Principle of Insurance - Review

Which of the following is a basic characteristic of insurance?
a. pooling of losses
b. avoidance of risk
c. payment of intentional losses
d. certainty about specific losses that will occur

a. pooling of losses

According to the law of large numbers, what happens as the number of exposure units increases? A) Actual results will increasingly differ from probable results.
B) Actual results will more closely approach probable results.
C) Nondiversifiable risk will decrease. D) Objective risk will increase.

B. actual results will more closely approach probable results

Characteristics of a fortuitous loss include which of the following?
A) The loss is certain to occur.
B) The loss occurs as a result of chance.
C) both A) and B)
D) neither A) nor B)

B. Thhe loss occurs as a result of chance

From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT
A) The loss must be accidental.
B) The loss should be catastrophic.
C) The premium must be economically feasible.
D) There must be a large number of exposure units.

B. The loss should be catastrophic

Which of the following types of risks is normally uninsurable by private insurers?
A. personal risks
B. property risks
C. liability risks
D. political risks

D. political risks

Which of the following is a result of adverse selection?
A) The insurer's financial results will be substantially improved.
B) Persons most likely to have losses are also most likely to seek insurance at standard rates.
C) It is unnecessary for the insurance company to use underwriting.
D) Insurance can be written only by the federal government.

B. Persons most likely to have losses are also most likely to seek insurance at standard rates.

XYZ Insurance Company writes coverage for most perils which can damage property. XYZ, however, does not write flood insurance on property located in flood plains. Which requirement of an ideally insurable risk might be violated if XYZ wrote flood insurance on property located in flood plains?
A) There must be a large number of similar exposure units.
B) The loss should not be catastrophic.
C) The chance of loss must be calculable.
D) The losses must be determinable and measurable.

B) The loss should not be catastrophic.

Adverse selection occurs
A) when an insurance company loses money on its investments.
B) when insurance purchasers buy insurance but do not have a loss.
C) when catastrophic losses occur as a result of a natural disaster.
D) when applicants with a higher-than-average chance of loss seek insurance at standard rates.

D. when applicants with a higher-than-average chance of loss seek insurance at standard rates

Reasons why market, financial, and production risks are often uninsurable include which of the following?
I. The potential to produce a catastrophic loss is great.
II. The chance of loss cannot be accurately estimated.
A) I only
B) II only
C) both I and II
D) neither I nor II

C. both I and II

A pure risk is defined as:
A) a situation in which there are only the possibilities of loss or no loss.
B) the chance a loss will occur
C) a diversifiable risk
D) a contingency that increases the chance of a loss

A) a situation in which there are only the possibilities of loss or no loss.

Fundamental purposes of the principle of indemnity include which of the following:
I. To Reduce physical hazards
II. To prevent the insured from profiting from insurance
A) I only
B) II only
C) Both I and II
D) neither I nor II

B) II only

When must an insurable interest exist in life insurance?
A) only at the time of the insured's death
B) only at the inception of the policy
C) only at the time the beneficiary is paid
D) both at the time of the insured's death and at the inception of the policy

B) only at the inception of the policy

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of
A) warranty.
B) insurable interest.
C) utmost good faith.
D) subrogation.

D) Subrogation

The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT
A) representations.
B) warranty.
C) subrogation.
D) concealment.

C) Subrogation

A false material statement made by an applicant for insurance is an example of
A) concealment.
B) breach of warranty.
C) lack of offer and acceptance.
D) misrepresentation.

D) misrepresentation

David owns a liquor store in a high-crime area. In order to obtain a reduced insurance premium, David promised to have a burglar alarm operating at the store when the store was closed. This agreement, which was incorporated into the insurance contract, is an example of a
A) representation.
B) binder.
C) rider.
D) warranty.

