Life and health insurance

Esson University of Iowa

Lecture-178] What is/are true about the cash value component of a permanent life insurance policy?

It can be used as collateral for a loan.

It is accessible to the policyholder through withdrawals or loans.

[Lecture-54] (Exactly One Correct Answer) The right to change a beneficiary designation is reserved for the:

Policyowner

[Lecture-59] (Exactly One Correct Answer) A type of annuity in which the cash values are invested in securities is called:

Variable

[Lecture-99] In what ways do Variable Annuities differ from Fixed Annuities?

They involve higher fees

[Lapse-Based Insurance-12] Predictions of a standard rational front-load model include:

Front-loaded premiums are used to deter lapses

Lapses should be rare and tied to major income shocks

[Lecture-153] (Exactly One Correct Answer) In the lifetime benefits approach for long-term care insurance, what is the implication of using less than the daily maximum benefit amount?

Using less than the daily maximum allows the benefits to last longer than the initially set period.

[Backdating-12] Which statements best describe “lapse-supported” pricing dynamics for level-premium life insurance?

If literally no one ever lapses, strain can emerge in later durations

Portfolio pricing often assumes some policyholders will lapse before very expensive later years

Mortality risk rises over time, so late-period level premiums can be below contemporaneous expected claims cost

[Long Term Care-10] (Exactly One Correct Answer) When selling to higher-risk women, which approach aligns with the paper’s insights?

Acknowledge the implicit tax and differentiate on quality/flexibility beyond what Medicaid covers well.

[Lecture-220] How does the concept of insurable interest relate to STOLI?

It is a principle that was challenged by the emergence of STOLI.

It was often circumvented in STOLI arrangements.

It is a requirement for legal life insurance policies.

[Lecture-140] (Exactly One Correct Answer) In the context of long-term care, what do premiums look like?

Premiums are level throughout the duration.

[Lecture-263] In the context of variable annuities, what does the Guaranteed Minimum Income Benefit (GMIB) ensure?

Minimum level of annuity payments regardless of investment performance.

[Lecture-30] (Exactly One Correct Answer) A 30-year level-premium term life policy primarily protects against which problem that arises with annual repricing?

Reclassification risk leading to premium spikes after a new diagnosis.

[Lecture-41] Which jurisdictions are reinsurance/captive hubs?

Vermont

Isle of Man

Bermuda

[Lecture-144] (Exactly One Correct Answer) How does the lapse rate affect premium setting by insurance companies?

Higher lapse rates lead to lower premiums.

[Lecture-105] What is a common exclusion in long-term care insurance policies?

Alcoholism and drug addition

[Lecture-29] Choose the universally true statements about Medicaid work requirements:

None of the above.

[Fragility of Variable Annuities-13] In the GLWB structure described in FVA:

The benefit base may step up after strong market performance

Lifetime income continues even if the account value hits zero

Investors pay mutual-fund fees plus annuity base fees plus rider fees

[Lecture-181] Which of the following scenarios could lead to a life insurance payout being denied for an in-force policy, even after the policyholder’s death?

The policyholder dies one year into the policy, and the insurer discovers that the applicant did not disclose a preexisting condition during the application process.

The policyholder’s death occurs due to an excluded activity, such as participating in hazardous sports.

[Lecture-51] Common rationales for regulating insurance include:

Curbing adverse selection via mandates

Equity concerns in essential lines

Third-party liability protection (e.g., auto)

[Annuity Puzzle-5] Which factors contribute to the annuity puzzle?

Mismatch between preset payouts and desired spending paths

Market incompleteness (limited ability to insure many real-world risks)

Annuity illiquidity

Uninsured long-term care and medical-expense risks

[Lecture-193] What is the role of age in life insurance pricing?

Pricing is based on integer age

Older individuals are charged significantly higher premiums

[Long Term Care-7] (Exactly One Correct Answer) Mark (65) believes his chance of needing LTC is low. Under unisex pricing, which is most likely?

His expected gross return is relatively worse than a similar woman’s.

[Lecture-118] (Exactly One Correct Answer) What categories are used to classify formal providers of long-term care?

Institutional settings and home and community based settings

[Lecture-31] (Exactly One Correct Answer) An annuity guarantees a minimum 5% return for 60 years. What is the issuer’s hedging challenge?

Exposure to either reinvestment risk or currency risk.

[Backdating-13] Which of the following is an effective “deductible-style” tool for reducing lapse risk?

None of the above

[Annuity Puzzle-10] Under complete financial markets:

Full annuitization can remain optimal even with other non-longevity risks present

The absence of a strong bequest motive remains pivotal

[Lecture-216] What are the causes and implications of adverse selection through lapsation in life insurance?

