TEST 280

Test Preparation Guide for LOMA 280

ONLINE COURSE PORTAL This text is assigned reading material for LOMA 280—Principles 280—Principles of Insurance. Enrollment E nrollment in this course includes access to the LOMA 280 Course Portal, which provides, in addition to all assigned study materials, an array of study tools, including some online and multimedia features to enhance your learning experience and help you prepare for the examination.

Copyright © 2011 LL Global, Inc. All rights reserved. www.loma.org

LOMA (Life Office Management Association, Inc.) is an international association founded in 1924. LOMA is committed to a business partnership with its worldwide members in the insurance and financial services industry to improve their management and operations through quality employee development, research, information sharing, and related products and services. Among LOMA’s activities is the sponsorship of several self-study education programs leading to professional designations. These programs include the Fellow, Fellow, Life Management Ma nagement Institute (FLMI) program and the Fellow, Financial Services Institute (FFSI) program. For more information on all of LOMA’s education programs, please visit www.loma.org. www.loma.org.

Statement of Purpose: LOMA Educational Programs Testing and Designations

Examinations described in the LOMA Education are designed solely to measure Education and Training Training Catalog Catalog are whether students have successfully completed the relevant assigned curriculum, and the attainment of any LOMA designation indicates only that all examinations in the given curriculum have been successfully completed. In no way shall a student’s completion of a given LOMA course or attainment of a LOMA designation be construed to mean that LOMA in any way certifies that student’s competence, training, or ability to perform any given task. LOMA’s examinations are to be used solely for general educational purposes, and no other use of the examinations or programs is authorized or intended by LOMA. Furthermore, it is in no way the intention of the LOMA Curriculum and Examinations staff to describe the standard of appropriate conduct in any field of the insurance and financial services industry, and LOMA expressly repudiates any attempt to so use the curriculum and examinations. Any such assessment of student competence or industry standards of conduct should instead be based on independent professional inquiry and the advice of competent professional counsel.


Test Preparation Guide for LOMA 280

Information in this text may have been changed or updated since its publication date. For current updates, visit www.loma.org. www.loma.org.

LOMA Education and Training Atlanta, Georgia Copyright © 2011 LL Global, Inc. All rights reserved. www.loma.org

PROJECT TEAM: Authors:

Sean Schaeffer Gilley, FLMI, ACS, AIAA, AIRC, FLHC, AAPA, ARA, CEBS, HIA, MHP, PAHM Melanie R. Green, FLMI, ACS, AIAA Martha Parker, FLMI, ACS, ALHC, AIAA

Project Manager:

Julia K. Wooley, FLMI, ACS, ALHC, HIA, MHP

Technical Support:

David A. Lewis, FLMI, ACS

Learning Coordinator:

Tonya Vaughan

Administrative Support:

Mamunah Carter

Copyright © 2011 LL Global, Inc. All rights reserved reserved.. 19 18 17 16 15 14 13 12 11

10 9 8 7 6 5 4 3 2 1

This text, or any part thereof, may not be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, storage in an information retrieval system, or otherwise, without the prior written permission of the publisher. While a great deal of care has been taken to provide accurate, current, and authoritative information in regard to the subject matter covered in this book, the ideas, suggestions, general principles, conclusions, and any other information presented here are for general educational purposes only. This text is sold with the understanding that it is neither designed nor intended to provide the reader with legal, accounting, investment, marketing, or any other types of professional business management advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

ISBN: 978-1-57974-352-9 978-1-57974-352-9 Printed in the the United States


Contents Contents ................................... .................... ................................................................................................................................................ ................................. .................................... ................................. .................................. ..................................... ...................................... .................... . 5 Preface................................................................................................................................................... Preface ................................................................................................................................................... 6 Practice Questions Questions................................................................................................................................ ................................................................................................................................ 8

Chapter Chapter One One................. ........ ....................................................................................................................................... .................... .................... ................. .................. .................. .......... ................ ........................... .................... .................. .................. ................. ................ ........ 9 Chapter Chapter Two Two....................... wo.............. ..................................................................................................................................... ................. ................. .................. ................... ............... ..... .................. ........................... .................. .................. .................. ................. .............. ...... 12 12 Chapter Chapter Three Three............ Three.... ................................................................................................................................... ................. ................... ............ ................. .......................... .................. .................. ................... .................. .................. ................... .................. ................. ........15 15 Chapter Four .......... Four Four.................. .................................................................................................................................... ................. .................. .................. ................. .................. .......... .................. ........................... ..................... ..................... .................. .................. ........... .. 17 1 Chapter Chapter Five................. Five........ Five ..................................................................................................................................... .................... .................... ................. ................. .................. ........... .................. ........................... .................. ................... ...................... ..................... ........... 20 20 Chapter Six................................... Six.................... Six....................................................................................................................................... ................................... .................... ...................................... .................. .................................... ................................. .......................... ......... 22 Chapter Chapter Seven......................... Seven................ Seven .................................................................................................................................. ............... ...... ................... ............................... ...................... ................... .................. ................... ................... .................. ................. ........... ... 25 Chapter Chapter Eight.......... Eight Eight.................. ................................................................................................................................... .................. .............. .... ................. .......................... .................. .................. ................... ................... .................. .................. .................. ................. ........ 28 Chapter Chapter Nine Nin Nine e .................. ......... .................................................................................................................................... .................. ..................... ...................... .................. .............. ...... ................. .......................... ................... ................... .................. .................. .............. ..... 33 Chapter Ten...................... Ten.... Ten ...................................................................................................................................... ................................. ................................. ................................... ................................... ...................................... ................................... ........................ ......... 38 Chapter Eleven............................... Eleven.............. Eleven ................................................................................................................................. ...................................... .................................... ............... .................................... .................. ................................... .......................... ......... 42 Chapter T Twelve welve .................................. ................ ................................................................................................................................ ................................. ................................ ...................................... ...................................... ................................ ........................ ......... 45 Chapter Chapter Thirteen Thirt Thirteen een .................. ......... .............................................................................................................................. .................. .................... .................... .................. ................ .................. .................... .................. .................. .................. .................. ................ ....... 48 Chapter Fourteen................................... Fourteen.............. Fourteen .............................................................................................................................. ...................................... ................................... .................................... ................................... ................................... ..................... ... 52 Answers to to Practice Practice Questions Questions.......................................................................................................... .......................................................................................................... 55 Sample amp e Examination xam nat on........................ on............... .......................................................................................................................... ................... ................... ................... .................... ..................... .................... ................... ................... .................. .................. ........... .. 57 Answers Answers to Sample Sam Sample ple Exa Ex Exam a .................. ......... .................................................................................................................. .................. .................. .................. .................. ................... .................. ................. ................... ................... ................ .............. ....... 74 7


6 | Test Preparation Guide for LOMA 280

Preface Before You You Begin… Important Information on How to Study and Prepare for a LOMA Examination Welcome to the Test Preparation Guide (TPG) for LOMA 280. This learning package was designed by LOMA to complement Principles of FLMI, AIRC, ACS, and of Insurance by Harriett E. Jones, J.D., FLMI, Steven R. Silver, J.D., FLMI, AFSI, ACS, AIRC, AAPA. Used along with the textbook, this TPG will help you master the course material as you prepare for the LOMA 280 examination. This TPG includes practice questions and a full-scale sample examination. The nature of LOMA’s self-study program offers two important benefits. First, you have the opportunity to learn important job-related information that will help you become a more knowledgeable and valuable employee. Second, a self-study program allows you to learn at your own pace and study at times that suit your own schedule. You may need some help in developing the skills necessary for self study, or you may have some qualms about taking examinations. Even if you’re very confident of your study skills, you need to understand what you will be expected to know once you have completed the course and how you can make sure you have mastered the course content. That’s why LOMA developed the TPG. LOMA provides valuable tips on effective studying and test taking strategies. “Study Tips” and “Becoming Test-Wise” include many practical pointers that will help you organize your study and prepare for the examination for this course. course. Both of these tools can be found found in the Exam Prep section of the Course Portal. The remainder of the TPG is your guide to mastering the course material. By reading re ading and working through this manual, you not only will discover how to focus your study, but you will also receive valuable practice in applying your knowledge and will be able to gauge your level of mastery of the material. The TPG is your key to learning success.


Preface | 7

Acknowledgments The TPG for LOMA 280 was designed to provide a comprehensive, self-directed learning approach to help students master the information in this course. As with all projects at LOMA, development of the TPG depended upon the combined efforts of many individuals. Our thanks go to Julia K. Wooley, FLMI, ACS, ALHC, HIA, MHP, who acted as Project Manager. Thanks also go to Tonya Vaughan for f or her work typesetting this text, and to Amy Stailey for her cover design. Sean Schaeffer Gilley, FLMI, ACS, AIAA, AIRC, FLHC, AAPA, ARA, CEBS, HIA, MHP, PAHM Melanie R. Green, FLMI, ACS, AIAA Martha Parker, FLMI, ACS, ALHC, AIAA Atlanta, Georgia 2011



Practice Questions

Learning objectives are now presented with the Practice Questions. The learning objectives in the assigned text are each e ach measured by one or more practice questions. Each practice question represents an example of how your knowledge of the learning objective may be measured on the examination for this course. Learning objectives appear in a shaded box above the question or questions associated with that learning objective. Additional Additional information on how to use learning objectives to guide your study and preparation for the exam appears in “Study “Study Tips,” Tips,” which can be accessed in the Course Course Portal under Exam Prep. An interactive version of these Practice Questions can be accessed in the Course C ourse Portal under Exam Prep.


Chapter 1 Practice Questions | 9

LEARNING OBJECTIVES & UESTIONS PRACTICE Q UESTIONS

Chapter One

Learning Objective: Distinguish between speculative risk and pure risk.

1.

Both individuals individuals and businesses experience two two kinds of risk—speculative risk—speculative risk risk and pure risk. risk. By definition, a pure risk is is one in which the possible outcomes include (1) (2) (3) (4)

loss, no loss, or gain gain only loss or no loss only loss only gain

Learning Objective: Describe various ways to manage financial risk.

2.

Individuals and businesses businesses often use risk management management as a means of identifying identifying and assessing assessing financial risks. To elim eliminate inate or reduce exposure to a specific financial risk, an individual can use at least one of four risk management techniques: avoid the risk, control c ontrol the risk, transfer the risk, or accept the risk. From the answer choices below, select the response that correctly describes an individual controlling the the risk of financial loss. (1) Lauren Knill insists that all passengers riding riding in her automobile wear seat belts at all times. (2) Colton Grey, Grey, a self-employed graphic design artist, purchased a disability income insurance policy that will provide him with monthly income benefits if he becomes totally disabled. (3) Because he is concerned about suffering neck and back injuries, Franklin Mulongo never never rides roller coasters at amusement parks. (4) After purchasing a new computer, Lisa Huggins Huggins rejected the manufacturer’s offer of an extended warranty on the new computer c omputer system. Learning Objective: Identify the five characteristics of insurable risks.

3.

In order for a risk—a potential loss—to be considered considered insurable, insurable, the the risk must have have certain characteristics. The following statements are about various risks. Select the answer choice that correctly represents a characteristic of insurable risk. (1) In order to provide insurance coverage coverage to an individual, individual, an insurer must be able to predict predict the losses that the proposed insured will experience. (2) In order for a potential loss to be be insurable, the element of chance must must be present. (3) Only those potential losses that would cause cause catastrophic financial damage to both the insurer and the insured are considered to be insurable. (4) For most types of insurance, insurance, an insurable loss must be definite definite in terms of the amount of the loss, but not in terms of when to pay the benefits.

Copyright © 2011 LL Global, Inc. All rights reserved. Answers to Practice Q uestions begin on page 55


4.

Every insurance insurance policy can be classified as as a valued contract contract or a contract of indemnity. indemnity. Nancy Upchurch is the policyowner-insured of a life insurance policy and a medical expense insurance policy. policy. Ms. Upchurch’s life life insurance policy can be classified classified as a (contract of indemnity / valued contract). Her medical expense insurance policy can be classified as a (contract of indemnity / valued contract). (1) (2) (3) (4)

5.

contract of indemnity indemnity / contract of indemnity contract of indemnity indemnity / valued contract contract valued contract / contract of indemnity indemnity valued contract / valued contract

The law of large large numbers states that, that, typically, typically, the more more times we observe observe a particular particular event, the (more / less) likely that our observed results will approximate the true probability—or likelihood—that the event will occur. Using this concept, insurers have been able to develop (mortality tables / morbidity tables) that indicate with great accuracy the number of people in a large group who are likely to die at each age. (1) (2) (3) (4)

more / mortality tables tables more / morbidity tables less / mortality tables less / morbidity tables

Learning Objective: Define antiselection and give examples of two factors that can increase or decrease the likelihood that an individual will suffer a loss.

6.

From an insurer’s standpoint, the tendency tendency of of individuals individuals who believe they they have have a greater-thanaverage likelihood of loss to seek insurance protection to a greater extent than do other individuals is known, by definition, as (1) (2) (3) (4)

reinsurance speculative risk antiselection moral hazard

Learning Objective: Identify four risk classes for proposed insureds.

7.

Insurance companies companies generally classify proposed insureds who have a significantly significantly greater-thanaverage likelihood of loss but who are still found to be insurable in a risk category known as (1) (2) (3) (4)

declined risks preferred risks standard risks substandard risks



Learning Objective: Define insurable interest and determine in a given situation whether the insurable interest requirement is met.

8.

Doris Crowell Crowell applied for a life life insurance policy on on her own life and named her next-door next-door neighbor, Patrick O’Neill, as the beneficiary of the policy e ven though they are not related re lated and have no relationship other than as neighbors. ne ighbors. At the the same time, Mr. M r. O’Neill applied for a life insurance policy on the life of Ms. Crowell and named himself as the beneficiary. According to insurable interest laws, an insurable interest most likely exists in (1) (2) (3) (4)

both of these these applications applications Ms. Crowell’s application, but not in in Mr. Mr. O’Neill’s application applica tion Mr. O’Neill’s application, applicati on, but not in Ms. Crowell’s application neither of these applications applications

Copyright © 2011 LL Global, Inc. All rights reserved. Answers to Practice Questions begin on page 55



Chapter Two

Learning Objective: Distinguish among the three types of business organizations and explain why insurance companies must be organized as corporations.

1.

In most countries, insurance companies companies and most other other businesses businesses are organized as corporations. corporations. One difference between a corporation and other forms of business organization is that (1) (2) (3) (4)

a corporation is less stable and less permanent than other forms of business organization organization a corporation’s corporation’s assets and liabilities belong to the corporation corporation itself, not to its owners a corporation’s corporation’s structure protects it from being being sued only a corporation dissolves dissolves if a majority owner owner dies

Learning Objective: Distinguish among stock insurers, mutual insurers, and fraternal benefit societies.

2.

The Benchmark Association is a nonprofit organization formed to provide social, as well as insurance, benefits to its members. Members Mem bers in the association share a common vocational background. Benchmark’s Benchmark’s members elect officers and and are members of local chapters, usually referred to as lodges, which hold regular meetings. Only lodge members and their families are permitted to own Benchmark insurance. insurance. Benchmark is best classified classified as a type of organization organization known as a (1) (2) (3) (4)

fraternal benefit benefit society society property/casualty (P&C) insurance company company partnership depository institution

Learning Objective: Describe the financial services industry and explain how insurance companies function within that industry.

3.

The following following statements are are about financial institutions. institutions. Three Three of the statements are true, and one of the statements is false. Select the answer choice containing the FALSE statement. (1) Insurance companies cannot be classified as financial institutions institutions because they do not function in the economy as financial fi nancial intermediaries. (2) Financial institutions serve serve as financial intermediaries by channeling funds from groups that act as suppliers of funds to groups that act as users of funds. (3) Financial institutions help help people, businesses, and governments save, borrow, borrow, invest, and otherwise manage money. (4) A financial institution institution is a business that owns primarily financial assets, such such as stocks and bonds, rather than fixed assets, such as equipment and raw materials. materials.



4.

Consider the following following consolidations in the financial services industry: Oak Financial Services and the Pine Bank recently consolidated to form one financial f inancial services corporation. After the consolidation, Pine Bank survived as a legal entity, entity, and Oak Financial Services ceased to exist. Emerald Financial Services purchased a controlling interest in Diamond Insurance. After this consolidation, both Emerald Financial Services and Diamond Insurance survived as separate legal entities. From the answer choices c hoices below, below, select the response that correctly indicates whether each consolidation transaction is a merger or an acquisition. (1) (2) (3) (4)

Oak and Pine transaction acquisition acquisition merger merger

Emerald and Diamond transaction acquisition merger acquisition merger

Learning Objective: Describe the roles that the federal and state governments play in U.S. insurance regulation.

5.

In the United States, States, the McCarran-Ferguson Act affects the regulation regulation of the insurance insurance industry industry.. The primary effect of the McCarran-Ferguson Act is that it (1) ensures uniformity in insurance insurance regulation among the the states (2) prohibits insurers from engaging engaging in a variety of practices that are considered considered unfair or deceptive (3) leaves insurance regulation to to the federal government, as long long as the states consider consider federal regulation to be adequate (4) leaves insurance regulation to to the state governments, as long as Congress considers state state regulation to be adequate

6.

