friends Friday night, gets drunk, and misses the Saturday exam. However, he goes to Carlos’ house, takes his application, and gets a check from Carlos for the first year premium. Unfortunately, Carlos is hit by lightening while playing golf Saturday afternoon and dies. Which of the following is correct?
a) Carlos’ beneficiary will collect $10M because of explicit authority and that the check was given to the agent.
b) The policy is not issued because Scott is not licensed to sell life insurance.
c) Carlos’ beneficiary will not receive anything because the check, while issued, was given to an unlicensed agent.
d) Presuming Carlos meets normal underwriting standards, his beneficiary will collect $10M under apparent authority.
Answer: D
Even though not licensed, Scott can still bind “Rest in Peace” because he should not have appli-cations and business cards.
Brandon purchased a home theater system for $10,000 two years ago. The replacement cost is $8,000. The home theater system was destroyed in a fire. Brandon’s insurance company estimates that the home theater system was 40% depreciated. How much will Brandon receive if the home theater system is covered under actual cash value?
a) $2,000.
b) $2,700.
c) $3,200.
d) $4,800.
Answer: D
$8,000 - (.40 x $8,000) = 8,000 - 3,200 = $4,800 If Brandon owed a $500 deductible, he would actually receive $4,800 - $500, or $4,300.
NAIC
National Association of Insurance Commissioners has no regulatory power over the insurance industry. Regulation occurs at the state level.
What are the six steps of risk management?
D-I-E-D-I-E: Don’t Insure Everything (Squared)
- Determine the objectives of the risk management program.
- Identify the risks to which the client is exposed.
- Evaluate the identified risks as to probability of occurrence and potential loss.
- Determine alternatives for managing risks, and select the most appropriate alternative for each.
- Implement the program.
- Evaluate, monitor, and review (control).
Which of the following methods of dealing with risk does not match its action?
a) Risk Avoidance: Wearing a hard hat on a construction site.
b) Risk Reduction: Installing a sprinkler system in a building.
c) Risk Transfer: Carrying automobile insurance.
d) Risk Retention: Health insurance policy deductibles.
Answer: A
Avoidance would mean not going anywhere near a construction site.
Savvy is 30 years old, a single mother of one child (age 9), making $25,000 per year as a secre-tary. Her net worth is zero. Savvy has two identified objectives:
- Provide for her child in the event of her death.
- Invest for retirement.
Which of the following insurance policies should Savvy purchase?
a) Whole life.
b) Universal variable.
c) Variable whole life.
d) Term life.
Answer: D
Savvy can only afford term life insurance and her primary goal is likely to provide for her child.
What are the five whole life insurance dividend options?
CRAP-O -> Cash option, Reduce premiums, Accumulate at interest, Paid-up additions, and Term (one-year).
What are the whole life insurance nonforfeiture options?
Cash Surrender Value
- Insured receives the accumulated cash value when terminating the life insurance policy. The cash surrender value is the cash value less surrender charges.
Reduced Paid-up Insurance
- Insured receives the cash value in the form of a paid-up policy with a smaller face amount.
Extended Term Insurance
- The insured receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.
John, age 35, is married with two children ages 3 and 5. John has a need for life insurance throughout his lifetime. He has a significant income, but has saved very little. He has expressed concern over stock market volatility and he is very risk averse. Which of the following life insurance policies would provide John with a savings component, permanent protection and will match his risk tolerance?
a) Level Term.
b) Variable Universal.
c) Variable Life.
d) Whole Life.
Answer: D
Level term is not permanent insurance and does not have a savings component. Neither variable policy will match John’s risk tolerance. Whole life insurance provides permanent protection and a savings component.
Cindy, who is actually 45, has been lying about her age for the last 15-20 years and tells Conner, the insurance agent, that she is 30. She has a drivers license to support age 30. She buys $1M term life policy paying premiums of $1 per thousand. Age 45 premiums are $2.50 per thousand. Cindy dies in the first year. Which is correct?
a) Cindy’s beneficiaries collect $0 but get the premiums back because Cindy died.
b) Cindy’s beneficiaries collect $1M as long as her death was accidental.
c) Cindy’s beneficiaries collect $400,000, which is the policy value with premiums adjusted for actual age.
d) The policy is voidable for up to two years by the insurance company for fraud.
Answer: C
The face is adjusted for the correct premiums. Cindy is paying $1,000 = ($100,000 / $1,000) x $1. She should be paying $2.50 per $1,000, so the face is adjusted to $400,000 = $1,000 / 2.5 = $400 x $1,000 = $400,000.
What is the tax deductibility of group life insurance premiums?
Premiums are not deductible for the insured, but premiums are deductible by the employer for group life insurance and those premiums are taxable income to the employee.
Just prior to the payout period the amount of money that is available in the contract as principal paid in over the life of the annuity is determined at $200,000. The total annuity is currently valued at $360,000. The annuity payment is calculated at $24,000 per year. Our client wants to retire at age 65. The the IRS Tables multiplier from the IRS Table for age 65 is 15 (remaining life expectancy). What amount of the annuitant’s payment will be excluded from tax?
a) $1,111.11 until the principal amount has been exhausted.
b) $888.89 for the life of the annuitant.
c) $1,111.11 for the life of the annuitant.
d) $888.89 until the principal amount has been exhausted.
Answer: A
Divide the figure of paid-in principal ($200,000) by the figure of current cash in the annuity ($360,000).
$200,000 / $350,000 = 55.6% (this is the exclusion ratio)
The exclusion percentage is then applied to each monthly payment: $2,000 x 55.6% = $1,111.11 (of each payment is tax excluded)
Walter is terminally ill and has a 20-year level term life insurance policy with a face value of $500,000. Walter has paid $15,000 in premiums over the last 10 years. Walter sells the term policy to a company that specializes in Viatical settlements. Walter sells the policy for $400,000. What is the tax impact to Walter and the Viatical settlement company at Walter’s death?
a) Walter has taxable income of $385,000, company has taxable income of $100,000.
b) Walter has taxable income of $400,000, company has taxable income of $100,000.
c) Walter has taxable income of $0, company has taxable income of $100,000.
d) Walter has taxable income of $0, company has taxable income of $500,000.
Answer: C
There is no taxable event to Walter and the Viatical settlement company has taxable income to the extent the policy proceeds exceed the amount paid for the policy.
Tip!
For annuities after 1982 and premature withdrawals, the withdrawal receives LIFO tax treatment. Any annuity prior to 1982 receives FIFO tax treatment.
Mary Pat, age 62, has an annuity worth $100,000 . Thirty-five years ago she purchased the annuity with $15,000. Today, she has a need for additional life insurance on her husband, Brad. Which of the following is the most appropriate strategy to provide Mary Pat with additional life insurance on her husband using her annuity?
a) Annuitize the annuity and purchase life insurance on Brad.
b) Surrender the annuity and purchase life insurance.
c) Exchange the annuity for a post-1987 annuity, then exchange for a life insurance policy.
d) Exchange the annuity for a life insurance policy.
Answer: A
Annuities cannot be exchanged for a life insurance policy on a tax-free basis. The best choice is to just annuitize the annuity and use the income to purchase additional life insurance.