Insurers don’t price based on income.

Poor people effectively subsidize rich policyholders.

High-income individuals are less likely to experience income shocks.

Rich people are more likely to buy life insurance.

[Backdating-4] (Exactly One Correct Answer) During the specifically backdated period that predates application, what benefit is payable if the insured dies?

Irrelevant

[Fragility of Variable Annuities-8] Which statements match FVA’s evidence from major stress episodes? (Examples: GFC 2008–09; COVID onset Jan–Apr 2020.)

VA-heavy insurers saw an equity drawdown around 51% (Jan–Apr 2020)

Hartford required TARP support in part due to VA losses

The broad S&P 500 fell ˜34% in the same 2020 window

[Lecture-8] (Exactly One Correct Answer) According to the principle of diminishing marginal utility of wealth, why are individuals generally risk-averse?

They value each additional unit of wealth less than the previous one

[Lecture-22] (Exactly One Correct Answer) Which statement best captures “optimization under constraints”?

Choosing the set of actions that maximizes a goal subject to limits like budgets, rules, or time.

[Long Term Care-4] (Exactly One Correct Answer) Under unisex pricing, which statement about gross expected value is most accurate?

Women receive better gross value than men.

[Selection through Lapsation-6] Adverse selection emerges in the paper because. . .

Front-loaded cash flows make early exit economically pivotal

Continuation (lapse) risk is heterogeneous across consumers

Price changes sort on continuation types

Wealth correlates with both mortality and lapse propensities

[Lecture-152] (Exactly One Correct Answer) How are benefits calculated in the lifetime benefits approach of long-term care insurance?

Based on a combination of the daily/monthly maximum benefits and the length of the benefits period.

[Lecture-169] (Exactly One Correct Answer) Jane is a single mother with two young children and works a steady job earning $70,000 annually. She does not currently have life insurance but is considering purchasing a policy. What would you recommend Jane do?

Jane should purchase a life insurance policy to protect against the income risk due to her death.

[Lecture-50] (Exactly One Correct Answer) In life insurance, demand is more tied to income/financial literacy than to mortality risk. Risk-based pricing therefore tends to:

Improve redistribution by reducing cross-subsidies to higher-income buyers

[Annuity Puzzle-11] (Exactly One Correct Answer) Which risk are life annuities designed to insure most directly?

Longevity risk (outliving one’s savings)

[Lapse-Based Insurance-8] For a product manager, which actions align with insights in Lapse-Based Insurance?

Offer flexible payment options and transparent liquidity features

Train agents to discuss realistic lapse probabilities

Incorporate behavioral lapse risk into pricing/risk management

Lecture-159] (Exactly One Correct Answer) What is the most common and least expensive type of life insurance policy?

Term Life

[Lecture-104] What does long-term care insurance typically cover?

Medical or custodial care received in nusing homes.

[Long Term Care-14] (Exactly One Correct Answer) In any market where unisex pricing is imposed and one group has higher expected losses, which statement is generally true?

Value transfers from lower-risk to higher-risk groups.

[Backdating-16] (Exactly One Correct Answer) An applicant expects to lapse within two years. How does saving age via backdating typically affect their decision?

It is less attractive, because most savings accrue over long horizons

[Lecture-110] What are the differences between disability insurance and long-term care insurance?

Disability insurance replaces income, while long-term care covers assistance with daily activities.

Disability insurance is for short-term conditions, while long-term care is for chronic conditions.

[Lecture-37] (Exactly One Correct Answer) A classic life-insurance branding message is about “the company you keep.” What are they really selling?

Long-term financial strength and staying power

[Backdating-7] (Exactly One Correct Answer) An applicant privately knows they may change jobs soon and might have trouble paying premiums later. Which friction is central here?

Asymmetric information about the applicant’s propensity to lapse

[Lecture-68] (Exactly One Correct Answer) The major difference between a mutual insurance company and a stock insurance company is the:

form of ownership each company is permitted

[Fragility of Variable Annuities-14] (Exactly One Correct Answer) Why doesn’t a 5% roll-up imply a 5% implied rate of return (IRR) to the investor?

Because the roll-up applies to the benefit base and is paid out over many years; the present value can be much lower than the headline base

[Lecture-176] Which options might be available if a life insurance policyholder fails to pay the premium on time?

The policy may be converted to a paid-up policy with a lower face value.

The cash value may be used to cover the premiums.

The policy might lapse.

The policy may enter a grace period.

[Shadow Insurance-16] (Exactly One Correct Answer) When a life insurer sells a policy, the liability is best described as:

The potential payout to policyholders/beneficiaries in the future

[Lecture-211] What was STOLI (Stranger-Originated Life Insurance) primarily used for?

Initiating life insurance policies for resale.