In the United States, States, the the National National Association Association of Insurance Commissioners (NAIC) develops develops model laws and regulations re gulations.. One characteristic of the NAIC and the model m odel laws and regulations it develops is that the (1) (2) (3) (4)

NAIC is a governmental association association created by the U.S. federal government government function of the NAIC is to promote promote uniformity of state insurance insurance regulation states are required to adopt the NAIC’s model model laws and regulations as written states may modify model laws and regulations, but they must must adopt some form of each model law and regulation regulation



Learning Objective: Identify the two primary types of insurance regulation in most countries.

7.

Owners’ equity is is the difference difference between the amount of a company’s company’s assets and the amount of its liabilities, and it represents the owners’ financial interest in the company. Owners’ equity in a mutual insurance company consists of (1) (2) (3) (4)

both capital and surplus surplus capital, but not surplus surplus surplus, but but not capital neither capital capital nor surplus




Chapter Three

Learning Objectives: (1) Explain the difference between a valid contract, a void contract, and a voidable contract; and (2) Identify the four general requirements for the creation of a valid informal contract and describe how each of these requirements can be met in the formation of an insurance contract.

1.

Robert Houck purchased a life insurance insurance policy on his life from Classic Financial. Financial. Mr. Mr. Houck Houck purchased the policy after a court had declared him to be mentally incompetent. incompetent. In this situation, the contract for insurance is (1) (2) (3) (4)

void valid and binding on Classic voidable only by Mr. Houck Houck voidable by either Classic Classic or Mr. Mr. Houck

Learning Objective: Distinguish between formal and informal contracts, bilateral and unilateral contracts, commutative and aleatory contracts, and contracts of adhesion and bargaining contracts, and identify the types of contracts an insurance contract represents.

2.

A life insurance insurance contract is enforceable enforceable because the parties parties to the contract contract met met requirements concerning the substance of the agreement a greement rather than requirements concerning the form of the agreement. In addition, the insurer’s promise to pay the policy benefit is contingent on the death of the insured occurring while the policy is in force. This information indicates that a life insurance contract is (1) (2) (3) (4)

an informal, commutative contract an informal, aleatory contract contract a formal, commutative contract contract a formal, aleatory contract contract

Learning Objective: Identify the four general requirements for the creation of a valid informal contract and describe how each of these requirements can be met in the formation of an insurance contract.

3.

The following following statements are about the general general requirements that must must be met for a valid life insurance contract to be formed. Select the answer choice containing the correct statement. (1) Only an insurer must express its its intent to be bound by the terms of an insurance contract in order to fulfill the requirement of mutual assent. (2) An applicant gives the application and the initial initial premium and promises to pay the renewal premiums as consideration for a life life insurance contract. (3) In order for an insurance contract to be be valid, each party to the contract must give give or promise something that is is of value to the other other party. (4) The requirement of lawful purpose purpose in the making of an insurance insurance contract is fulfilled by the presence of an offer and the acceptance of that that offer. offer.



4.

The following following statements statements are are about contractual capacity in the formation of contracts. contracts. Select the answer choice containing the correct statement. (1) If an insurer issues a policy to a person person who is younger than the the permissible age to purchase insurance, the insurer insurer can sue to avoid the policy. policy. (2) An insurer acquires its legal legal capacity to issue an insurance insurance contract by being licensed licensed or authorized to do business as an insurer by the proper regulatory authority. authority. (3) To establish a valid contract in most jurisdictions, an individual individual must first prove his legal capacity in a court of law. (4) Corporations are generally presumed presumed to have the same contractual capacity capacity as that of a minor. Learning Objective: Distinguish between formal and informal contracts, bilateral and unilateral contracts, commutative commutative and aleatory contracts, and contracts of adhesion and bargaining bargaining contracts, and id entify the types of contracts an insurance contract represents. represents.

5.

Different types types of of contracts have certain characteristics. In a life insurance insurance contract, contract, only the insurer makes a legally enforceable e nforceable promise when entering into the contract. This characteristic of an insurance contract identifies it as a (1) (2) (3) (4)

bilateral contract bargaining contract contract of of adhesion adhesion unilateral contract




Chapter Four

Learning Objective: Describe the legal reserve system, and explain how a product’s financial design allows a life insurance company to meet its policy reserve requirements.

1.

In the insurance industry industry,, policy reserves represent the amount amount an insurer estimates estimates it will need for the purpose of (1) (2) (3) (4)

2.

accumulating surplus funds funds reinsuring risks risks for direct writers paying future benefits benefits to policyowners policyowners paying stockholder dividends dividends to the owners of its its stock

For this question, if answer answer choices (1) through (3) are all correct, select answer answer choice choice (4). Otherwise, select the one correct answer a nswer choice. The system insurance companies use to set financial values for life insurance policies is generally known as the legal reserve system. The premise(s) on which this system is based include (1) that the amount of benefits payable payable should be specified or calculable in advance of the insured event (2) that companies should collect collect in advance the money needed to fund a policy reserve so that the insurer will have sufficient funds available to pay claims and expenses as they occur (3) that the amounts a customer customer pays for a life insurance policy should should be related to the amount of risk the insurance company assumes for that policy (4) all of the above Learning Objective: Identify and define the three primary elements in the financial design of a life insurance product, and explain how each element affects a product’s financial design.

3.

For an insurance insurance product, product, the cost of benefits is the value of all benefits under under the product. The cost of benefits for a single life insurance product can be calculated by (1) adding a charge for operating expenses to each year’s potential benefit benefit payable minus expected investment earnings (2) subtracting all the potential benefits benefits payable from the total premiums the company expects to receive (3) multiplying all the potential benefits payable payable by the expected probability that each potential benefit will will be payable (4) dividing all the potential benefits payable payable by the expected probability that each potential benefit will be payable



Learning Objectives: (1) Identify and define the three primary elements in the financial design of a life insurance product, and explain how each element affects a product’s financial design, and (2) Explain how insurers use mortality tables in the financial design of products, and describe the effect that mortality rates have on the cost of benefits and the premium rate for a block of policies.

4.

The following following statements statements are are about the mortality mortality rates that that are shown in mortality mortality tables. Select Select the answer choice containing the correct statement. (1) In general, the higher the mortality rate for a group of insureds of the the same age and sex, the lower the premium rate. (2) Mortality rates for males typically typically are lower than the mortality rates rates for females of the same age. (3) A mortality table that shows shows separate mortality rates for smokers and nonsmokers is referred to as a composite mortality table. (4) A mortality experience experience table is a mortality table that reflects the actual mortality of an insurance company’s insureds. Learning Objective: Describe the effect of compound interest on investment earnings, and calculate the amount of interest earned on a given sum of money.

5.

Dan Ruggiero Ruggiero loaned $1,000 $1,000 to his sister, sister, Ronda Ronda Houseman. Houseman. Mr. Mr. Ruggiero Ruggiero charged his sister sister a 10 percent interest rate, compounded annually. At the end of two years, Ms. Houseman wanted to pay back the entire loan plus the total interest accrued on the loan. This information indicates that Ms. Houseman should pay Mr. Ruggiero a total of (1) (2) (3) (4)

$1,000 $1,020 $1,200 $1,210

Learning Objective: Identify and define t he three primary elements in the financial design of a life insurance product, and explain how each element affects a product’s product’s financial design.

6.

The operating expenses in an insurance insurance product design are are the expenses expenses that arise in in the normal normal course of the insurer’s operations. An insurer’s operating expenses include all of the following costs EXCEPT (1) (2) (3) (4)

taxes payroll office expenses benefit payments



Learning Objective: Explain the purpose of using conservative values in the financial design of a life insurance product.

7.

Using conservative conservative values in financial design provides provides to insurers a risk margin against adverse developments. Conservative values for specific life insurance product elements generally take the form of (1) (2) (3) (4)

mortality rates that are higher than expected investment earnings earnings that are higher than than expected operating expenses that that are lower than expected profits that are higher than than expected

Learning Objective: Define premium rate, and calculate the annual premium amount for a given life insurance policy.

8.

The annual premium rate for a $500,000 life life insurance insurance policy policy is expressed as $4 per $1,000 of of coverage. The annual premium amount for this policy is (1) (2) (3) (4)

$20 $200 $2,000 $20,000

operates. Learning Objective: Explain how the level premium system operates.

9.

In the level premium premium system of financial design, design, the premium rates charged charged for level premium policies (1) (2) (3) (4)

increase as an insured’s insured’s age increases decrease as an insured’s insured’s age age increases are higher than needed to pay claims claims and expenses in earlier policy years are lower than needed to pay claims and expenses in earlier policy years years




Chapter Five

Learning Objective: Identify the common personal and business needs that life insurance can meet.

1.

Colleen Moore Moore is the policyownerpolicyowner-insured insured of a life insurance insurance policy that names names her 32-year-old son, David, as the beneficiary. beneficiary. If Ms. Moore dies while the policy is in force and while David is still alive, then the death benefit of the policy will be payable to (1) Ms. Moore’s estate, and the death benefit, if paid in a lump sum, most likely will be considered taxable income to the estate (2) Ms. Moore’s estate, and the death benefit, if paid in a lump sum, most likely will not be considered taxable income to the estate (3) David, and the death benefit, if paid paid in a lump sum, most likely will will be considered taxable income to David (4) David, and the death benefit, if paid paid in a lump sum, most likely will will not be considered taxable income to David

2.

George Remick developed a plan that considers considers the amount of of assets and debts debts that he is likely to have at the time of his death. The plan also considers how Mr. Remick can best preserve those assets so that they can ca n be distributed as he desires. The plan Mr. Remick developed is known, by definition, as (1) (2) (3) (4)

a key person insurance plan plan an estate plan a business continuation continuation insurance insurance plan a buy-sell buy-sell agreement

Learning Objective: Describe the coverage provided by level term, decreasing term, and increasing term life insurance policies, and explain when the premium charged for term life insurance coverage may increase.

3.

Harris Anderson purchased a new home and obtained a 30-year 30-year mortgage mortgage from the HomeSweetHome Mortgage Company. Company. The terms of the mortgage loan contract required Mr. Anderson Anderson to purchase mortgage life insurance and to name HomeSweetHome as the beneficiary of the mortgage life insurance insurance policy. policy. Mr. Anderson purchased mortgage mortgage life insurance from the Beachside Insurance Company. Company. The following statements are about this situation. Select the answer choice containing the correct statement. (1) HomeSweetHome Mortgage Company is a party to the mortgage life insurance insurance contract that Mr. Anderson purchased. (2) Beachside Insurance is a party to the mortgage loan contract that Mr. Anderson obtained. (3) The amount of the renewal premium Mr. Anderson Anderson will pay for his mortgage life insurance policy is likely to decrease decrease throughout the 30-year 30-year term of his mortgage loan. (4) The amount of the policy benefit payable at any given time under Mr. Anderson’s Anderson’s mortgage life insurance policy generally equals the amount Mr. M r. Anderson owes on the mortgage loan.



4.

The following following statements statements are are about family income coverage coverage and credit life insurance. insurance. Select the answer choice containing the correct statement. (1) Family income coverage is a plan of increasing term life insurance. (2) Family income coverage provides a stated monthly monthly income benefit amount to to the beneficiary—typically the insured’s insured’s surviving surviving spouse—if the insured dies during the term of coverage. (3) The amount of benefit payable under a credit life insurance policy usually remains level over the duration of the loan. (4) The policy benefit of of a credit life insurance policy may be paid to a beneficiary other than the lender, or creditor c reditor,, if the insured borrower dies during the policy’s term. Learning Objective: Describe renewable term life insurance and convertible term life insurance.

5.

Ana Maria Avila purchased purchased a $100,000 $100,000 15-year 15-year renewable term insurance insurance policy on her life. At the end of the 15-year term, the renewal provision in Ms. Avila’s Avila’s policy most likely gives her the right, within specified limits, to renew her insurance c overage (1) (2) (3) (4)

6.

without having to submit submit evidence of her insurability insurability for a one-year term, but not for another 15-year term after first undergoing undergoing a required medical examination at the same premium rate she was charged charged for the original 15-year 15-year term policy

Edgar Whitefeather is the policyowner-insured policyowner-insured of a five-year five-year term life insurance insurance policy policy for which the face amount remains the same throughout the term of the insurance coverage. One feature of Mr. M r. Whitefeather’s policy gives him the right to change the term policy to a cash value life insurance policy without providing evidence that he continues to be a n insurable risk. This information indicates that Mr. Whitefeather’s insurance policy can be characterized as (1) (2) (3) (4)

a renewable term insurance policy an increasing term insurance policy policy a decreasing term term insurance policy a convertible term insurance policy

Learning Objective: Describe the operation of a return of premium (ROP) term policy.

7.

Kaitlin Miller, age 35, purchased a $250,000 30-year return return of premium (ROP) (ROP) term insurance policy from the Kumquat Insurance Insurance Company. Company. Ms. Miller paid annual premiums of $700. Ms. Miller paid all required premiums and was alive at the end of the 30-year term when the policy expired. This information information indicates that that (1) (2) (3) (4)

Ms. Miller’s policy expired expired without Kumquat making making any payment to anyone Kumquat paid $21,000 $21,000 to Ms. Miller Miller Kumquat paid $250,000 to to the beneficiary of Ms. Miller’s policy policy Kumquat paid $250,000 $250,000 to Ms. Miller Miller




Chapter Six

Learning Objective: Define cash value life insurance and distinguish it from term life insurance.

1.

Whole life insurance products products and term life insurance products products differ differ as to whether they contain contain a savings element, and whether they offer insurance coverage for the entire lifetime of the insured or for only a certain period of time. (Term / Whole) life insurance builds a cash value that functions as a savings element. (Term / Whole) life insurance provides protection for the entire lifetime of the insured, as long as the policy remains in force. (1) (2) (3) (4)

Term / Term Term / Whole Whole / Term Whole / Whole

Learning Objective: Identify the common characteristics of whole life insurance, modified whole life insurance, and joint whole life insurance, and describe the features that differentiate these types of whole life insurance.

2.

The following following statements are are about two types types of whole life life insurance insurance policies: policies: limited-payment limited-payment policies and continuous-premium continuous-premium policies. Select the answer answer choice containing the the correct statement. (1) The annual premium for a limited-payment whole life insurance policy is greater than the limited-payment whole annual premium for an equivalent continuous-premium whole life insurance policy. policy. (2) The cash value of a continuous-premium whole life insurance policy builds more rapidly than does the cash value under an equivalent limited-payment whole life insurance policy. policy. (3) Under a limited-payment whole whole life insurance policy, policy, life insurance coverage expires at the end of the specified premium payment period. (4) A continuous-premium whole life insurance policy is considered to be paid up when the insured reaches age 65.

3.

Some insurers issue modified-premium whole life insurance insurance policies. policies. According to the terms of most modified-premium policies, the amount of the annual premium changes after a specified initial time period. Compared to a continuous-premium continuous-premium whole life insurance policy with the same face amount, a modified-premium whole life insurance policy has an initial annual premium that is normally (1) (2) (3) (4)

lower, and a cash value value that builds more quickly quickly lower, and a cash value value that builds more slowly slowly higher, and a cash value that builds more quickly quickly higher, and a cash value value that builds more more slowly



4.

Sang-jin Kwon, age 42, pays level level premiums for a type of whole life insurance policy policy.. The policy specifies that the face amount amount will decrease from $300,000 $300,000 to $200,000 when Mr. Mr. Kwon reaches age 60, and then decrease again from $200,000 to $100,000 when he reaches age 70. From the answer choices c hoices below, below, select the response that correctly identifies the type of policy Mr. Kwon purchased, and whether the annual premium Mr. Kwon pays for t his policy is higher or lower than than the annual a nnual premium he would pay for a continuous-premium continuous-premium whole life insurance policy that provided $300,000 $300,000 of coverage throughout throughout his lifetime. (1) (2) (3) (4)

5.

Type of policy modified-premium policy modified-premium policy modified coverage policy modified coverage policy

Annual premium rate lower than for a continuous-premium continuous-premium policy higher than for a continuous-premium continuous-premium policy lower than for a continuous-premium continuous-premium policy higher than for a continuous-premium continuous-premium policy

Doug Cooper purchased a whole whole life insurance policy that insures insures both both him and his wife, Jennifer, and provides funds to pay any estate taxes that may be levied after their deaths. The policy specifies that the death death benefit will be paid only only after both Doug and Jennifer Jennifer have died. This information indicates that the type of insurance policy Doug purchased is (1) (2) (3) (4)

an endowment insurance policy policy a last survivor life insurance policy policy a joint whole whole life insurance policy policy a family policy

Learning Objective: Explain how universal life insurance differs from whole life insurance in terms of its separate policy elements and its flexible premiums, face amount, and death benefit.

6.