D) warranty

Melody's car was damaged when another driver ran a stop sign and hit her car. Melody decided to collect from her own insurer and to let her insurer recoup the loss payment from the negligent driver who hit her. What fundamental legal principle is illustrated in this scenario?
A) the principle of utmost good faith
B) the principle of insurable interest
C) the principle of subrogation
D) the principle of reasonable expectations

C) the principle of subrogation

When Ben applied for life insurance, he was asked on the application if he smoked or used tobacco products. Ben answered "No." In reality, Ben smokes two packs of cigarettes a day. The policy was issued at the "preferred, nonsmoker rate." If Ben dies 6 months after the policy is issued, upon what grounds will the insurer be able to legally deny the claim?
A) warranty
B) misrepresentation
C) waiver
D) concealment

B) misrepresentation

Hank bought a farm that had an old barn. He noticed one day that the roof of the barn was swaying in the wind. Hank went to see his insurance agent and he insured the barn for $20,000. The agent didn't ask if the roof might collapse, and Hank didn't say anything about it. One week 4 later there was a strong wind and the roof collapsed. Assuming the insurer can prove it, under what legal grounds could the insurer deny payment of the claim?
A) misrepresentation
B) concealment
C) warranty

B) concealment

That part of a property and liability insurance contract that contains information about the property or activity to be insured is called the
A) declarations.
B) insuring agreement.
C) exclusions.
D) conditions.

A) declarations

Exclusions are used in insurance policies for all of the following reasons EXCEPT
A) to reduce moral hazard.
B) to waive policy conditions.
C) to eliminate coverage for uninsurable perils.
D) to eliminate coverage not needed by typical insureds

B) to waive policy conditions

The policy provision requiring the filing of proof of loss with the insurer is an example of a(n)
A) declaration.
B) condition.
C) insuring agreement.
D) miscellaneous provision.

B) condition

One of the reasons that deductible is used in insurance policies is to
A) eliminate coverage for small claims.
B) place restrictions or limits on the insurer's promise to perform.
C) provide broader coverage by increasing the number of perils covered.
D) exclude perils that are not insurable.

A) eliminate coverage for small claims

A provision in a disability income insurance policy that requires a person to be disabled for 60 days before receiving benefits is an example of a(n)
A) calendar year deductible.
B) grace period.
C) elimination period.
D) probationary period

C) elimination period

Maggie purchased a life insurance policy. She was concerned that if she became disabled, she would no longer be able to pay the premiums. Her agent added an amendment of the policy stating that if she became disabled, future premium payments would be waived. Such an amendment to a life insurance policy is called a(n)
A) binder.
B) rider.
C) warranty.
D) schedule.

B) rider

Maria's home was damaged by an earthquake. As Maria has open-perils coverage on her home, she was surprised to learn that her loss was not covered. Which section of a property insurance policy specifies which perils, property, and types of losses are not covered?
A) the declarations
B) the exclusions
C) the conditions
D) the insuring agreement

B) the exclusions

The section of the insurance policy that includes provisions that qualify or limit the insurer's promise to perform is the
A) definitions.
B) insuring agreement.
C) exclusions.
D) conditions.

D) conditions

Shauna hurt her back and was unable to work. She filed a claim under her disability income insurance policy. Under terms of the policy, a period of time must pass between when the injury occurred and when the insurer begins to replace lost earnings. This time period is called a(n)
A) grace period.
B) enrollment period.
C) probationary period.
D) elimination (waiting) period.

D) elimination (waiting) period

Under the terms of Jenny's auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny's auto insurance policy?
A) calendar-year deductible
B) waiting period
C) straight deductible
D) aggregate deductible

C) straight deductible

Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. When she finally reported the claim, her insurer denied payment, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n)
A) declaration.
B) definition.
C) insuring agreement.
D) condition.

D) condition

Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the cause of loss is not 6 specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy?
A) unconditional coverage
B) named-perils coverage
C) extended-perils coverage
D) "open-perils" coverage

"open-perils" coverage

Lisa has three fire insurance policies on her office building. The policy from company A is for $400,000, and the policies from companies B and C are for $100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered by each policy if the loss is settled on a pro rata basis by the insurers?
A) each policy: $120,000
B) policy A: $160,000; policies B and C: $100,000 each
C) policy A: $240,000; policies B and C: $60,000 each
D) policy A: $360,000; policies B and C: nothing

C) policy A: $240,000; policies B and C: $60,000 each

Kevin has three liability policies which provide for contribution by equal shares if other insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgment if policy A provides $500,000 of coverage, policy B provides $1,000,000 of coverage, and policy C provides $3,000,000 of coverage?
A) Each policy will pay $500,000, and Kevin must pay the remaining $1,500,000.
B) Policy A will pay $500,000, policies B and C will each pay $1,000,000, and Kevin must pay the remaining $500,000.
C) Policy A will pay nothing, policy B will pay $1,000,000, and policy C will pay $2,000,000.
D) Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000.

D) Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000.

Which of the following statements about premature death is (are) true?
- I. From an economic standpoint, premature means death before a specified age, such as 65.
- II. The economic problem of problem of premature death in the U.S. has declined substantially over time.
A) I only
B) II only
C) both I and II
D) neither I nor II

B) II only

Tom and Nancy Boyle provide financial support for their two children. In addition, they provide financial support for Tom's aged father and Nancy's aged mother. The Boyle family can be described as a
A) blended family.
B) single-parent family.
C) two-income earner family.
D) sandwiched family.

D) sandwiched family.

The period during which a surviving spouse is ineligible for Social Security benefits is referred to as the
A) emergency period.
B) readjustment period.
C) dependency period
D) blackout period

D) blackout period

Bill is attempting to determine how much life insurance to purchase. He has two dependent children and his wife does not work outside of the home. An advisor suggested that Bill should consider Social Security benefits when doing his life insurance planning. One concern in this regard is the period after Social Security benefits to a widow terminate until they resume again. This period is called the
A) blackout period.
B) dependency period.
C) emergency period.
D) readjustment period.

A) blackout period

Most family heads need substantial amounts of life insurance. However, with limited income, money spent on life insurance reduces the amount of discretionary income available for other high-priority needs. What an insured person gives up when he or she purchases life insurance instead of using the premium dollars for other purposes is called the
A) estimated cost of life insurance.
B) net cost of life insurance.
C) real (inflation-adjusted) cost of life insurance.
D) opportunity cost of buying life insurance.

D) opportunity cost of buying life insurance

What happens to the premiums for yearly renewable term insurance as an insured gets older?
A) They increase at an increasing rate.
B) They increase at a decreasing rate.
C) They decrease at a constant rate.
D) They remain level.

A) They increase at an increasing rate.

Which of the following statements about term insurance is true?
A) The coverage is appropriate if the goal is permanent lifetime protection.
B) Most policies can be renewed for additional periods without evidence of insurability.
C) Premiums increase at a constant rate each time the policy is renewed.
D) Most policies have a cash value that is refunded when coverage ceases.

B) Most policies can be renewed for additional periods without evidence of insurability.

The purchase of term insurance is justified by which of the following circumstances?
- I. The insured wants to save money through the policy for a specific need.
- II. The insured has a temporary need for life insurance protection.
A) I only
B) II only
C) both I and II
D) neither I nor II

B) II only

The net amount at risk for an ordinary life insurance policy is the difference between the
A) present value of future benefits and the present value of future premiums.
B) face amount of the policy and the total premiums that have been paid.
C) face amount of the policy and the legal reserve.
D) annual premium and the annual policyholder dividend.

C) face amount of the policy and the legal reserve.

Which of the following statements about endowment insurance policies is (are) true? - I. The face amount is paid if the insured dies during the policy period or at the end of the policy period if the insured is still alive.
- II. The use of endowment insurance has increased in recent years because of its favorable tax treatment.
A) I only
B) II only
C) both I and II
D) neither I nor II

A) I only

Which of the following statements about a variable universal life insurance policy is (are) true?
- I. There is a minimum guaranteed interest rate for the cash value.
- II. The policyowner has a variety of investment options for the savings component of the policy.
A) I only
B) II only
C) both I and II
D) neither I nor II

C) both I and II (not sure double check)

Mark would like to save money for a comfortable retirement. He intends to buy a cash-value life insurance policy that has the following characteristics:
• The premiums are invested in separate investment accounts selected by the policyholder.
• Interest income and capital gains are not currently taxable to the policyholder.
• The frequency and amount of premium payments can be changed as financial circumstances change.
• A mortality and expense (M&E) charge is periodically deducted from the cash value account.
A) A universal life insurance policy
B) A variable universal life insurance policy C) A whole life policy
D) A term life policy

B) a variable universal life insurance policy