Generating profits through life expectancy bets.

Circumventing insurable interest principles.

Lecture-202] What is true about level premiums in life insurance?

They make it so that the policy becomes less valuable the longer the policy is held

They are constant throughout the policy term

[Lecture-237] A life insurer operating in a low-interest rate environment invests heavily in long-term bonds to meet guaranteed returns. As interest rates begin to rise sharply, the insurer experiences a spike in policy lapsation. What are the likely outcomes?

Higher than predicted lapse rates can create liquidity constraints for the insurer.

[Lecture-203] (Exactly One Correct Answer) In the context of life insurance, what leads to advantageous selection?

Higher demand for insurance when it’s cheaper to insure

Lecture-226] What are the tax implications of cash value in whole life insurance?

Tax-free withdrawal up to the amount of premiums paid.

Tax-deferred growth on interest earned.

[Annuity Puzzle-2] (Exactly One Correct Answer) Two bequest-neutral clients face complete markets. Mia expects above-average longevity; Raj expects below-average. Who benefits more from annuitization?

Mia

Long Term Care-8] (Exactly One Correct Answer) If many buyers lapse before claims, what happens to realized loads?

Realized loads rise sharply

[Lapse-Based Insurance-3] (Exactly One Correct Answer) An actuary claims surrender charges exist solely to recover front-loaded commissions. Which empirical fact most directly contradicts that single-cause story?

Lapse profitability varies materially with lapse timing

Lecture-1] (Exactly One Correct Answer) Meghan purchased long-term care insurance because she knew that she has inherited the ApoE4 gene, which increases the risk of developing Alzheimer’s disease. Long-term care insurance would partially cover the cost of a nursing home. This is an example of what?. Moira did not purchase flood insurance offered by NFIP because she knew that might be able to rely on taxpayer-funded disaster relief to recover any losses from flood damage. This is an example of what?.

Adverse selection; Moral hazard

[Long Term Care-2] (Exactly One Correct Answer) Which statement about the “standard” policy design studied is accurate?

It covered roughly one-third of expected lifetime LTC costs.

[Lecture-238] Which of the following statement/s is/are true concerning the impact of consistently decreasing interest rates on life insurers?

Reinvestment risk increases as bonds mature and are replaced with lower-yielding assets.

The cost of maintaining guaranteed returns exceeds the yield from newly purchased assets.

[Lecture-188] What are the concerns related to equity in life insurance markets?

Use of genetic tests

[Lecture-21] Which claims about addressing adverse selection are correct?

None of the above

[Intro to RILAs-15] Which statement about structure and risk is accurate?

None of the above

[Lecture-45] (Exactly One Correct Answer) Variable-annuity minimum-return guarantees most closely resemble:

Put options on an index

[Lecture-9] On the U.S. individual market, premiums may be set using the applicant’s...

Age (within regulated bands)

Smoking status (within limits)

County of residence

[Backdating-2] (Exactly One Correct Answer) A 30-year-old applies four months after a birthday and elects to “save age.” What is the intended financial effect?

Lock a lower level premium by being rated at the younger age for the policy term

[Lecture-179] What can occur when a term life insurance policy expires?

The policy can be renewed at a higher premium.

The policyholder loses coverage without any payout.

[Annuity Puzzle-9] Which innovations are highlighted as promising ways to address the annuity puzzle?

Variable (investment-linked) life annuities

Customizable payout paths (e.g., hump-shaped or decreasing)

Bundling annuities with long-term care coverage

[Lecture-62] (Exactly One Correct Answer) In life insurance, insurable interest must exist at the time the:

producer writes an application on a proposed insured

Lecture-46] (Exactly One Correct Answer) Why doesn’t “more policyholders” diversify variable-annuity guarantee risk very well?

Because guarantee triggers are highly correlated with the same market index

[Lecture-67] (Exactly One Correct Answer) All of the following groups are considered eligible for group life insurance EXCEPT:

Volunteer religious groups

[Lecture-114] IADLs differ from ADLs in that they:

Are more complex and include tasks like managing medications.

[Backdating-6] Which of the following are examples of a two-part tariff—the framework the paper uses to interpret the mechanism?

Warehouse club annual membership plus per-visit spending

Razor handle purchase plus ongoing blade purchases

Amusement park entry fee plus per-ride charges

[Intro to RILAs-9] (Exactly One Correct Answer) A simple hedge that offsets a RILA promise with a cap and a floor/buffer is to:

Buy a put at the floor and sell a call at the cap

Lecture-11] Which of the following are standard cost-sharing forms?

Coinsurance

Deductible

Copay

[Lecture-228] What factors influence the stability and operations of life insurance companies?

The ability to invest in a variety of assets.