One true statement statement about about a universal life insurance policy is that the (1) policy is treated as a life insurance insurance product under United United States federal tax laws, regardless of the size of the policy’s cash value in relation to its death benefit (2) policyowner decides, within within certain limits, what the policy’s face amount amount will be, the amount of the death benefit payable, and the amount of premiums he will pay for that coverage (3) policyowner may not use the the cash value of the policy as security security for a policy loan (4) policy elements, such as mortality mortality charges, interest rate, rate, and expenses, are combined into one bundle and stated in the policy as a single periodic premium amount that the policyowner must pay to keep keep the policy in force



Learning Objective: Describe how variable life insurance allows policyowners to decide how their premiums and cash values are invested.

7.

The following following statements statements are are about variable life (VL) insurance in the United States. Select Select the answer choice containing the correct statement. (1) A VL VL insurance policy’s policy’s premiums and cash values are invested in an investment account, which the insurer maintains separately from its general investment account. (2) The death benefit provided by a VL insurance insurance policy remains constant throughout the the life of the policy. (3) VL insurance policies offer offer policyowners guaranteed investment investment earnings and minimum cash values. (4) The insurance company alone assumes the investment risk of a VL insurance insurance policy. policy. Learning Objective: Describe the features that variable universal life insurance products share with universal life insurance and variable life insurance products. products.

8.

Margaret Reece Reece purchased a variable variable universal universal life (VUL) insurance insurance policy from the the Patrician Life Insurance Company. Ms. Reece’s policy combines features of universal life insurance and variable life insurance. One characteristic of Ms. Reece’s VUL insurance policy is that the (1) (2) (3) (4)

policy elements are not listed separately separately premiums are fixed face amount is flexible flexible policy has a flexible interest interest rate with a guaranteed minimum

characteristics of endowment endowment insurance. Learning Objective: Describe the characteristics

9.

The difference difference between an endowment endowment insurance policy policy and a cash value value life life insurance policy is that only the endowment insurance policy (1) pays a fixed benefit whether the insured survives to the policy’s policy’s maturity date or dies before that maturity date (2) has premiums that are level throughout throughout the term of the policy (3) steadily builds builds a cash value (4) receives favorable federal income income tax treatment in the United States




Chapter Seven

Learning Objective: Identify and describe three types of supplemental disability benefits that life insurance policies may provide.

1.

Rusty Shackleford is the policyownerpolicyowner-insured insured of a whole whole life insurance policy issued by the Mountainview Life Insurance Company. Mr. Shackleford was injured in an accident and was unable to work for 18 months. After Mr. Shackleford satisfied satisfied a three-month waiting period, Mountainview began paying the renewal r enewal premiums on Mr. Shackleford’s policy, policy, and the policy’s cash value continued to increase just as if Mr. Shackleford were paying the premiums himself. This information indicates that Mr. M r. Shackleford’s Shackleford’s policy contained a (1) (2) (3) (4)

2.

waiver of premium premium for payor payor benefit waiver of premium for disability (WP) (WP) benefit paid-up additions additions option benefit disability income benefit

One benefit that may may be added added to an individual individual life insurance policy is the disability disability income benefit. One true statement about a supplemental supplemental disability income benefit is that (1) the insured must be totally totally disabled to receive the benefit benefit (2) the insurer begins paying benefits at the start of the disability disability (3) life insurance policies that include include a disability income benefit rarely include a waiver waiver of premium for disability (WP) (WP) benefit as well (4) the amount of the monthly disability income benefit is a percentage of the insured’s insured’s current earnings Learning Objective: Explain the coverage that an accidental death benefit rider provides and give examples of common exclusions.

3.

Rachel Loo, age 29, died when the commercial airplane airplane on which she she was traveling as a passenger crashed, killing everyone everyone on board. At the time of her death, Ms. Loo was insured insured by a $300,000 whole life insurance policy with a typical double indemnity accidental death benefit rider. This information indicates indicates that the insurer is liable for paying the designated beneficiary of Ms. Loo’s policy (1) (2) (3) (4)

$0 $300,000 $600,000 $900,000



4.

One type of supplemental supplemental accident benefit is the accidental death and dismemberment (AD&D) benefit. AD&D benefits generally specify that the the (1) insured must be totally disabled and unable to work work in order to receive any benefits (2) insurer will pay both accidental accidental death benefits and dismemberment dismemberment benefits for injuries injuries suffered in the same accident (3) insured must suffer suffer the actual physical loss of a limb to to qualify for dismemberment benefits (4) dismemberment benefit is payable payable if an accident causes the insured insured to lose any two limbs limbs or sight in both eyes Learning Objective: Identify three types of accelerated death benefit riders and describe the differences differences among those riders.

5.

Accelerated death benefits, also known as living living benefits, allow allow a policyowner-insured policyowner-insured to to receive all or part of the policy’s policy’s death benefit before the insured’s death if certain conditions are met. Three commonly offered types of accelerated ac celerated death benefits are the terminal illness (TI) benefit, the dread disease (DD) benefit, be nefit, and the long-term care (LTC) (LTC) insurance benefit. The following statements are about these different types of accelerated death benefits. Select the answer choice containing the correct statement. (1) Insurers generally offer accelerated accelerated death benefit coverage on policies policies of all face amounts. (2) Insurers typically charge charge an additional premium amount amount for all three types of accelerated death benefits. (3) The payment of an accelerated death benefit benefit reduces the death benefit that that will be paid to the beneficiary at the insured’s insured’s death by the amount of the accelerated death benefit paid. (4) Insurers pay only lump-sum lump-sum benefits under all three types types of accelerated death benefits. Learning Objective: Describe three types of insurance riders that expand a life insurance policy’s coverage to insure more than one individual.

6.

Sally Warner, Warner, the policyowner-insured policyowner-insured of a whole whole life insurance insurance policy, policy, wants to add a second second insured rider to the policy so that her business partner, Patricia Skelton, will be provided with life insurance coverage. The insurer most likely will base the premium rate for the coverage provided by the rider on (1) (2) (3) (4)

the combined risk characteristics of of Ms. Warner Warner and Ms. Skelton the risk characteristics of Ms. Warner only the risk characteristics characteristics of Ms. Skelton only a flat amount that the company charges charges for all second insured insured riders



Learning Objective: Identify two types of insurability benefit riders and explain how they allow a life insurance policyowner to purchase additional insurance coverage.

7.

Scott Herbermann is the the policyowner-insured policyowner-insured of a $200,000 whole life insurance policy. policy. The policy includes a supplemental supplemental benefit rider that gives gives Mr. Herbermann the right right to purchase $25,000 of additional whole life insurance at age a ge 34, age 37, and age 40, without submitting evidence of insurability. insurability. This information indicates that Mr. Herbermann’ Herber mann’ss policy includes the type of supplemental benefit known as (1) (2) (3) (4)

an additional insured rider a paid-up additions additions option benefit benefit a guaranteed insurability insurability (GI) (GI) benefit credit life insurance




Chapter Eight

Learning Objective: Describe the free-look provision of an insurance policy.

1.

Ginger Harrison applied for an individual individual $250,000 insurance insurance policy policy on her life and paid the initial premium. The insurer issued the policy as applied for, and the insurer’s agent delivered the policy to Ms. Harrison on June June 15. The policy included a typical 10-day free-look period. Ms. Harrison was killed in an a n automobile accident on June 22. She never indicated whether she intended to keep the policy or return it to the insurer. In this situation, the named beneficiary is entitled to receive (1) $250,000, because Ms. Harrison’s Harrison’s coverage was in effect during the 10-day 10-day freelook period (2) a return of the initial premium only, only, because Ms. Harrison had not advised the insurer of her decision to keep or return the policy (3) a return of the initial premium only, only, because Ms. Harrison’s death occurred during the 10day free-look period (4) nothing, because Ms. Harrison’s Harrison’s coverage would not have gone into effect until after the expiration of the 10-day free-look period Learning Objective: Identify the documents that make up the entire contract between the owner of a life insurance policy and the insurer.

2.

The wording of the entire contract provision provision in a life insurance policy policy varies varies according to whether the policy is a closed contract or an open contract. The following statements are about these two types of contracts. c ontracts. Select the answer choice containing the correct statement. (1) The entire contract contract provision provision in a closed contract typically states that the entire insurance contract consists of the policy, policy, any attached riders, and the attached copy of the application for insurance. (2) Because insurance policies policies issued by fraternal insurers are closed contracts, the insurer must attach a copy of the fraternal society’s charter, constitution, constitution, and bylaws to the policy in order for the contract to be valid. (3) All individual life life insurance policies policies are open contracts. (4) The entire contract provision provision in an open contract allows oral statements to modify the terms of the policy.



Learning Objective: Explain the purpose and operation of the incontestability provision.

3.

Each of the situations below describes a misrepresentation misrepresentation made made in the application application for an individual life insurance policy. The insurer discovered the misrepresentations after receiving death claims on the policies. In each case, the insurance policy contains a typical two-year incontestability provision: Claire Bodin stated on her application a pplication for insurance that she had broken her right r ight wrist in a jogging accident, when in fact, she had broken her left wrist. Ms. Bodin died during her policy’s policy’s contestable period. period. Miriam Kauffman stated on her application for insurance that she had been treated for a chest cold when, in fact, she had been treated for cancer. Ms. Kauffman died of cancer three years after the policy was issued. Clayton Stuckey stated on his application for insurance that he h ad received a routine medical check-up on February 26, when in i n fact, the visit was a post-operative visit following heart bypass surgery. surgery. Mr. Stuckey died 18 months after the t he policy was issued. With regard to these situations, it most likely is correct to say that the insurer has the right to avoid the contract on the ground of a material misrepresentation in the application(s) submitted by (1) (2) (3) (4)

Ms. Bodin, Ms. Kauffman, Kauffman, and Mr. Mr. Stuckey Ms. Bodin only Ms. Kauffman only Mr. Stuckey only

Learning Objective: Apply the terms of the standard grace period provision in a given situation to determine whether a life insurance policy has lapsed for nonpayment of premium.

4.

Creighton Madden Madden was the policyowner-ins policyowner-insured ured of a $100,000 $100,000 term life insurance policy that contained a typical grace period provision. The policy’s annual premium of $500 was due on September 1 of each year. Mr. Mr. Madden died on September 14, 2010, without having paid the renewal premium due on September 1, 2010. At the time of his death, Mr. Madden had paid a total of $10,000 in premiums to the insurer. In this situation, the amount the insurer most likely paid Mr. Madden’s Madden’s designated designated beneficiary was (1) (2) (3) (4)

$0 $10,000 $99,500 $100,000



Learning Objective: Identify situations in which a life insurance policy can be reinstated and the conditions the policyowner must meet to reinstate the policy.

5.

Antonio Castellano was the policyowner-insured policyowner-insured of a traditional traditional whole whole life insurance insurance policy that lapsed two years ago. Mr. Castellano now wishes to reinstate the lapsed policy. policy. At the time his policy lapsed, there were no outstanding outstanding policy loans. If the reinstatement provision provision in his policy is typical, then the conditions Mr. Castellano must meet in order to reinstate his policy include (1) completing a reinstatement application within within the time frame stated in the reinstatement provision and presenting satisfactory evidence of his his continued insurability insurability only (2) completing a reinstatement application within within the time frame stated in the reinstatement provision and paying all all back premiums plus interest interest on those premiums premiums only (3) presenting satisfactory evidence evidence of his continued insurability and paying all back premiums plus interest on those premiums only (4) completing a reinstatement application within within the time frame stated in the reinstatement provision, providing providing satisfactory evidence of of his continued insurability insurability, and paying all back premiums plus interest on those those premiums Learning Objective: Determine the action an insurer likely will take if it discovers a misstatement of the age or sex of the person insured by a life insurance policy.

6.

Tom Tom Espeland applied to the Mosaic Insurance Company Company for an insurance insurance policy on the life of his mother, Joanna. He incorrectly stated on the application that Joanna was age 50, when in fact, she was 53 years old. The policy contained a typical misstatement of age provision. Mosaic discovered the misstatement of age when processing a claim for the policy’s death benefits. In this situation, Mosaic most likely will (1) pay the policy’s face amount based on the age stated in the insurance application application (2) reduce the policy’s face amount to the amount that the premiums premiums paid would have purchased had Joanna’s Joanna’s age been stated correctly on the insurance application application (3) give the policy beneficiary the the option to receive as a refund any premium amount difference caused by the misstatement rather than adjust the policy’s policy’s face amount (4) declare the policy void because Joanna’s age was was misrepresented on the the insurance applicatio a pplication n



Learning Objective: Describe the rights provided by a policy loan provision and a policy withdrawal provision, and explain the differences between a policy loan and a commercial loan.

7.

Cash value life insurance insurance policies policies typically typically grant grant the policyowner the right right to borrow money money from the insurer by using the cash value of the policy as security for the loan. The following statements are about the characteristics of such policy loans. Select the answer choice containing c ontaining the correct statement. (1) Insurers typically do not permit policyowners policyowners to take out policy loans on universal life insurance policies. (2) A policy loan is an advance payment of part of the amount that the insurer eventually eventually must pay out under the life insurance insurance policy. policy. (3) A policy loan creates a debtor-creditor debtor-creditor relationship between the policyowner policyowner and the insurer. (4) A policyowner policyowner has the right to take out a policy loan for any amount up to the policy’s face amount. Learning Objective: Identify and describe the nonforfeiture options typically included in cash value life insurance policies.

8.

The following following statements statements are are about the nonforfeiture nonforfeiture options options available available to to policyowners policyowners of of life insurance policies that build cash values. Select the answer a nswer choice containing the correct statement. (1) Coverage issued under the reduced reduced paid-up insurance nonforfeiture nonforfeiture option does not not have a cash value. (2) Once a policyowner selects the the extended term insurance nonforfeiture nonforfeiture option, the policyowner loses the right right to cancel the extended term insurance insurance and surrender the policy for its remaining cash value. (3) Under the cash payment nonforfeiture option, when a policyowner surrenders a policy policy,, the insurer may subtract the amount of any outstanding policy loan, plus any interest on the loan, from the cash c ash surrender value amount listed in the policy. (4) Under the reduced paid-up nonforfeiture nonforfeiture option, any supplemental supplemental benefits that were available on the original policy, such as accidental death benefits, are usually available when the policy is continued as reduced paid-up insurance.



include in individual life lif e Learning Objective: Identify the exclusions that insurers sometimes include insurance policies.

9.

Jutta Kindermann Kindermann was insured under under a $250,000 $250,000 life insurance policy that contained contained a typical accidental death benefit rider and a typical two-year suicide exclusion provision. Three years after Ms. Kindermann’s policy was issued, Ms. Kindermann died, and it was determined that she had committed suicide. At the time time of her death, the policy was in force, and there were no unpaid premiums or policy loans. In this situation, the insurer most likely was obligated to pay the beneficiary of Ms. Kindermann’s policy (1) (2) (3) (4)

nothing, because Ms. Kindermann committed committed suicide a return of premiums paid for the policy policy only the basic death death benefit only both the basic death benefit and and the accidental death benefit



LEARNING OBJECTIVES & UESTIONS PRACTICE Q UESTIONS 1.

Chapter Nine

An insurance policy is a contract between the the insurer insurer and the policyowner policyowner and is subject to the rules of contract law. An insurance policy also is a type of property and, thus, is subject to the principles of property law. law. In legal terminology, terminology, property is classified as either real property property or personal property and as tangible tangible property or intangible intangible property. property. With With regard to these classifications, an insurance policy is classified correctly as (1) (2) (3) (4)

tangible real real property property tangible personal personal property property intangible real property property intangible personal personal property property

Learning Objective: Distinguish between primary and contingent beneficiaries and between revocable and irrevocable beneficiaries.

2.

Lindsay Inthachak was was the policyowner-insured policyowner-insured of a whole whole life life insurance insurance policy. policy. Lindsay designated her husband, Stephen, as the party to receive the policy proceeds following her death. Lindsay designated their daughter, Lily, Lily, to receive the policy proceeds if Stephen predeceases Lindsay. Lindsay. In this situation, Stephen is the type of policy beneficiary known as a (1) (2) (3) (4)

3.

contingent beneficiary primary beneficiary secondary beneficiary successor beneficiary

The following following statements are about about revocable revocable and irrevocable irrevocable beneficiary designations. Select the answer choice containing the correct statement. (1) A beneficiary designation is is said to be revocable if the policyowner has the right to change the beneficiary designation only after obtaining the beneficiary’s beneficiary’s consent. (2) The vast majority of beneficiaries of life life insurance policies are irrevocable beneficiaries. (3) A revocable beneficiary’s beneficiary’s interest in a life insurance insurance policy during the insured’ insured’ss lifetime is referred to as a “mere expectancy” of receiving the policy proceeds. (4) A beneficiary designation is is said to be irrevocable if the policyowner has the unrestricted right to change the designation during the life of the insured.



Learning Objective: Identify the policy dividend options that most commonly are included in participating life insurance policies, and describe the characteristics of each option.

4.

A participating policy is is a type of policy under under which the policyowner policyowner shares in the the insurance company’s company’s divisible surplus through the receipt of policy dividends. A nonparticipating policy is a type of policy in which the policyowner does not share in the insurer’s surplus. The following statements are about participating and nonparticipating life insurance policies. Select the answer choice containing the correct statement. (1) Although policy dividends are not guaranteed guaranteed to be paid, most insurers periodically pay participating life insurance policies that are expected to remain dividends on their participating re main in force over a long term. (2) Generally, Generally, the premium rates for participating policies are lower than those for equivalent participating policies policies. nonparticipating policies. (3) In setting premium rates for nonparticipating policies, policies, insurers typically use more conservative assumptions regarding mortality, mortality, investment earnings, and expenses than they do for equivalent participating policies. participating policies. (4) A policy dividend is not considered considered a refund of part of the premiums premiums a participating participating policyowner paid during during a policy year. year.

5.

A participating life insurance insurance policy is a type of policy under which the policyowner policyowner shares in the insurer’s divisible surplus through the receipt of policy dividends. The following statements are about these policy dividends. Select the answer choice containing the correct statement. (1) The amount payable as an annual policy dividend is determined during the risk assessment assessment process in an insurer’s underwriting underwriting department. (2) Generally, Generally, dividend amounts paid on participating life life insurance policies decrease substantially with the age of the policy. (3) The terms of some life insurance policies policies state that the policy must must be in force for two years before any policy dividends are payable. (4) An applicant for a participating policy usually selects a dividend dividend option during the application process and once selected, the dividend option cannot be changed over the life of the policy.

6.

The owner of a participating life insurance policy may receive policy dividends dividends in a number of different ways, called dividend options. Under one type of dividend option, the insurer applies policy dividends toward toward the payment of renewal premiums. premiums. By definition, this dividend dividend option is known as the (1) (2) (3) (4)

accumulation at interest option option automatic dividend dividend option option cash dividend dividend option option premium reduction dividend option



7.

When Craig Alred purchased purchased a participating whole life life insurance policy on on his life, he selected the cash dividend option. After the policy had been in force for five years, Mr. Alred requested that the dividend option be changed to the paid-up additional insurance dividend option. With regard to this situation, it is correct to say that (1) any paid-up additional insurance issued under this new dividend dividend option will be one-year one-year term insurance in an amount equal to the policy’s cash value (2) the premium charged for any paid-up additional insurance issued issued under this new dividend option will include an amount to cover the insurer’s expenses (3) the insurer will require Mr. Alred to provide satisfactory evidence of insurability insurability before changing to this new dividend option (4) any paid-up additional insurance insurance issued under this new dividend option will be whole life insurance in whatever face fac e amount the dividend can provide at Mr. M r. Alred’s Alred’s attained age of a life l ife insurance policy can Learning Objective: Identify the methods by which ownership of be transferred.

8.

An assignment assignment of a life insurance policy policy may take one of of two forms: an absolute assignment assignment or a collateral assignment. With respect to a collateral assignment, assignment, it is correct to say that the assignee’s rights (1) (2) (3) (4)

9.

include all ownership ownership rights granted to the policyowner policyowner are limited to those ownership rights that directly concern the monetary value value of the policy are permanent, rather than temporary temporary are limited to the right to select select a settlement option only only

Tim Parnell purchased a $50,000 whole life life insurance policy on the life of his his daughter, daughter, Samantha, shortly after her third birthday. birthday. The policy contained a typical change of ownership provision. Using the the endorsement method, Tim Tim transferred ownership of of the policy to Samantha as a gift when she turned 23. With regard to making the transfer of ownership using the endorsement method in this situation, it most likely is correct to say that (1) Tim must enter into a separate assignment agreement with Samantha that will will exist apart from the life insurance policy (2) Tim must make a collateral collateral assignment of the life insurance insurance policy to Samantha (3) the insurer must issue a new life insurance insurance policy that names Samantha Samantha as the new policyowner (4) Tim must notify the insurer, insurer, in writing, of the change of ownership Learning Objective: Identify the person in a given situation who is entitled to receive the proceeds of a life insurance policy following the insured’s death.

10. Ian Muldoon was the policyowner policyowner of a $150,000 life life insurance policy policy insuring the the life of his wife, Sarah. The policy named Hannah, Sarah’s mother, mother, as primary beneficiary, and Joseph, Sarah’s brother, as contingent beneficiary. beneficiary. When Sarah S arah died, Ian, Hannah, and Joseph had all predeceased her. This information indicates indicates that the policy proceeds proceeds are payable to (1) (2) (3) (4)

Ian’s estate Sarah’s estate Hannah’s estate Joseph’s estate



simultaneous death act, and explain Learning Objective: Describe the general rule stated in a simultaneous how that rule is affected if a policy contains a survivorship clause.

11. Sharon Rickett was the the policyowner-insured policyowner-insured of a life life insurance policy policy that named her husband, husband, Brandon, as the primary beneficiary and their daughter, Abigail, as the contingent beneficiary. beneficiary. Sharon and Brandon were both killed in an automobile accident, and there was no proof as to which of them died first. f irst. Sharon’s policy policy did not provide for common disasters. If the Ricketts lived in a state that has enacted a typical simultaneous death act, and if Abigail was still living at the time of her parents’ deaths, then the proceeds of Sharon’s policy most likely would be payable to (1) (2) (3) (4)

Abigail Sharon’s estate Brandon’s estate no one, because Sharon and Brandon died simultaneously

12. Some life insurance policies policies include include a clause which states states that the beneficiary beneficiary must outlive outlive the insured by a specified period to be entitled to receive the policy proceeds. Under this type of clause, if the beneficiary does not outlive the insured by the specified period of time, the n the policy proceeds are paid as if the beneficiary predeceased the insured. As a result, the policy policy proceeds are more likely to be distributed distributed as the policyowner policyowner had intended. By definition, definition, this type of clause is known as a (1) (2) (3) (4)

right of revocation clause succession beneficiary clause survivorship clause key person clause

Learning Objective: Identify the person in a given situation who is entitled to receive the proceeds of a life insurance policy following the insured’s death.

13. According to laws in many countries, countries, if the beneficiary of a life insurance insurance policy wrongfully wrongfully and intentionally kills the insured, the beneficiary (is / is not) disqualified from receiving policy proceeds. If it is proven that the policy policy was purchased with the the intention to profit from from the insured’s insured’s death, then the life insurance contract is considered (void / valid). (1) (2) (3) (4)

is is is is

/ void / valid not / void not / valid



Learning Objective: Calculate the proceeds payable under a given lif e insurance policy following the death of the insured.

14. Nathan Katogir was the policyowner-insured policyowner-insured of a $100,000 $100,000 participating participating whole life life insurance policy with a $100,000 accidental accidental death benefit rider. rider. Mr. Katogir’s Katogir’s $1,150 annual premium premium was due on June 21. On June 30, Mr. Katogir was killed in an automobile accident. At the time of his death, he had not yet paid his overdue premium. Also at the time of his death, his policy had $4,500 in accumulated policy dividends, including interest, left on deposit with the insurer, and a $2,000 outstanding policy loan. This information indicates that the total death benefit payable to the beneficiary of Mr. Katogir’s policy was (1) (2) (3) (4)

$96,850 $101,350 $196,850 $201,350

included in life insurance Learning Objective: Identify the settlement options that typically are included policies, and describe the features of each option.

15. In addition to lump-sum settlements of policy proceeds, insurers insurers also make make available to the the policyowner and to the beneficiary beneficiary alternative settlement settlement options for receiving life insurance policy proceeds. With With regard to these settlement options, options, it is correct to say (1) that the life income option typically results in larger installment payments than would be available under the fixed amount or fixed period options (2) that a policyowner policyowner who selects the the interest option cannot place restrictions on the payee’s right to withdraw the policy proceeds (3) that, under under the fixed period period option, the payee usually has the right to withdraw only a part of the policy proceeds during the payment period (4) that, under under the fixed amount amount option, the insurer pays equal installments of a stated amount to the payee until the policy proceeds, plus the interest earned, are exhausted




Chapter Ten

Learning Objective: Define the terms .

1.

,

,

, and

By definition, definition, the person whose lifetime is used to determine the amount amount of benefits payable under an annuity contract is known as the (1) (2) (3) (4)

2.

,

payee annuitant contract owner annuity consideration

Ravi Patel purchased an an annuity on February February 1, 2010. Under Under the terms of of the contract, the the insurer will begin making annual income payments to Mr. M r. Patel on February 1, 2030. With regard to the contract’s maturity date and annuity period, it is correct to say that Mr. Patel’s contract has a maturity date of (1) (2) (3) (4)

February 1, 2010, and the contract’s contract’s annuity period is is one year February 1, 2010, and the contract’s contract’s annuity period is is twenty years February 1, 2030, and the contract’s contract’s annuity period is is one year February 1, 2030, and the contract’s contract’s annuity period is is twenty years

Learning Objective: Distinguish between immediate and deferred annuity contracts, singlepremium and flexible-premium annuity contracts, and fixed and variable annuity contracts.

3.

An annuity contract can be classified classified as either an immediate annuity annuity or a deferred annuity. annuity. An annuity contract under which periodic income payments are scheduled to begin more than one annuity period after the date on which the annuity was purchased is (an immediate / a deferred) annuity. annuity. For this type of annuity contract, the time period between the contract owner’s purchase of the annuity and the beginning of the payout period is known as the annuity contract’s (liquidation / accumulation) period. (1) (2) (3) (4)

4.

an immediate / liquidation liquidation an immediate / accumulation accumulation a deferred / liquidation liquidation a deferred / accumulation

David Hoddeson, Hoddeson, age age 58, inherited inherited $300,000 $300,000 from his father’s estate. Mr. Mr. Hoddeson Hoddeson used the entire inheritance as a lump-sum premium payment to purchase an annuity contract that will provide him with monthly periodic income payments, beginning on his 65th 65th birthday. birthday. This information indicates that Mr. Hoddeson purchased a (1) (2) (3) (4)

flexible-premium deferred annuity flexible-premium immediate annuity single-premium deferred annuity single-premium immediate annuity



5.

A variable annuity is an annuity annuity under which the the amount of the accumulated value and the amount of the periodic income payments fluctuate f luctuate in accordance with the performance of one or more specified investment funds. The following statements are about variable annuities. Select the answer choice containing the correct statement. (1) An insurer that issues a variable annuity must guarantee that the contract’s contract’s accumulated value will experience no loss of principal and will earn at least a minimum guaranteed interest rate. (2) Federal laws in the United States treat variable annuities as securities that must comply comply with federal securities laws. (3) Once the contract owner of a variable annuity annuity allocates premium premium amounts among a number of subaccounts, she cannot change the subaccounts in which future premiums are invested. (4) If the contract owner of a variable annuity annuity allocates premiums among a number number of subaccounts, she generally cannot change the percentage of money allocated to specific subaccounts.

6.

Two Two hybrid types of annuity products products that insurers issue issue are equity-indexed annuities (EIAs) and market value adjusted (MVA) (MVA) annuities. With regard to these hybrid annuities, it is correct to say that an (1) EIA typically is classified as a variable annuity (2) EIA does not offer any guarantees (3) MVA MVA annuity allows contract owners to move or withdraw premium deposits at certain times stipulated in the contract to take advantage of prevailing market interest rates (4) MVA MVA annuity requires contract owners to be “locked in” with fixed earnings for the life of the contract provisions included in individual Learning Objective: Explain standard contract provisions annuity contracts.

7.

One individual individual annuity annuity contract provision gives the contract owner owner a stated period of time— time— usually 10 to 30 days—after the contract is delivered in which to cancel the contract and receive a full refund of the initial premium paid. This type of individual annuity contract provision is known as the (1) (2) (3) (4)

incontestability provision free-look provision entire contract provision dividends provision

Learning Objective: Describe the guaranteed benefits included in some variable annuity contracts.

8.

Some variable annuity contracts contracts guarantee that up to a certain percentage percentage of the amount amount paid into the contract will be available for withdrawals annually during the accumulation period, even if subaccount investments perform poorly. This guaranteed benefit is known as a (1) (2) (3) (4)

guaranteed minimum withdrawal benefit benefit (GMWB) guaranteed minimum death benefit benefit (GMDB) guaranteed minimum income benefit (GMIB) guaranteed minimum accumulation accumulation benefit (GMAB) (GMAB)



Learning Objective: Explain the fees and charges typically paid by annuity contract owners.

9.

Antoine Fargo Fargo purchased purchased a variable annuity annuity from the Habersham Habersham Insurance Insurance Company. Company. The The contract specifies that, each time Mr. M r. Fargo Fargo withdraws money from the product, Habersham will charge a fee, expressed as a percentage of the withdrawal. This This percentage will decrease over time, until eventually Mr. Fargo can withdraw funds without incurring a charge. By definition, this fee is known as a (1) (2) (3) (4)

contingent deferred sales charge charge (CDSC), and it is considered a front-end front-end sales charge contingent deferred sales charge charge (CDSC), and it is considered a back-end back-end sales charge mortality and expense risk (M&E) charge, and it is considered considered a front-end sales charge charge mortality and expense risk (M&E) charge, and it is considered considered a back-end sales charge charge

Learning Objective: Identify and distinguish among the types of payout options available under annuity contracts.

10. Greta Anderson Anderson was the contract owner, owner, the annuitant, and the payee payee of a life with refund annuity for which she paid a single premium of $75,000. The annuity will provide an income payment of $5,000 per year during Greta’s lifetime. lifetime. Greta died five years after income income payments began, and at the time of her death, she had received received periodic income payments payments totaling $25,000. In this situation, the contingent payee named in Greta’s Greta’s annuity contract is entitled to receive (1) (2) (3) (4)

nothing a single payment payment of $5,000 $5,000 $50,000 $75,000

t he amount of an annuity’s periodic income Learning Objective: List the factors that affect the payments and describe the effect of each factor.

11. For all types of life life annuities, the number and timing of periodic income income payments depends depends on mortality experience as well as on the frequency of payments and the total length of the payout period. All other other factors being equal, it generally generally is correct to say that the shorter the the time period that an annuitant is expected to live, the (1) larger the periodic income payments will be (2) smaller the the periodic income payments will be (3) greater greater the number of periodic income payments that will be made (4) lower the annuity contract’s stated interest rate will be



Learning Objective: Describe two types of favorable income tax treatment for annuities in various jurisdictions, and compare the income tax treatment of traditional IRAs and Roth IRAs.

12. In the United States, States, the tax treatment treatment of an individual individual retirement arrangement arrangement (IRA) varies depending on whether it is a traditional IRA or a Roth IRA. One correct statement about a (1) traditional IRA IRA is that contributions c ontributions are not tax-deductible (2) traditional IRA IRA is that investment earnings accumulate and are distributed on a taxfree basis (3) Roth IRA is that federal tax laws la ws typically impose tax penalties if an individual who is younger than age 59½ makes a withdrawal from an IRA (4) Roth IRA is that there are no annual contribution limits




Chapter Eleven

Learning Objective: Identify the parties to a group insurance contract, and distinguish between contributory and noncontributory group insurance plans.

1.

The parties to a master group insurance contract are the (1) (2) (3) (4)

2.

group policyholder policyholder and the insurer insurer only group policyholder and and the group insureds only only insurer and the group group insureds only only insurer, the group policyholder, policyholder, and the group insureds insureds

The following following statements are about about group group insurance insurance contracts. contracts. Select Select the answer choice containing the correct statement. (1) If a group policyholder pays the entire premium amount for the group group coverage, then the group insurance plan is a contributory plan. (2) Each group member must receive individual individual copies of the master group group contract. (3) Each group member insured under a group group life insurance policy has has the right to name the beneficiary who will receive the the benefit payable upon that that group member’s death. (4) Group policyholders policyholders are not required to provide each group member member with a certificate of insurance or a separate benefit booklet that describes the group insurance plan.

3.

An insurance contract is an informal informal contract that must be formed formed in accordance accordance with the rules of contract law. Thus, to form a valid group insurance contract, certain requirements must be met. The following statements are about these requirements. Select the answer choice containing the correct statement. (1) The group insureds covered covered under the group insurance contract contract and the insurer must mutually agree to the contract’s terms. (2) Both the proposed group insureds and the group policyholder policyholder must have contractual capacity in order to enter e nter into a contract for group insurance. (3) The group policyholder must prove an insurable interest in the group insureds insureds so that the contract will have been formed for a lawful purpose. (4) The group policyholder and the insurer must exchange legally adequate adequate consideration in order for the contract to be valid.



probationary period and a nd the actively-atLearning Objective: Describe the operation of the probationary work requirement. requirement.

4.

Rafael Montero accepted a job with with the Beehive Company Company on June 5, 2010, 2010, and actually began working for Beehive on June 10, 2010. Beehive provides both noncontributory group life insurance and contributory group health insurance to its employees. e mployees. Beehive’s employee benefits plan requires a typical 30-day probationary probationary period and a 31-day eligibility eligibility period. This information indicates that Mr. Montero’s Montero’s group life insurance coverage will become effective on (1) June 10, and he will be eligible eligible to enroll for group health insurance coverage during a 31day period that begins on June 10 (2) June 10, and he will be eligible eligible to enroll for group health insurance coverage during a 31day period that begins on July 10 (3) July 10, and he will be eligible eligible to enroll for group health insurance coverage during a 31day period that begins on July 10 (4) July 10, and he will be eligible eligible to enroll for group health insurance coverage during a 31day period that begins on August 10 Learning Objectives: Compare group underwriting with individual underwriting, and identify the risk characteristics that group underwriters consider.