The predictability of death benefits and cash value growth.

Diversification of investments to mitigate systematic risk.

[Lecture-133] (Exactly One Correct Answer) How do indemnity long-term care insurance policies operate?

By paying a flat dollar amount per day regardless of actual expenses.

[Lapse-Based Insurance-11] Which factors are empirically associated with higher lapse risk in Lapse-Based Insurance?

Macroeconomic recessions

Smaller policy face amounts

Younger policyholders

[Lecture-24] Which are examples of constraints in an optimization problem?

A lifetime budget that limits total spending.

An inability to borrow or save (hand-to-mouth).

Limits on attention that make search costly.

A regulation that sets a minimum insurance coverage level.

[Lecture-17] Why might a risk-averse person buy less than full insurance?

Premiums include a positive load/markup

Systematic misperceptions or mistakes

Availability of substitutes like saving/borrowing

Liquidity constraints bind

[Lecture-18] Which of the following are examples of insurance mandates used in the U.S.?

Medicare

Social Security

Workers’ compensation

Auto Liability

[Lecture-236] Which of the following incorrectly describes what happens to life insurers as a result of increasing interest rates?

The change in interest rates reduces the insurers’ ability to meet guaranteed returns.

Policyholders lapse which is beneficial for insurers through lapse-supported pricing.

[Lecture-143] Which of the following accurately describe what can happen if an individual lapses on their long-term care insurance policy?

The policy may be subject to cancellation and require new underwriting to reinstate

[Lecture-180] What factors typically affect life insurance premium rates?

The total coverage amount.

The policyholder’s age.

The policyholder’s health history.

[Selection through Lapsation-1] A pricing meeting: After a modest premium increase, the insurer notices average future costs per policy rise. Which mechanism best explains this pattern in the paper?

A spike in risky asset returns inside the insurer’s portfolio

Differential lapse/continuation behavior interacting with level, front-loaded premiums

Lecture-274] (Exactly One Correct Answer) What are the two main types of downside protection in RILAs?

Floors and buffers

[Lecture-222] What are reasons for backdating a life insurance policy?

To reduce the premium amount for the policy duration.

To cover administrative costs sooner for insurers.

To gain higher commission as an agent.

To pay premiums for months not covered.

[Lecture-156] (Exactly One Correct Answer) What is the concept of crowd-out in the context of long-term care insurance?

When the availability of public insurance reduces demand for private insurance.

[Lecture-146] (Exactly One Correct Answer) Why can’t long-term care insurers use lapse-supported pricing as extensively as say life insurance?

Because long-term care insurance policies typically have lower lapse rates than other types of insurance.

Lecture-127] (Exactly One Correct Answer) Who is the largest payer for long-term care services?

Medicaid

[Lecture-63] (Exactly One Correct Answer) A life insurance application is incomplete if it is missing the signature of which of the following?

The proposed adult insured

[Lecture-65] (Exactly One Correct Answer) Which of the following features allows an insurance policy to remain in force for a specified number of days beyond the premium due date?

Grace Period provision

Annuity Puzzle-7] Which assumptions from Yaari (1965) can be relaxed without overturning the full-annuitization result?

Absence of any non-longevity risks (provided financial markets are complete)

Actuarial fairness of annuities

A specific functional form for discounting or risk preferences

[Lecture-266] (Exactly One Correct Answer) What is a characteristic of the Guaranteed Minimum Withdrawal Benefit (GMWB) in variable annuities?

A certain percentage of premiums paid in can be withdrawn annually.

[Lecture-185] How are life insurance premiums typically structured?

Based on integer age

Level throughout the policy term

[Lecture-183] What aspects are considered in underwriting a life insurance policy?

Policyholder’s lifestyle choices, like smoking.

The insurable interest of the beneficiary.

The policyholder’s family medical history.

Lecture-233] What are the implications of “paid up” policies?

Beneficiaries often don’t know they can claim death benefits.

They are a common way to have a ’lost’ insurance policy.

[Lecture-214] How do viatical settlements differ from STOLI?

Viatical settlements are aimed at terminally or chronically ill individuals.

Viatical settlements are legal and regulated.

[Lecture-134] (Exactly One Correct Answer) If a policyholder with an expense incurred policy incurs a daily long-term care cost of $130, and the policy covers up to $150 per day, how is the excess amount typically handled?

It goes into a pool to extend the length of benefit duration.

[Lecture-285] (Exactly One Correct Answer) Carmen invests $150,000 in a RILA with the following terms: 15% floor, 10% buffer, and 8% cap. In the first year, the S&P experiences a 12% gain. In the second year, the S&P experiences a 25% loss. Ignoring compound returns, what is Carmen’s total account value after two years?

$137,700