5.

The following following groups groups have have applied for group life insurance insurance coverage coverage from Palmino Financial. Financial. Palmino’s group underwriting underwriting guidelines are typical of most insurers. Select the answer choice describing a group that will likely FAIL to qualify for group insurance coverage. (1) RBG Associates Associates is a small group of retired individuals who banded together as a group for the sole purpose of obtaining group life insurance coverage at reasonable rates. (2) In the United States, the Milltown Labor Union promotes the welfare, interests, interests, and rights of its members. (3) The Prism Company is a professional organization for accountants accountants that provides continuing education classes and organized travel opportunities and seeks to provide voluntary group insurance coverage to its members. (4) CB&C Association Association is a group consisting of the eligible employees of several small employers and two labor unions that are in the building industry. industry. Learning Objective: Identify the common types of insurable groups.

6.

Group underwriters underwriters consider consider a number of of specific specific characteristics characteristics of a group group when evaluating whether that group is an acceptable risk. One factor that would tend to make an employeremployee group eligible for group insurance coverage is if the (1) employer plans to pay no portion portion of the group insurance insurance premium (2) employer anticipates experiencing experiencing excessive changes in in the group membership (3) group will maintain at leas leastt a 25% participation level level at all times in the group insurance plan (4) group has a sufficient number of new members periodically entering the group so that both the group’s size and its age distribution remain stable



Learning Objective: Describe the purpose and operation of benefit schedules in group life insurance policies.

7.

Group life life insurance policies typically include a schedule that defines the amount of life insurance the policy provides for each insured. For example, the schedule might provide life insurance coverage to all eligible employees in an amount equal to one year’s salary. salary. In another schedule, the amount of life insurance coverage might vary depending on whether the em ployee is a senior executive, e xecutive, a manager, or a nonmanagement employee. By definition, this schedule is known as (1) (2) (3) (4)

a blended rating schedule schedule a benefit schedule a self-administered group plan plan schedule an experience refund schedule schedule

Learning Objective: Explain the method insurers use to calculate group insurance premiums.

8.

Celestial Financial Financial Services Services is negotiating with the the following following two prospective prospective clients for group life insurance coverage: The Spiral Company is a newly formed organization that employs nine people. The Galaxy Company is seeking life insurance coverage for its 1,500 employees. Galaxy is presently insured by another insurer. With regard to the methods used to calculate the premium rate for group insurance coverage and these two companies, it most likely is correct to say that Celestial Financial will use (1) (2) (3) (4)

9.

manual rating for both both Spiral and Galaxy Galaxy manual rating for Spiral and experience rating rating for Galaxy experience rating for both Spiral and Galaxy experience rating for Spiral and manual manual rating for Galaxy

The Fencepost Fencepost Corporation Corporation provides $50,000 of noncontributory noncontributory group life insurance coverage for each of its eligible employees. The current monthly premium rate for this coverage is $0.50 per $1,000 of coverage. In February, February, Fencepost had 100 eligible eligible employees. On March 1, Fencepost hired five additional employees who immediately became eligible for group life insurance coverage. During the month of March, the number of Fencepost employees remained constant. This information indicates that the amount of premium payable for the month of March was (1) (2) (3) (4)

$25 $125 $2,500 $2,625




Chapter Twelve

Learning Objective: Identify and describe typical provisions contained in a group life insurance policy and compare these provisions with similar provisions contained in individual life insurance policies.

1.

Group life life insurance policies usually include a number of standard standard provisions, provisions, many many of of which are similar to provisions found in individual life insurance policies. The following statements statements are about provisions typically found in group life insurance policies. Select the answer c hoice containing the correct statement. (1) The incontestability provision provision in a group life insurance policy prohibits an insurer from contesting an individual group member’s coverage without contesting the validity of the master group contract itself. (2) Some group life insurance policies include a conversion privilege, which which allows a group insured whose coverage terminates for certain reasons re asons to convert her group life insurance coverage to an individual life insurance policy, but only after presenting evidence of her insurability. (3) Group life insurance policies typically include include a misstatement of age provision but typically do not include a misstatement of sex provision. (4) The grace period provision in a group life insurance policy specifies specifies that, if the policy policy terminates for nonpayment of premiums, then the group policyholder is not legally obligated to pay the premium for the coverage provided during the grace period.

2.

An insured insured group group member under a group life insurance insurance policy is prohibited prohibited from naming naming the group policyholder as the beneficiary of the policy UNLESS the policy is provided under a (1) (2) (3) (4)

group creditor creditor life policy policy single-employer group group policy policy multiple-employer group policy policy labor union group policy policy

Learning Objective: Identify the features of group term life insurance plans, group accidental death and dismemberment plans, group cash value insurance plans, and group creditor life insurance plans.

3.

One type of group life insurance policy is is yearly renewable term term (YRT) (YRT) insurance plans. With With regard to group YRT plans, plans, it is correct to say that (1) the insurer typically has the right to change the premium rate of a group YRT YRT insurance plan each year when the coverage coverage is renewed (2) few group life insurance policies are YRT YRT insurance plans (3) evidence of insurability is required from the group insureds each year when the YRT YRT insurance coverage is renewed (4) group YRT YRT insurance plans build a cash value



4.

Julia Gallagher is covered under the group life life insurance plan her employer provides. provides. The group insurance policy provides $125,000 of group term life insurance, $50,000 of group accidental death and dismemberment (AD&D) insurance, and $25,000 of business travel accident insurance. If Ms. Gallagher dies in an accident while she is traveling on business for her employer, then her beneficiary would be entitled to receive (1) (2) (3) (4)

5.

One commonly commonly offered offered group cash value life insurance insurance plan is a group group paid-up paid-up plan, which combines paid-up whole life insurance with decreasing amounts of term life insurance. With regard to the premium contributions that employees and employers pay for these group paid-up plans, it is correct to say that the the employees’ contributions typically pay for e mployees’ premium contributions (1) (2) (3) (4)

6.

$0 $75,000 $125,000 $200,000

both the paid-up whole whole life insurance and the decreasing term life insurance the paid-up whole whole life insurance only only the decreasing term life insurance only only neither the paid-up whole whole life insurance nor the decreasing decreasing term life insurance

Some insurers offer group universal life life (UL) plans and/or group group variable universal universal life (VUL) plans. With With regard to these two group plans, it is correct to say (1) that, under under a group UL plan, the employer typically pays a portion of the policy premium (2) that, under under a group UL plan, employees are not permitted to choose the amount of premium they wish to pay (3) that, under under a group VUL plan, the employer typically pays the entire policy premium (4) that the participants participants in a group VUL plan are given a choice of different subaccount options for investing their cash values Learning Objective: Identify the components of a group retirement plan and describe the types of provisions that a plan document contains.

7.

One component component of a retirement retirement plan is a detailed legal agreement agreement that establishes the existence existence of an employer-sponsored retirement plan and specifies the rights and obligations of various parties to the plan. Among other things, things, this component describes the the individuals whom the plan covers, the benefits that the plan provides, and the method for funding the plan. This component is referred to as the (1) (2) (3) (4)

plan document funding vehicle plan sponsor plan administrator



8.

A retirement plan’s plan’s benefit formula describes describes the calculation of the plan sponsor’s sponsor’s financial financial obligation to plan participants. One type of benefit formula allows the plan sponsor to know in advance what it will cost to fund the retirement plan each year. This type of benefit formula most likely is the (1) (2) (3) (4)

defined benefit formula that is commonly commonly used in pension plans plans defined benefit formula that is commonly commonly used in savings savings plans defined contribution formula formula that is commonly used in pension pension plans defined contribution formula formula that is commonly used in savings savings plans

Learning Objective: Identify and describe the four common types of employer-sponsored retirement retirement plans.

9.

In the United States, States, two types of of employer-sponsored employer-sponsored retirement retirement plans are a 401(k) plan plan and a stock bonus plan. With regard to these two types of retirement plans, it is correct to say that, under a (1) 401(k) plan, the amount of an employee’s employee’s plan contribution is included in the employee’s current taxable income (2) 401(k) plan, the employee enters into a salary reduction arrangement that permits the employer to deduct the amount of the employee’s employee’s plan contributions from her salary (3) stock bonus plan, contributions are dependent upon company profits (4) stock bonus plan, retirement assets are accumulated on behalf of participants, and such a plan promises to provide a monthly monthly retirement income income benefit

10. In the United States, States, employers sometimes sometimes establish for employees employees a retirement savings savings plan known as a profit sharing plan. One characteristic of a typical profit sharing plan is that (1) employer contributions contributions may fluctuate each year, year, but the employer must make make a minimum contribution to the plan each year (2) the plan guarantees a specified monthly monthly retirement income income benefit to employees (3) the amount of an employer’s contribution each year is determined by the employer’s employer’s profits for that year (4) employees are never allowed to contribute contribute to such plans 11. In the United States, the Old Age, Survivors, Disability Disability and Health Insurance (OASDHI) (OASDHI) Act, Act, or Social Security, Security, provides retirement income benefits to qualified residents. In Canada, either the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) provides retirement benefits. With regard to whether these programs require mandatory contributions from covered employees and their employers, it is correct to say that (1) (2) (3) (4)

both the Social Security program and the CPP and QPP require mandatory contributions contributions only the Social Security program program requires mandatory contributions contributions only the CPP and QPP QPP require mandatory contributions contributions neither the Social Security program nor the CPP and QPP require mandatory contributions contributions




Chapter Thirteen

Learning Objective: Identify some common types of basic medical expense coverage, and describe the benefits that each provides.

1.

Major medical medical expense expense coverage coverage specifies specifies the different different types of medical medical treatments, treatments, supplies, and services that are included under the coverage, as well as those expenses that are excluded from the coverage. From Fr om the answer choices below, select the response that correctly identifies a medical expense that typically is included under major medical expense coverage, and a medical expense that typically is excluded from such coverage. Included in coverage (1) anesthesia and oxygen (2) elective cosmetic surgery (3) hospital charges for room and board in semiprivate room (4) routine eye examinations and corrective lenses

2.

Excluded from coverage surgical supplies and services childhood immunizations routine dental treatments speech therapy

In its major medical medical expense expense policies, policies, the Nova Insurance Insurance Company Company specifies specifies that the maximum maximum benefit amount payable for a particular particular service will be 90% of of the amount that medical care providers within a particular particular geographic region commonly commonly charge for that same service. service. This information indicates that Nova bases the maximum benefit amount payable for a particular service on that service’s service’s (1) (2) (3) (4)

manual rate blended rate vesting requirement usual, customary, customary, and reasonable (UCR) fee

Learning Objective: Identify the purpose of expense participation features in major medical expense policies, and give examples of commonly used expense participation methods.

3.

Ademe Bekele Bekele is covered by by a comprehensive major medical medical expense expense policy policy that that specifies a $700 calendar-year deductible, a 15% coinsurance requirement, and a $5,000 maximum out-of pocket provision. In March 2010, Mr. Mr. Bekele was hospitalized for four days for treatment of pneumonia. During that period period of hospitalization, Mr. Bekele incurred $12,500 $12,500 in covered medical expenses. If Mr. Bekele incurs no other medical expenses during 2010, then his out-of pocket medical expenses for 2010 will will total (1) (2) (3) (4)

$700 $1,770 $2,470 $5,000



Learning Objective: Identify and describe common types of medical expense coverage other than basic and major medical expense coverage.

4.

In the United States, States, most insureds are covered by some some type of managed care plan. There are several types of managed care plans, but most of them share some common characteristics. One such characteristic is that managed care plans typically (1) shift all of the financial risk to to the insurer rather than to the health care provider (2) require plan members to pay a copayment, copayment, in addition to premium payments, payments, to the provider when a plan member receives services services from that provider (3) adjust the amount of the plan member’s monthly premium premium payment to reflect the number of times the plan member used provider services (4) exclude extensive preventive preventive care programs, such as prenatal and well-baby well-baby care, routine physical examinations, examinations, and screening programs

5.

The United United States States federal government provides certain medical expense expense benefits benefits through through a federal government program known as Medicare. Medicare provides medical expense benefits to (1) (2) (3) (4)

persons over the age of 65 and persons persons with qualifying disabilities disabilities persons over the age of 65 only persons with qualifying qualifying disabilities disabilities only all persons in the United United States, regardless of age or disability disability

Learning Objective: Identify the criteria used to classify disability income coverage as either short-term coverage or long-term coverage.

6.

The coverage provided by individual individual disability income insurance insurance policies policies is classified as either either short-term or long-term coverage, depending on the length of the benefit period. For example, most short-term individual disability income coverage provides a maximum benefit period ranging from (13 to 26 weeks / one to five years). The maximum benefit period provided by long-term individual disability income coverage for illnesses commonly extends (for one year / until the insured reaches age 65). (1) (2) (3) (4)

13 to 26 weeks / for one year 13 to 26 weeks / until the insured reaches age 65 one to five five years / for one year year one to five years / until the insured insured reaches age 65



that have commonly commonly Learning Objective: Identify the various definitions of been included in disability income insurance policies, and distinguish among those definitions.

7.

Joel Cohen’s Cohen’s disability disability income income insurance policy contains the current usual usual definition definition of total disability that is included in most disability income policies. According to his policy, the definition of total disability changes after the insured has been totally disabled for two years. This information indicates that, should Mr. Cohen become disabled, then at the e nd of the initial two-year period of disability, disability, he will be considered totally disabled only if his disability (1) prevents him from working at any occupation occupation for which he is is reasonably fitted by education, training, or experience (2) prevents him from performing the essential essential duties of his own previous occupation (3) prevents him from performing the essential essential duties of any any occupation (4) causes him to earn less than he earned before before becoming disabled

8.

The following following statements are about about disability disability income insurance insurance coverage. coverage. Select the the answer answer choice containing the correct statement. (1) As a general rule, the benefit amount provided provided by disability disability income coverage is intended intended to fully replace the insured’s pre-disability earnings. (2) Most disability income policies are designed to provide provide benefits beginning on the first day of an insured’s disability. (3) A presumptive presumptive disability is a stated condition that, if present, automatically automatically causes the insured to be considered totally disabled. (4) Disability income benefits typically typically should be set low enough so as to cause the disabled insured to experience a drastic dr astic reduction in income and lifestyle. supplemental benefits that may be included Learning Objective: Identify and describe some supplemental in a disability income insurance policy. policy.

9.

Nancy Tong purchased an individual individual disability disability income income policy that specifies specifies a flat benefit amount. The policy contains a supplemental benefit that grants Ms. Tong the right to increase the be nefit amount in accordance with commensurate increases in her income, without providing evidence of insurability. This information indicates that Ms. Tong’s Tong’s disability income policy contains a supplemental benefit known as a (1) (2) (3) (4)

guaranteed minimum income benefit (GMIB) cost-of-living adjustment (COLA) (COLA) benefit future purchase option option benefit benefit partial disability disability benefit



f or long-term care insurance policies. policies. Learning Objective: Describe the benefit triggers for

10. For this question, if answer choices (1) through (3) are all correct, select answer answer choice (4). Otherwise, select the one correct answer a nswer choice. Long-term care benefits generally are payable if an insured either loses his physical functional capacity to perform at least a specified number of the activities of daily living (ADLs) without assistance or has a severe cognitive impairment. With With regard to ADLs, it is correct to say that activities that are considered to be ADLs include (1) (2) (3) (4)

eating bathing dressing all of the above

Learning Objective: Describe the methods insurers use to pay long-term care benefits.

11. Some long-term care (LTC) (LTC) policies specify that that the insurer will pay the insured insured the amount of covered LTC LTC expenses per day up to the stated maximum daily benefit amount. For example, if an insured enters a nursing nur sing home costing $100 per day and the policy provides a daily benefit amount of $125, then the insured will receive a benefit of $100 per day, the actual cost for nursing home care. In this scenario, the LTC LTC policy includes a method for calculating the LTC benefit that is known as the the (1) (2) (3) (4)

benefit trigger trigger method method indemnity method reimbursement method portability method




Chapter Fourteen

Learning Objective: Identify and describe the provisions that individual health insurance policies typically include.

1.

One individual individual health health insurance insurance policy policy provision provision limits limits the time during during which a claimant claimant who disagrees with the insurer’s claim decision has the right to sue the insurer to collect the amount the claimant believes she is owed under the policy. policy. By definition, this provision is known as (1) (2) (3) (4)

a claims provision a legal actions actions provision provision a stop-loss stop-loss provision an overinsurance overinsurance provision provision

Learning Objective: Describe the factors that insurers consider in the financial design of individual health insurance products.

2.

For this question, select the answer answer choice containing the terms that correctly correctly complete complete the blanks labeled A and B in the paragraph below. Underwriting of applications for individual health insurance focuses on the degree of morbidity risk that a proposed insured represents. One factor that can affect the degree of morbidity risk a proposed insured presents is is whether the proposed insured insured is male or female. In general, females experience a morbidity rate than do males of the same age. Therefore, the cost of A providing health insurance insurance coverage to females generally is is than the cost of B providing health insurance insurance coverage to males of the same same age. (1) (2) (3) (4)

3.

A higher higher lower lower

B higher lower higher lower

A number of jurisdictions require an insurer’s loss loss ratio ratio to be at least a minimum stated stated percentage. The loss ratio for a block of policies generally is stated as the percentage of (1) (2) (3) (4)

premiums the insurer paid out in benefits for the block of policies policies total premiums the insurer received received during the grace period total premiums the insurer paid out out in premium refunds only total premiums the insurer lost lost because of policy lapses lapses only



Learning Objective: Calculate the amount of benefits payable when an insured is covered by two group health insurance policies that contain a coordination of benefits (COB) provision.

4.

Rachel Culpepper is covered under two group medical medical expense plans; one plan plan is through her employer and the second plan is through her husband’s employer. employer. Both plans specify a $500 deductible and a 20% coinsurance requirement. Both plans contain a coordination of benefits (COB) provision, but neither plan contains a nonduplication nonduplication of benefits provision. Ms. Culpepper’s primary plan is the plan provided through her employer. During the current calendar year, Ms. Culpepper incurred $5,600 in allowable medical expenses. This information indicates that the amount of the benefit Ms. Culpepper is entitled to receive under her husband’s plan is (1) (2) (3) (4)

5.

$1,020 $1,520 $3,580 $4,080

Damon and Andrea Utsey Utsey have one young daughter, Abigail. Both Both Damon and Andrea work work full time for employers that provide group medical expense coverage to employees and their spouses and dependents. Both group plans include coordination of benefits (COB) provisions, provisions, and both plans specify that the birthday birthday rule will be used to determine determine which plan will be the primary payer if an individual is covered covered as a dependent under both plans. plans. The dates of birth birth for the members of the Utsey family are as follows: Damon’s Damon’s date of birth is October 9, 1970 Andrea’s date of birth is April 20, 1972 Abigail’s Abigail’s date of birth is October 15, 2004 In this situation, the plan that most likely will be considered the primary provider of benefits for is the plan provided by Abigail is (1) Damon’s employer, employer, because Damon is older than Andrea (2) Damon’s employer, employer, because his birth date falls closer to Abigail’s Abigail’s birth date than does Andrea’s birth date (3) Damon’s employer, employer, because the majority of the members of the Utsey family have birthdays during the the same month as Damon (4) Andrea’s employer, employer, because her birth date falls earlier in the calendar year than does Damon’s birth date



Learning Objective: Distinguish between fully insured plans and self-insured plans.

6.

The following following statements are about ways in which a group insurance insurance plan’s plan’s claim claim costs and administrative expenses are paid using funding mechanisms. Select the answer choice containing the correct statement. (1) Most group long-term long-term disability income income plans are fully insured insured plans. (2) Under a fully insured insured group insurance plan, the group policyholder bears the responsibility and the risk for all claim payments. (3) Under a fully insured insured group insurance plan, if the dollar amount of the claims submitted to the insurer is less than the dollar amount of premiums collected, the insurer must refund the difference to the group policyholder. policyholder. (4) Most group long-term long-term care insurance plans are self-insured plans. self-insured plans. Learning Objective: Describe the operation of a self-insured group health insurance plan, including the use of stop-loss insurance and plan administration. administration.

7.

The Skyline Skyline Company Company provides group group medical expense and disability disability income insurance coverage to its employees through a self-insured plan. Skyline purchased stop-loss coverage to protect itself from the risk of having having several catastrophic medical medical claims in a given year. year. Under the terms of the stop-loss coverage, the insurer will become responsible for paying claims when Skyline’s Skyline’s total claims c laims exceed $1 million within the contract year. This information indicates that Skyline purchased the type of stop-loss coverage known as (1) (2) (3) (4)

specific stop-loss stop-loss coverage aggregate stop-loss stop-loss coverage coverage individual stop-los stop-losss coverage salary continuation continuation coverage


Answers to Practice Questions | 55

Answers to Practice Questions Chapter 1 1. 2. 3. 4. 5. 6. 7. 8.

p. 21 21................................... .................... ................................. ...................... .... 2 pp. 22-23 ................................. ............... .................................. ................ 1 pp. 26-27, 26-27, 28, 29 .................................... .................. .................... 2 p. 27 27................................... .................. ................................... .................. .... 3 p. 28 28................................... .................. ................................... .................. .... 1 p. 30 30................................... .................. ................................... .................. .... 3 pp. 31-32 ................................. ............... .................. ................ 4 pp. 32-33 ................................. ............... .................. ................ 2

Chapter 2 1. 2. 3. 4. 5. 6. 7.

pp. 36-37 ................................. ............... .................................. ................ 2 p. 38 38................................... ................. .................................... .................. .... 1 pp. 38, 40................................. ............... .................................. ................ 1 p. 41 41................................... ................. .................................... .................. .... 3 p. 43 43................................... ................. .................................... .................. .... 4 p. 43 43................................... ................. .................................... .................. .... 2 p. 44 44................................... ................. .................................... .................. .... 3

Chapter 3 1. 2. 3. 4. 5.

pp. 49, 53................................. ............... .................................. ................ 1 pp. 49, 56................................. ............... .................................. ................ 2 pp. 50-51 ................................. ............... .................................. ................ 3 pp. 51-53 ................................. ............... .................................. ................ 2 p. 55 55................................... ................. .................................... .................. .... 4

Chapter 4 1. 2. 3. 4. 5. 6. 7. 8. 9.

p. 61 61................................... .................... ................................. ...................... .... 3 pp. 61-62 ................................. ............... .................................. ................ 4 p. 62 62................................... ................. .................................... .................. .... 3 pp. 62-64 ................................. ............... .................................. ................ 4 p. 65 65................................... ................. .................................... .................. .... 4 p. 67 67................................... ................. .................................... .................. .... 4 p. 68 68................................... ................. .................................... .................. .... 1 pp. 68-69 ................................. ............... .................................. ................ 3 pp. 69-70 ................................. ............... .................................. ................ 3


Chapter 5 1. 2. 3. 4. 5. 6. 7.

p. 74; c. c. 1, p. 27................................. .................. ..................... ...... 4 p. 74................................... ................. .................................... ...................... .... 2 p. 80................................... ................. .................................... ...................... .... 4 pp. 81-82 .................................. ................ ................................. ............... 2 pp. 83-84 .................................. ................ ................................. ............... 1 pp. 84-86 .................................. ................ ................................. ............... 4 pp. 86-87 .................................. ................ ................................. ............... 2

Chapter 6 1. 2. 3. 4. 5. 6. 7. 8. 9.

p. 89................................... ................. .................................... ...................... .... 4 pp. 92-93 .................................. ............. .................................... ............... 1 pp. 93-94 .................................. ............. .................................... ............... 2 pp. 94-95 .................................. ............. .................................... ............... 3 p. 95................................... ................. .................................... ...................... .... 2 p. 98................................... ................. .................................... ...................... .... 2 pp. 100, 102................................... ................. ............................ .......... 1 pp. 102-103 ................................... ................. ............................ .......... 3 pp. 103-104 ................................... ................. ............................ .......... 1

Chapter 7 1. 2. 3. 4. 5. 6. 7.

pp. 107-108, 107-108, 109 ................................. ............... ...................... .... 2 p. 110.................................. ............... .................................... ..................... .... 1 pp. 110-111 ................................... ................. ............................ .......... 3 p. 111.................................. ............... .................................... ..................... .... 4 pp. 111-114 ................................... ................. ............................ .......... 3 p. 115.................................. ............... .................................... ..................... .... 3 pp. 115-116 ................................... ................. ............................ .......... 3

Chapter 8 1. 2. 3. 4. 5. 6. 7. 8. 9.

pp. 118-119 ................................... ................. ............................ .......... 1 p. 119.................................. ............... .................................... ..................... .... 1 pp. 120-122 ................................... ................. ............................ .......... 4 pp. 122-123 ................................... ................. ............................ .......... 3 pp. 124-125 ................................... ................. ............................ .......... 4 pp. 125-126 ................................... ................. ............................ .......... 2 pp. 126-127 ................................... ................. ............................ .......... 2 pp. 128-129 ................................... ................. ............................ .......... 3 p. 131; c. c. 7, p. 111.................................. .............. ...................... 3


Chapter 9

Chapter 12

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

p. 134............................... ............... ..................................... ........................ ... 4 p. 135............................... ............... .................................... .................... .... 2 pp. 136-137 ................................... ................. ............................ .......... 3 pp. 138-139 ................................... ................. ............................ .......... 1 p. 139............................... ............... .................................... ........................ .... 3 p. 139............................... ............... .................................... ........................ .... 4 p. 140............................... ................ .................................... ........................ ... 4 p. 143............................... ................ .................................... ........................ ... 2 p. 144............................... ................ ................................. ........................ ...... 4 p. 145............................... ............... ..................................... ........................ ... 1 pp. 145-146 ................................... ................. ............................ .......... 1 p. 146............................... ............... .................................... ........................ .... 3 p. 147............................... ............... .................................... ........................ .... 1 pp. 147-148 ................................... ................. ............................ .......... 4 pp. 149-150 ................................ ................. ............................ ............. 4

Chapter 10 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

p. 154............................... ............... ..................................... ........................ ... 2 p. 154............................... ............... .................................... .................... .... 3 p. 155............................... ............... .................................... ........................ .... 4 pp. 156, 157.................................... ................. ............................ ......... 3 pp. 158-159 .................................... ................. ............................ ......... 2 p. 158............................... ............... .................................... .................... .... 3 p. 160............................... ............... .................................... ........................ .... 2 p. 162............................... ............... .................................... ........................ .... 1 p. 162............................... ................ .................................... ........................ ... 2 p. 165............................... ............... ..................................... ........................ ... 3 p. 166............................... ............... ..................................... ........................ ... 1 p. 169............................... ............... .................................... ........................ .... 3

Chapter 11 1. 2. 3. 4. 5. 6. 7. 8. 9.

p. 173............................... ............... ..................................... ........................ ... 1 pp. 173, 174, 174, 175.................................... .................. .................... 3 p. 175............................... ............... .................................... .................... .... 4 p. 176............................... ............... .................................... ........................ .... 3 p. 178............................... ............... .................................... .................... .... 1 pp. 179-180 ................................... ................. ............................ .......... 4 pp. 180-181 ................................... ................. ............................ .......... 2 pp. 182-183 ................................... ................. ............................ .......... 2 pp. 183-184 ................................... ................. ............................ .......... 4


pp. 188, 189, 189, 190................................. ................ ..................... .... 3 pp. 189-190, 189-190, 193 ................................. ................ ..................... .... 1 p. 191.................................. ................ ................................... ..................... .... 1 pp. 191-192 ................................. ............... .............................. ............ 4 p. 192.................................. ................ ................................... ..................... .... 2 p. 193.................................. ................ ................................... ..................... .... 4 p. 194.................................. ................ ................................... ..................... .... 1 pp. 195, 195, 196-198 196-198 ................................. ................ ..................... .... 4 p. 198.................................. ................ ................................... ..................... .... 2 p. 198.................................. ................ ................................... ..................... .... 3 pp. 198-199 ................................. ............... .............................. ............ 1

Chapter 13 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

pp. 204, 206................................. ............... .............................. ............ 3 p. 204.................................. ................ ................................... ..................... .... 4 pp. 205-206 ................................. ............... .............................. ............ 3 p. 208.................................. ................ ................................... ..................... .... 2 p. 210.................................. ................ ................................... ..................... .... 1 p. 211.................................. ................ ................................... ..................... .... 4 pp. 211-212 ................................. ............... .............................. ............ 1 p. 213.................................. ................ ................................... ..................... .... 3 p. 215.................................. ................ ................................... ..................... .... 3 p. 216.................................. ................ ................................... ..................... .... 4 p. 217.................................. ................ ................................... ..................... .... 3

Chapter 14 1. 2. 3. 4. 5. 6. 7.

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Sample Examination | 57

Sample Examination

Learning Objectives for the Sample Examination E xamination Questions. Learning objectives for the Sample Examination questions appear only in the interactive version of the Sample Examination, which is available in the Course Portal under Exam Prep. The learning objective associated with each question appears in the answer explanation for the question’s question’s correct response. Additional Additional information on how to use learning objectives to guide your study and preparation for the exam appears in “Study Tips,” which can be accessed in the Course Portal under Exam Prep.



This examination contains 60 objective questions. Each question is valued at 1.667 points. For each question, circle the number of your chosen response.

1.

One primary primary focus of insurance insurance regulation is is to ensure that insurance insurance companies companies conduct conduct their their businesses fairly and ethically ethically.. For example, many countries have laws that prohibit insurers from engaging in unfair trade practices. This type of insurance regulation is known, by definition, as (1) (2) (3) (4)

2.

To be considered considered insurable, insurable, a risk—a potential potential loss—mus loss—mustt have certain characteristics. characteristics. The following statements are about the characteristics of insurable risks. Select the answer choice that contains the correct statement. (1) (2) (3) (4)

3.

The only type of risk that can can be insured is speculative risk. A pure risk is not insurable because it it involves the possibility of gain. In order for a potential loss to be be insurable, the element of chance must must not be present. For most types of insurance, insurance, in order for a potential loss to be insurable, the loss must must be definite in terms of time and amount.

A contract must be supported supported by an exchange of legally legally adequate consideration. When Jacques Renard purchased a life insurance policy from the Prescott Life Insurance Company, Prescott provided legally adequate consideration consideration by promising to pay the policy benefit if if Mr. Renard dies while the policy is in i n force. Mr. Renard provided legally adequate consideration for the life insurance contract by submitting to Prescott the (1) (2) (3) (4)

4.

market conduct conduct regulation regulation solvency regulation prudential regulation securities regulation

application only initial premium premium only only application and the initial premium premium initial premium and and subsequent renewal renewal premiums

Variable universal life (VUL) (VUL) insurance insurance combines combines the features of variable life insurance insurance and universal life insurance. One typical feature of variable universal life insurance policies is that (1) they guarantee investment investment earnings and cash values (2) they are not considered securities securities because the insurer assumes assumes the investment risk of a VUL policy (3) insurers place the cash values of VUL policies policies in their general accounts (4) policyowners can choose whether the death benefit will remain level or will vary along with changes in the investment earnings of subaccounts

5.

By definition, definition, the person person or party who is to receive the policy proceeds of a life insurance policy policy under a settlement option is known as the (1) (2) (3) (4)

assignor assignee payee preference beneficiary



6.

Liza Nagel was the policyowner-insured policyowner-insured of a $200,000 life insurance insurance policy. policy. Ms. Nagel died while the policy was in f orce, and the beneficiary submitted a claim for the policy benefit. A claim examiner used the following information to calculate the amount of proceeds payable: $350 in declared but unpaid policy dividends $600 in accumulated policy dividends left on deposit with the insurer $10,000 in paid-up additions $650 premium due and unpaid $5,000 outstanding policy loan This information indicates that the total benefit amount payable on Ms. Nagel’s Nagel’s life insurance policy is (1) (2) (3) (4)

7.

$183,400 $194,700 $205,300 $214,100

The Westcott Health Insurance Insurance Company Company is establishing initial premium rates rates to charge the following two groups for group health insurance: The Camelot Corporation is a large company with over 10,000 employees who are eligible for group health insurance coverage. Camelot has been insured by another health insurance company for the past five f ive years. The Pixie Company is a small company with 10 employees who are eligible e ligible for group health insurance coverage. Pixie has been insured by another health insurance company for the past two years. From the following answer choices, select the response that correctly identifies the method(s) Westcott most likely will use to calculate the initial i nitial premium rates for these two groups. (1) (2) (3) (4)

8.

Camelot Camelot manual rating manual rating blended rating experience rating

Pixie manual rating experience rating experience rating manual rating

The Calypso Company provides group life insurance insurance coverage coverage to its eligible employees. The group insurance premiums are payable monthly. monthly. During one month, eight new employees enrolled in Calypso’s group life insurance plan, and no insured employees left the group. With respect to the effect that this increase in insured group members had on Calypso’s Calypso’s monthly premium amount and premium rate, it is correct to say that the monthly premium premium amount (1) (2) (3) (4)

increased, and the premium premium rate per $1,000 of coverage c overage also increased increased, but the premium rate per $1,000 of coverage did not change did not change, and the premium rate per $1,000 of coverage also did not change did not change, change, but the premium rate per $1,000 of coverage increased



9.

The Banyan Company sponsors a defined contribution retirement plan for its eligible employees. The vesting requirements and other terms of Banyan’s plan are specified in a plan document. Employee participation in the plan is voluntary. voluntary. The following f ollowing statements are about Banyan’s retirement plan. Select the answer choice that contains the correct statement. (1) One benefit to Banyan of using a defined contribution plan is that it knows in advance what it will cost to fund the plan each year. (2) Banyan’s use use of a defined contribution plan indicates that the benefit a plan participant will receive is determined in advance a dvance of the participant’s retirement. (3) The vesting requirements in Banyan’s Banyan’s plan document specify the requirements employees employees must meet to be eligible to participate in the plan. (4) The fact that employee participation in Banyan’s Banyan’s plan is voluntary indicates that all eligible group members are automatically enrolled as plan participants.

10. The Fauna Company self-insures self-insures medical expense expense coverage for its its employees. Fauna purchased insurance from the Luray Insurance Company to place a maximum dollar limit on Fauna’s liability for paying health insurance claims. The insurance contract provides that Luray will begin to reimburse Fauna for claims when when Fauna has paid a total of $500,000 $500,000 in claims within a 12-month period. The type of insurance coverage that Fauna purchased from Luray is known as (1) (2) (3) (4)

specific stop-loss stop-loss coverage first-dollar coverage individual stop-los stop-losss coverage aggregate stop-loss stop-loss coverage coverage

11. The Crescent Insurance Company Company sold a life life insurance policy policy to Drew Fleming, Fleming, age 16. Drew resides in a jurisdiction where the minimum permissible age to purchase life insurance is 18. With respect to whether the contract between Crescent and Drew is legally enforceable, it is correct to say that the contract most likely is (1) voidable by Crescent, and Crescent Crescent may reject the contract at any time (2) voidable by Drew, Drew, and Drew may reject the contract before before he reaches age 18 or within a reasonable time afterward (3) voidable by Drew, Drew, and Drew may reject the contract only only after he reaches age 18 (4) valid, and neither Crescent nor Drew may may reject the contract 12. Today Today,, the financial services industry industry is characterized by the movement movement toward a single financial institution being able to serve a customer’s customer ’s banking, banking, insurance, and securities needs. This movement is commonly known as (1) (2) (3) (4)

portability incorporation globalization convergence



13. One characteristic of cash cash value life insurance insurance that distinguishes distinguishes it from from term life insurance insurance is that cash value life insurance policies such as whole life policies typically (1) provide coverage at a premium rate that is lower than the premium rate charged charged for comparable term life insurance policies (2) provide coverage at a premium rate that increases each year as the insured ages, whereas whereas the premium rate for a term life insurance policy remains level throughout throughout the life of the policy (3) provide a savings element in addition to insurance insurance coverage, whereas term life insurance policies provide insurance insurance coverage only (4) provide a death benefit only if the insured dies during the period specified in the policy, policy, whereas term life insurance policies provide insurance coverage for the entire lifetime of the insured, as long as the policy remains in force 14. Individual health insurance insurance policies typically typically include a provision provision that limits limits the time during during which a claimant who disagrees with the insurer’s claim decision has the right to sue the insurer to collect the amount the claimant believes is owed under the policy. This individual health insurance policy provision is known as a (1) (2) (3) (4)

stop-loss provision legal actions actions provision provision claims provision conversion provision

15. Sylvie Hyde is the the policyowner-insured policyowner-insured of a whole life insurance policy policy that includes a typical spouse and children’s insurance rider. Sylvie’s Sylvie’s spouse, Van, Van, and their three children are covered under the rider. One true statement about this spouse and children’s insurance rider is that the (1) insurance coverage on Van Van also is whole life insurance coverage (2) insurance coverage on each child is is term life insurance that will expire expire when that child reaches a stated age (3) premium for the rider will increase if Sylvie Sylvie adds children who are born or adopted adopted after the issue date of the insurance rider (4) premium for the rider increases as Van Van and the children age 16. By definition, variable variable life (VL) insurance insurance is a form of cash value life insurance insurance in which (1) premiums and the amount of the the death benefit are fixed for the life of of the policy (2) premiums are fixed, but the amount of the death death benefit may vary over the life of of the policy (3) premiums are flexible, and the amount of the the death benefit may vary over the life of of the policy (4) premiums are flexible, but the amount of of the death benefit is fixed for for the life of the policy



17. The following statements statements are about the level premium system. system. Select the answer answer choice that contains the correct statement. (1) Under a level premium system, system, the insurer uses premium dollars from the early policy policy years, plus the investment earnings, to help pay the increased number of death claims in the later years. (2) Insurers cannot increase the premium rate for a level premium policy based on an insured’s age, but they can increase the premium rate when the cost of providing benefits on a block of level premium policies increases. (3) The level premium system allows allows a person to purchase a series of one-year one-year term life insurance policies and pay the same premium amount for every year of coverage rather than pay a premium that increases each year with the insured’s insured’s age. (4) As people insured under a block of level premium policies grow older, older, insurers increase the premium rate to have sufficient sufficient funds to pay the increasing increasing number of death claims each year. 18. In the United States, States, Medicare is a federal government government program that that provides medical medical expense benefits to eligible individuals. individuals. One true statement about about Medicare is that it (1) covers 100 percent of an enrollee’s medical expenses, expenses, without requiring a contribution from the enrollee (2) provides medical expense benefits benefits only to individuals individuals who have low incomes incomes (3) provides medical expense benefits benefits to persons age 65 and older and persons with certain disabilities di sabilities (4) prohibits Medicare recipients recipients from purchasing supplemental supplemental Medicare coverage 19. Teresa Teresa Fahey is covered by two group medical medical expense insurance policies. policies. Each policy policy specifies a $250 calendar-year deductible and a 20 percent coinsurance requirement. Each plan contains a typical coordination of benefits (COB) provision that is not a nonduplication nonduplication of benefits provision. Last year, year, Ms. Fahey incurred $10,000 in allowable allowable medical expenses during a hospital stay. stay. Those were her only medical expenses for the year. The plan designated as the primary plan paid the full benefit benefit amount payable under the plan. plan. In this situation, the benefit benefit amount payable by the plan designated as the secondary plan is (1) (2) (3) (4)

$0 $2,200 $5,600 $7,800



20. The following paragraph paragraph contains two pairs of terms enclosed in parentheses. parentheses. Determine which which term in each pair correctly completes the paragraph. Then select the answer choice containing the two terms that you have chosen. A point-of-service point-of-service (POS) plan is a managed care plan that allows plan members to choose, c hoose, at the point of service, whether to seek medical medical care in-network or out-of-network. out-of-network. A POS plan’s plan’s level of coverage for services received from non-network providers is (lower than / the same as) the level of coverage for f or services received from in-network providers. Plan members generally must select a [third-party administrator (TPA) / primary care provider (PCP)] who is responsible for coordinating members’ medical care within the plan’s network of providers. (1) (2) (3) (4)

lower than / third-party administrator administrator (TPA) (TPA) lower than / primary primary care provider (PCP) the same as / third-party administrator administrator (TPA) (TPA) the same as / primary care provider (PCP) (PCP)

21. Major medical expense insurance insurance policies typically typically specify the services and treatments that are covered by the policy and those that are excluded from coverage. Major medical expense policies in the United States typically cover medical medical expenses that result from (1) treatment of an illness or injury injury that occurs while the insured insured is in military service service or that results from an act of war (2) routine dental treatments and routine eye examinations examinations (3) treatment that is paid for by other other organizations (4) preventive services such as childhood childhood immunizations immunizations and periodic screening and diagnostic tests 22. The Langdon Corporation Corporation provides its its employees with with a retirement savings savings plan that is funded entirely by cash contributions payable from Langdon’s profits. The amount of Langdon’s contributions varies from year to year, depending on company profits. Although the plan accumulates retirement assets on behalf of plan participants, it does not promise to provide monthly retirement income benefits. This information indicates that Langdon sponsors a type of retirement savings plan known, by definition, as a (1) (2) (3) (4)

savings plan stock bonus bonus plan plan profit sharing sharing plan plan Riester pension



23. The Fernbank Corporation purchased a group life insurance contract contract that contained a two-year two-year contestable period. Four years after the contract was issued, Kenny Dowd, a new employee, filled out a medical questionnaire to be eligible for group coverage. He made material misrepresentations about his health on the questionnaire. Mr. Dowd died nine months after his coverage became effective, and the insurer discovered the material misrepresentations when Mr. Dowd’s Dowd’s beneficiary filed a claim for the death benefit. In this situation, the incontestability incontestability provision in the contract provides provides that the insurer (1) can contest the validity of Fernbank’s Fernbank’s master group contract on the basis of Mr. Dowd’s Dowd’s material misrepresentations misr epresentations (2) can contest the validity of Mr. Dowd’s Dowd’s coverage on the basis of the material misrepresentations misr epresentations (3) cannot contest the validity of either the master group contract or Mr. Dowd’s Dowd’s coverage, coverage, because the contestable period period had expired (4) cannot contest the validity of Mr. Dowd’s Dowd’s coverage, but it can adjust the amount of the death benefit payable to reflect Mr. Dowd’s true insurability at the time of a pplication 24. Bernadette Russo was insured insured under the group group life insurance plan plan provided by her employer, employer, the Bainbridge Company. Company. Bainbridge’s policy provided her with $125,000 of group term life insurance coverage, $125,000 of group accidental death and dismemberment (AD&D) insurance coverage, and $50,000 of business travel accident insurance coverage. Ms. Russo was insured under Bainbridge’s group policy when she died in an automobile accident while traveling on vacation. In this situation, the total amount of benefits payable to Ms. Russo’s beneficiary is (1) (2) (3) (4)

$125,000 $175,000 $250,000 $300,000

25. Sheila Donahue applied applied for an insurance policy policy on the life life of her husband, Burt, Burt, and named their their daughter, Naomi, as the beneficiary of the policy. policy. The insurer’s insurer ’s underwriting underwriting guidelines regarding the presence of insurable interest in a third-party policy are the same guidelines that most insurers use. In this situation, before the insurer issues a policy, policy, it most likely will require that an insurable interest in Burt’s life is present for (1) both Sheila and Naomi, and, according to laws in most jurisdictions, their relationship relationship to Burt is sufficient to create an insurable interest in his life (2) both Sheila and Naomi, and, according to laws in most jurisdictions, their relationship relationship to Burt is not sufficient to create an a n insurable interest in his life (3) Sheila only, only, and, according to laws in most jurisdictions, her relationship to Burt is sufficient to create an insurable interest in his life (4) Naomi only, only, and, according to laws in most jurisdictions, her relationship to Burt is not sufficient to create an insurable interest in his life



26. The four primary factors factors that affect the amount of an annuity’s annuity’s periodic income income payments are the amount of the principal invested, the accumulation period, the interest rate that represents investment earnings, and the number and timing of periodic income payments. With With regard to the relationships among these factors, and assuming that all other factors remain unchanged, it is correct to say that increasing the the accumulation period of an annuity contract generally results in (1) (2) (3) (4)

a decrease in the number of periodic income payments a decrease in the amount of investment earnings an increase in the stated interest rate an increase in the dollar amount of each periodic income payment

27. When Kayla Miller purchased purchased a $500,000 term insurance policy policy on her life, she she named her son Jeremy as the sole beneficiary of the policy and selected a settlement option whereby Jeremy would receive the policy proceeds in a series of monthly payments for 10 years. The amount of each monthly payment under this option depends on the amount of the policy proceeds, the interest rate applied to the proceeds, and the length of the payment period that Ms. Miller chose. This information indicates that the settlement option Ms. Miller chose for her policy is the (1) (2) (3) (4)

interest option life income income option fixed amount option fixed period period option option

28. Colin Munro paid an initial premium premium of $2,500 when he applied for for a $200,000 life insurance policy on his life. The insurer insurer issued the policy with a typical two-year two-year suicide exclusion period and a double indemnity accidental death benefit. Nine months after the policy was issued, Mr. Munro committed suicide by jumping off a bridge. At the time of his death, Mr. Munro had not made another premium payment. In this situation, the insurer most likely was liable to pay the policy beneficiary (1) (2) (3) (4)

$0 $2,500 $200,000 $400,000

29. Contracts between two parties can be classified classified as either either bilateral or unilateral, unilateral, depending on whether one or both parties make legally enforceable promises. Contracts can be further classified as bargaining contracts or contracts of adhesion, depending on whether both parties, as equals, set the terms and a nd conditions of the contract or whether the contract is prepared by one party and accepted by the other party without without any bargaining bargaining between the parties. parties. With respect respect to these classifications of contracts, life insurance policies are classified as (1) (2) (3) (4)

bilateral bargaining bargaining contracts bilateral contracts contracts of adhesion unilateral bargaining bargaining contracts unilateral contracts of adhesion



30. The specific wording of the entire contract provision in an individual life insurance insurance policy varies according to whether the policy is an open contract or a closed contract. With With respect to types of contracts and to the documents that constitute the entire contract, most individual life insurance policies are (1) open contracts, and the entire contract consists of the insurance policy, policy, any attached riders, and the insurance company’s company’s governing corporate documents (2) open contracts, and the entire contract consists of the insurance policy, policy, any attached riders, and the attached copy of the insurance application (3) closed contracts, and the entire contract consists of the insurance policy, policy, any attached riders, and the insurance company’s company’s governing corporate documents (4) closed contracts, and the entire contract consists of the insurance policy, policy, any attached riders, and the attached copy of the insurance application 31. When Paul LaRue purchased purchased an insurance policy policy on his life, life, he stated on the application that his age was 35, when in fact he was then age 40. The policy contained a typical misstatement misstatement of age provision. Fifteen years after the policy policy was issued, Mr. Mr. LaRue died, and the policy beneficiary filed a claim for the policy proceeds. In processing the death claim, the insurer discovered the misstatement of age on Mr. LaRue’s policy application. The action that the insurer most likely would take in this situation is to (1) pay the full face amount stated in in the policy without requiring requiring any payment from the beneficiary (2) pay the face amount stated in the the policy on the condition condition that the beneficiary first pay pay the difference between the amount of premiums actually paid and the amount of premiums that would have been payable by Mr. LaRue at age 40 (3) adjust the policy’s policy’s face amount to the amount the premiums actually paid would have purchased if Mr. Mr. LaRue’s age age had been stated correctly on the the application (4) deny the the claim claim 32. A common common supplemental benefit in individual individual life insurance insurance policies is the waiver of premium premium for disability (WP) benefit. Under a WP benefit, the insurer waives its right to collect premiums that become due while the t he insured is totally disabled. One true statement about the WP benefit included in a cash value life insurance policy is that the (1) WP benefit is designed for third-party policies in in which the policyowner is not the policy’s policy’s insured (2) cash value does not increase while while the insurance company is is waiving premiums (3) insurance company will waive waive the payment of premiums immediately upon receiving proof that an insured is totally disabled, without imposing a waiting period (4) insurance company actually pays the premiums that are waived under a WP benefit benefit



33. The length of a whole life insurance policy’s policy’s premium premium payment period directly directly affects both the amount of the premium required for the policy and the pace at which the policy’s cash value builds. Compared to a limited-payment limited-payment whole life policy policy with the same face amount, a continuous-premium continuous-premium whole life policy typically has a (lower / higher) annual premium and builds a cash value more (slowly / rapidly) . (1) (2) (3) (4)

lower / slowly slowly lower / rapidly rapidly higher / slowly higher / rapidly

34. The basic accounting accounting equation for a stock insurance company company consists of the insurer’s assets, assets, liabilities, capital, and surplus. With With respect to the capital and surplus components of the accounting equation, it is correct to say that a stock insurance company’s (1) capital represents represents the amount of money that the company’s owners invested in the company (2) capital represents represents the amount by which the company’s assets exceed its liabilities (3) surplus represents the amount of money the company earns from investing the funds it receives from customers (4) surplus represents the items of value that the company owns 35. Calvin Ludlow, Ludlow, age 40, purchased an annuity annuity that will begin providing providing him with annual income income payments when he is 50 years old. old. Mr. Ludlow is the annuitant of the contract. contract. The annuity will will provide payments for 15 years, regardless regardless of whether Mr. Mr. Ludlow lives or dies during the period. The income payments will cease at a t the end of the 15-year period, even if Mr. Ludlow is still alive. One true statement about Mr. Ludlow’s annuity is that it (1) (2) (3) (4)

has a 10-year 10-year payout period period has a 15-year 15-year annuity period is a deferred deferred annuity annuity is a life annuity with period certain

36. A Roth IRA IRA (individual (individual retirement arrangement) is one one type of retirement savings savings plan that an individual can establish in the United States. With respect to the federal tax treatment of Roth IRAs, it is correct to say that (1) qualified withdrawals of a Roth IRA’s IRA’s investment investment earnings are tax-free (2) there are no limits on the amount that an individual can contribute to a Roth IRA each year (3) the contributions that an individual individual makes to a Roth IRA are deductible from his current taxable income (4) investment earnings on a Roth Roth IRA are taxable taxable in the year in which they are earned



37. Sanjay Reddy was insured by a $200,000 term life insurance insurance policy that included a double double indemnity accidental death benefit rider with typical exclusions and limitations. Ten years after the policy was issued and while the policy was still in force, Mr. Reddy had a heart attack while standing at the corner of a busy street, waiting for the pedestrian sign to change. A moment later, he was struck by an a n automobile, but was not badly injured. Mr. Reddy was rushed to the hospital, where he died three days later of complications resulting from his heart atta ck. After the beneficiary submitted a claim for the the policy proceeds, the insurer was was able to confirm from eyewitnesses that Mr. Reddy had suffered the heart attack before he was struck by the automobile. In this situation, the total death benefit payable most likely was (1) (2) (3) (4)

$100,000 $200,000 $400,000 $600,000

38. The following statements statements are about risk characteristics that a group insurance insurance underwriter considers when evaluating whether a group is an acceptable risk. Select the answer choice that contains the correct statement. (1) If young, new members are continually joining a group, the age distribution distribution and loss rate of the group will be less stable than if the group did not add young, new members for a number of years. (2) In general, the larger the group, group, the more likely that the group group will experience a loss rate that approximates the group’s predicted loss rate. (3) Regardless of the type of group that is being insured, group underwriting guidelines guidelines require the group policyholder to pay at least a portion of the group insurance premium. (4) Insurers impose more stringent underwriting underwriting requirements on employer-employee employer-employee groups than on association groups because antiselection by individual group members is more likely to occur in employer-employee employer-employee groups. 39. Fiona Beck purchased a whole life insurance insurance policy that included a typical typical reinstatement provision and an incontestability incontestability provision with with a two-year contestable period. period. Ms. Beck paid premiums for eight years and then allowed the policy to lapse. One year after the the policy lapsed, Ms. Beck reinstated her policy by meeting the conditions specified in the reinstatement provision. With With respect to the contestability contestability of reinstated reinstated insurance policies, it is correct correct to say that Ms. Beck’s reinstated policy (1) is incontestable, because the contestable period specified specified in the original policy has expired (2) will never become incontestable, because the reinstated policy policy does not contain an incontestability provision (3) is contestable for two years from the date on which the policy was reinstated, but only on the basis of material misrepresentations misrepresentations made in her he r original application (4) is contestable for two years from the date on which the policy was reinstated, but only on the basis of material misrepresentations misrepresentations made in her he r reinstatement application



40. Todd Todd Swenson was the policyowner policyowner of a $300,000 whole whole life insurance policy. policy. The amount of his annual renewal premium was $1,200. When Mr. Swenson’s Swenson’s policy lapsed for f or nonpayment of a renewal premium, the policy’s policy’s reduced paid-up insurance nonforfeiture option went into effect. The policy’s net cash surrender value was $15,000 when the policy lapsed. In applying the nonforfeiture option in this situation, the insurer most likely (1) paid $15,000 in a lump sum to Mr. Swenson Swenson (2) automatically paid the overdue premium for Mr. Swenson Swenson by making a $1,200 loan against the policy’s cash value (3) applied $15,000 as a net single single premium to purchase a whole life life insurance policy with a face amount lower than $300,000 (4) applied $15,000 as a net single single premium to purchase a $300,000 whole whole life insurance policy 41. Cassandra Hirsch is the the policyowner-insured policyowner-insured of a 10-year renewable term life insurance policy policy that includes a typical renewal provision. On the policy anniversary at the end of the 10-year term, the renewal provision most likely gives Ms. Hirsch the right to renew her policy for another 10-year term for (1) (2) (3) (4)

a smaller face amount than the original policy policy provided, at a lower premium premium rate the same face amount that the original original policy provided, at the same premium rate the same face amount that the original original policy provided, at a higher premium rate a larger face amount than the original original policy provided, provided, at a higher premium rate

42. One distinguishing distinguishing characteristic characteristic of a universal life life insurance policy policy is that the (1) policyowner is allowed to request an increase in the policy’s policy’s face amount after the policy has been in force f orce for a specified period, but the policyowner cannot decrease the policy’s face amount (2) policy does not guarantee that interest will be paid on the policy’s policy’s cash value each year (3) policyowner is allowed allowed to decide the amount he will will pay for renewal premiums at the time time he purchases the policy, but the renewal premium amount remains fixed for the life of the policy (4) mortality charge that the insurer deducts from the policy’s policy’s cash value increases each year as the insured ages 43. When an annuity contract owner owner withdraws money from the the annuity, annuity, the insurer may charge charge a back-end sales charge, which is called called a contingent deferred sales sales charge (CDSC) in a variable annuity. annuity. With respect to the form of this charge and whether the amount of the charge changes over time, it is correct to say that a back-end sales charge/CDSC is expressed as a (1) (2) (3) (4)

flat amount, and the amount of the charge charge typically decreases over over time flat amount, and the amount of the charge charge typically remains remains the same over time percentage of the withdrawal, withdrawal, and the percentage typically decreases decreases over time percentage of the withdrawal, withdrawal, and the percentage typically remains remains the same over time



44. Credit life insurance insurance is available to cover borrowers and credit card holders holders for the amounts they owe on their loans and a nd accounts. One characteristic of credit life insurance is that the (1) insurance policy generally provides provides protection for the insured’s insured’s lifetime, as long as the insured continues paying the premiums (2) lender pays the entire premium amount without any contributions contributions from the borrowers who who are covered by credit life insurance (3) policy benefit always is payable directly to the creditor if the insured borrower dies while the policy is in force (4) amount of life insurance coverage coverage in force remains level over the duration of the the loan, regardless of changes in the amount of the outstanding loan balance 45. During the financial design of a life insurance product, product, insurance companies companies multiply all of the potential benefits payable payable under the product by the expected expected probability that each each benefit will be payable. The result of this this calculation is the life insurance insurance product’s product’s (1) (2) (3) (4)

cost of benefits divisible surplus policy reserves accumulated value

46. The following statements statements are about the mortality tables that insurers insurers use in the financial financial design of life insurance products. Select the answer choice that contains the correct statement. (1) Conservative values for specific specific life insurance product elements elements generally take the form of mortality rates that are lower than expected. (2) A mortality experience table is a mortality table table that is compiled compiled from an insurance company’s own records, reflecting its insureds’ actual mortality. (3) Most mortality tables are unisex unisex tables that do not show show separate mortality rates for males and females. (4) Mortality tables are not developed developed for use in a particular country country because life expectancy and mortality rates do not vary significantly from one country to another. 47. The Jasper Life Insurance Insurance Company places proposed insureds insureds into one of of four risk classes: classes: standard, preferred, substandard, and declined. An underwriter for Jasper determined that Morteza Samad, a proposed insured, presented a likelihood of loss that was neither significantly greater than average nor significantly lower than average. This information indicates that Jasper placed Mr. Samad in the risk risk class known as the (1) (2) (3) (4)

standard risk class preferred risk class substandard risk class declined risk class



48. The Zuni Investment Investment Company was formed for the purpose of operating investment investment vehicles that that pool the funds of investors investors and use the funds to buy a variety of stocks, bonds, and and other securities. This information indicates that Zuni is the type of financial institution known as a (1) (2) (3) (4)

depository institution finance company fraternal benefit benefit society society mutual fund company company

49. Lloyd Belanger, Belanger, a United States resident, resident, purchased an insurance policy policy on his life and named his wife, Carol, as the primary beneficiary. beneficiary. Several years later, Lloyd and Carol died in an automobile accident, and it was impossible to determine which of them died first. The state’s state’s simultaneous death act governed how the insurer paid the policy proceeds. Assuming Assuming that Lloyd’s policy policy did not contain a provision pr ovision that conflicted with the simultaneous death act, the policy proceeds were (1) (2) (3) (4)

payable as if Carol had had outlived Lloyd Lloyd payable as if Lloyd had outlived Carol Carol payable as if Carol had not been involved involved in the accident not payable, because Lloyd and Carol Carol died simultaneously

50. Abraham Kern is the the policyowner-insured policyowner-insured of a participating participating whole whole life insurance policy policy that specifies the premium reduction dividend option. Mr. Kern pays an annual premium of $1,500 for his coverage. Last year, the insurer declared a $300 dividend for Mr. Kern’s policy. policy. Regarding the effect of this policy dividend, it is correct to say that (1) (2) (3) (4)

the face amount of Mr. Kern’s policy policy increased by $300 Mr. Kern had to pay only only $1,200 toward the next annual renewal premium the insurer used the policy dividend to purchase one-year term insurance on Mr. Mr. Kern’s life the dividend was left on deposit with the insurer, insurer, because it was less than the amount of Mr. Kern’s annual premium

51. Vera Sund is the policyowner policyowner of a juvenile life insurance insurance policy on the life life of her 6-year-old daughter, Lily. Vera’s husband, Troy, is the primary beneficiary of the policy. Under the terms of the policy, policy, when Lily reaches age 18, ownership and control of the policy will pass to her. The policy contains a typical waiver waiver of premium for payor rider. rider. Under the terms of this rider, rider, the insurer will waive its right to collect the policy’s policy’s renewal premiums upon the death or total disability of (1) (2) (3) (4)

Vera, and the insurer will waive the premiums only until Lily reaches age 18 Vera, and the insurer will continue to waive the premiums even after Lily reaches age 18 Troy, Troy, and the insurer will waive the premiums only until Lily reaches age 18 Troy, Troy, and the insurer will continue to waive the premiums even after Lily reaches age 18



52. When Ben and Rachel Spano obtained a 30-year 30-year mortgage loan of $310,000 to purchase purchase a home, they also purchased a $310,000 joint mortgage life insurance policy. policy. Ben died 10 years after the policy was issued. The beneficiary designation in in the policy was typical of that found found in most joint mortgage policies. This information indicates indicates that, upon Ben’s Ben’s death, a policy benefit most most likely was (1) (2) (3) (4)

payable to Rachel in an amount less than $310,000 payable to Rachel in an amount equal equal to $310,000 payable to the mortgage lender lender in an amount less than $310,000 not payable because a policy benefit is not payable until until both Ben and Rachel have have died

53. An insurer performed the the following calculation calculation to determine determine the annual premium amount for a $100,000 life insurance policy with a $5.00 premium rate: $5.00 × 100 = $500 The number 100 in this calculation c alculation represents the policy’s (1) (2) (3) (4)

coverage units actuarial assumptions indemnity benefits tabular mortality mortality rates

54. When underwriters evaluate evaluate applications for individual health health insurance, they they consider several factors to determine the degree of morbidity risk that a proposed insured presents. Four primary factors are an individual’s individual’s sex, age, health, and a nd work history. history. One true statement about these morbidity factors is that (1) males generally experience a higher morbidity morbidity rate than females of the the same age (2) the average duration of illnesses illnesses generally decreases with age (3) an individual’s individual’s future health is strongly affected by her past and current illnesses and injuries (4) people with a history of steady steady employment generally generally represent a higher degree of morbidity risk than do people with a history of only temporary jobs or who have a number of gaps in their work record 55. Natalie Koch declined declined to participate in her employer’s employer’s group life life insurance plan when when she first became eligible for coverage in March. When When she later decided to participate, participate, she waited until November to enroll because eligible eligible employees are allowed to join join the plan during that month month without providing evidence of insurability. insurability. The November period during which Ms. Koch can join her employer’s plan without without providing evidence evidence of insurability insurability generally is known as (1) (2) (3) (4)

a probationary probationary period period an elimination elimination period period an eligibility eligibility period an open enrollment enrollment period



56. Most disability income income policies use a two-part definition definition of total disability. disability. The current usual definition of total disability states that, at the end of a specified period after the disability begins, usually two to five years, an insured is considered totally disabled only if the disability (1) (2) (3) (4)

is classified as a presumptive disability disability prevents him from performing the duties duties of any occupation prevents him from performing the essential essential duties of his own previous previous occupation prevents him from working at any occupation occupation for which he is is reasonably fitted by education, training, or experience

57. Consolidation, which which is the combination combination of financial financial services institutions institutions within within or across sectors, has (decreased / increased) the number of traditional financial institutions institutions within each sector of the financial services industry. Consolidation Consolidation in the t he financial services industry occurs primarily through mergers mergers and acquisitions. When two two corporations are involved involved in a transaction known as (a merger / an acquisition), both corporations survive as separate legal entities after the transaction. tr ansaction. (1) (2) (3) (4)

decreased / a merger decreased / an acquisition acquisition increased / a merger increased / an acquisition acquisition

58. The Willow Willow Life Insurance Insurance Company has a reinsurance reinsurance agreement with the Copley Insurance Insurance Company in which Willow transfers, and Copley accepts, part of the risk on insurance policies that Willow has issued. Willow’s role in this reinsurance agreement is that of a (1) (2) (3) (4)

reinsurer plan administrator direct writer financial holding company

59. Long-term care insurance policies policies contain requirements specifying specifying the conditions conditions that establish establish an insured’s eligibility to receive long-term care benefits. These requirements are known, by definition, as (1) (2) (3) (4)

benefit triggers attachment points class designations physical hazards

60. Madelyn Berg is developing developing a plan that considers the amount amount of assets and debts that she is is likely to have when she dies and how best to preserve those assets so that they can be distributed as she desires. A will and life insurance coverage are important components of the plan. The type of plan Ms. Berg is developing is known, by definition, as (1) (2) (3) (4)

an estate estate plan plan a financial model a funding funding vehicle vehicle a survivorship survivorship life insurance insurance plan END OF EXAMINATION



Answers to Sample Exam 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

J&S, c. 2, pp. 44, 44, 45 ................................ ................ ................ 1 J&S, c. 1, pp. 21, 23, 26 .......................... ................ .......... 4 J&S, c. 3, pp. pp. 50-51................................. ................. ................ 3 J&S, c. 6, 6, p. 103 103 ............................... ............. ......................... ....... 4 J&S, c. 9, 9, p. 148 148 ............................... ............. ......................... ....... 3 J&S, c. 9, pp. pp. 147-148............................. ............. ................ 3 J&S, c. 11, 11, p. 183 183 ................. ................... 4 J&S, c. 11, 11, p. 184 184 ................. ................... 2 J&S, c. 12, pp. pp. 194-196................. .......... 1 J&S, c. 14, 14, p. 231 231 ................. ................... .................. . 4 J&S, c. 3, pp. pp. 52-53................. ................ 2 J&S, c. 2, 2, p. 40 ................................. ............... ......................... ....... 4 J&S, c. 6, 6, p. 89 ................................. ............... ......................... ....... 3 J&S, c. 14, 14, p. 222 222 ................. ................... .................. . 2 J&S, c. 7, pp. 114-115 114-115 ............................. ............. ................ 2 J&S, c. 6, 6, p. 102 102 ............................... ............. ......................... ....... 2 J&S, c. 4, pp. pp. 69-70................. ................ 1 J&S, c. 13, 13, p. 210 210 ................. ................... .................. . 3 J&S, c. 14, pp. 226-227 226-227 ................. .......... 2 J&S, c. 13, pp. 207-208........................... ................. .......... 2 J&S, c. 13, p. 204 204 ................................. ............... ..................... ... 4 J&S, c. 12, p. 198 198 ................................. ............... ..................... ... 3 J&S, c. 12, pp. 188-189................. .......... 2 J&S, c. 12, pp. 191-192................. .......... 3 J&S, c. 1, p. 33 ................................. ............. ........................... ....... 1 J&S, c. 10, pp. pp. 166, 167 167 .......................... ................ .......... 4 J&S, c. 9, p. 149 .................................. ................ ...................... .... 4 J&S, c. 8, p. 131; c. 7, p. 111 .................. ................. . 2 J&S, c. 3, pp. 55, 57 ................................ ................ ................ 4 J&S, c. 8, p. 119 .................................. ................ ...................... .... 4


31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

J&S, c. 8, pp. 125-126 125-126............................. .............. ............... 3 J&S, c. 7, pp. 107-108 107-108............................. .............. ............... 4 J&S, c. 6, pp. pp. 92-93................................. ................. ................ 1 J&S, c. 2, p. 44 .................................. ................ ........................ ...... 1 J&S, c. 10, p. 155 155 .................................... ............... ..................... 3 J&S, c. 10, p. 168 168 .................................... ............... ..................... 1 J&S, c. 7, pp. 110-111 110-111............................. .............. ............... 2 J&S, c. 11, pp. 178-180 178-180 ........................... ................. .......... 2 J&S, c. 8, p. 125 125 ................................... ................. ..................... ... 4 J&S, c. 8, p. 128 128 ................. ..................... 3 J&S, c. 5, pp. pp. 83-84................................. ................. ................ 3 J&S, c. 6, p. 96 .................................. ................ ........................ ...... 4 J&S, c. 10, p. 162 162 .................................... ............... ..................... 3 J&S, c. 5, p. 81 .................................. ................ ........................ ...... 3 J&S, c. 4, p. 62 .................................. ................ ........................ ...... 1 J&S, c. 4, pp. pp. 63, 68 ................. ............... 2 J&S, c. 1, p. 31 .................................. ................ ........................ ...... 1 J&S, c. 2, p. 39 .................................. ................ ........................ ...... 4 J&S, c. 9, pp. 145-146 145-146............................. ................ ............. 2 J&S, c. 9, p. 139 139 ................. ..................... 2 J&S, c. 7, pp. 108-109 108-109............................. .............. ............... 1 J&S, c. 5, pp. pp. 80-81................................. ................. ................ 1 J&S, c. 4, pp. pp. 68-69................................. ................. ................ 1 J&S, c. 14, p. 223 223 .................................... ............... ..................... 3 J&S, c. 11, p. 177 177 .................................... ............... ..................... 4 J&S, c. 13, pp. 211-212........................... ................. .......... 4 J&S, c. 2, p. 41 .................................. ................ ........................ ...... 2 J&S, c. 1, p. 29 .................................. ................ ........................ ...... 3 J&S, c. 13, p. 216 216 .................................... ............... ..................... 1 J&S, c. 5, p. 74 .................................. ................ ........................ ...... 1

280-TPGPDF-11 Test Preparation Guide for LOMA 280

TEST 280

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