Principles of Risk Management and Insurance: Principles of Risk Management and Insurance - Chapter 11 Flashcards

Which of the following types of families is likely to have the least
need for a large amount of life insurance?
A) a blended family B) a traditional family
C) a single person family D) a sandwiched family

Answer: C

The human life value is defined as the
A) present value of a deceased breadwinner's future gross
income. B) future value of a deceased breadwinner's past
earnings. C) present value of the family's share of a
deceased breadwinner's future earnings. D) future value of
the family's share of a deceased breadwinner's future earnings.

Answer: C

Which of the following pieces of information is needed to calculate a
person's human life value?
A) the marital status of the person. B) the person's
estimated annual Social Security benefits after retirement.
C) the person's cost of self-maintenance. D) current
outstanding debts, including mortgage debt.

Answer: C

To calculate a human life value, it is necessary to deduct certain
costs from a person's average annual earnings. These costs include
A) funeral costs. B) income taxes. C)
investment income. D) pension benefits after
retirement.

Answer: B

All of the following are defects which limit the usefulness of the
human life value approach in determining the correct amount of life
insurance to purchase EXCEPT
A) The effects of inflation are ignored. B) Other
sources of income for survivors are ignored. C) Earnings
are assumed to remain constant. D) Earnings during the
individual's productive lifetime are ignored.

Answer: D

Which of the following statements about the needs approach for
estimating the amount of life insurance to purchase is (are) true?
It involves an analysis of various family needs which must be
met if a family breadwinner dies. Its use is appropriate
only if a person currently has no life insurance protection.
A) I only B) II only C) both I and II
D) neither I nor II

Answer: A

Which of the following is a cost/expense that an estate clearance
fund is designed to pay?
A) burial expenses B) retiring the mortgage
C) education costs D) income for the widow(er) during
the readjustment period

Answer: A

What is the length of the readjustment period which is considered
when the needs approach is used to determine the amount of life
insurance to own?
A) 3 to 6 months B) 1 to 2 years C) until
the youngest child reaches age 18 D) until the surviving
spouse reaches age 65

Answer: B

Under the needs approach, when is the dependency period of a
surviving spouse assumed to end?
A) 1 or 2 years after the breadwinner's death B) when
the youngest child reaches age 18 C) when the surviving
spouse reaches age 65 D) when the surviving spouse
dies

Answer: B

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.

Answer: D

Which of the following statements about premature death is (are) true?
From an economic standpoint, premature means death before a
specified age, such as 65. 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

Answer: B

Which of the following statements about re-entry term insurance is true?
A) It permits the coverage to be renewed an unlimited number
of times as long as insurability is demonstrated. B) It
permits a refund of premiums paid if the term insurance is renewed a
specified number of times. C) It permits a lower renewal
premium if the insured demonstrates insurability. D) It
permits a lapsed whole life policy to be reinstated as term
insurance.

Answer: C

Which of the following is a noneconomic cost associated with
premature death?
A) reduction in the standard of living B) loss of a
parental role model C) additional expenses, such as
uninsured medical bills D) loss of the deceased
breadwinner�s future earnings

Answer: B

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.

Answer: D

Julian, age 45, would like to determine how much life insurance to
purchase using the human life value approach. He assumes his average
annual earnings over the next 20 years will be $40,000. Of this
amount, $20,000 is available annually for the support of his family.
Julian will generate this income for 20 more years and he believes
that 5 percent is the appropriate interest (discount) rate. The
present value of one dollar payable for 20 years at a discount rate of
5 percent is $12.46. What is Julian's human life value?
A) $184,600 B) $249,200 C) $360,800
D) $400,000

Answer: B

Jessica is an agent for LMN Life Insurance Company. She met with
Brad, who was interested in purchasing life insurance. Jessica
explained the various uses of life insurance, including income for
Brad's wife during the 1- or 2-year period following Brad's death.
This period is known as the
A) dependency period. B) estate clearance
period. C) blackout period. D) readjustment
period.

Answer: D

Sarah is using the needs approach to determine how much life
insurance to buy. Her cash needs are $30,000; her income needs are
$140,000; and special needs are $100,000. Sarah has the following
assets: $20,000 in bank accounts, $30,000 in retirement plans, and
$40,000 in investment accounts. Sarah owns no individual life
insurance. She is covered by a $50,000 group life insurance policy
through her employer. Based on this information, how much additional
life insurance should Sarah purchase?
A) $80,000 B) $130,000 C) $150,000
D) $160,000

Answer: B

Which of the following statements regarding convertible term
insurance is true?
A) Evidence of insurability must be provided to convert the
policy. B) More term policies are converted using the
original-age method than using the attained-age method. C)
The converted coverage has a lower face amount than the term
coverage. D) The annual premium for the cash value coverage
is lower if an original-age conversion is used than if an
attained-age conversion is used.

Answer: D

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.

Answer: A

When using the needs approach, several "special needs"
should be considered. One special need is money to cover unexpected
events, such as major car repairs, dental bills, or home repairs.
Money set aside for this purpose is called a(n)
A) estate clearance fund. B) emergency fund.
C) readjustment period fund. D) mortgage redemption
fund.

Answer: B

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.

Answer: D

Which of the following statements about yearly renewable term
insurance is (are) true?
It requires evidence of insurability for renewal. It
is most appropriate when an insured needs lifetime protection.
A) I only B) II only C) both I and II
D) neither I nor II

Answer: D

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.

Answer: A

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.

Answer: B

All of the following statements about the conversion of a term policy
are true EXCEPT
A) Under an attained age conversion, the premium is based on
the insured's attained age at the time of conversion. B)
Under an original age conversion, the policyowner must pay a
financial adjustment in addition to the premium for the new
policy. C) Most insurers require original age conversion to
take place within a specified period (5 years, for example) of the
issue of the term policy. D) Evidence of insurability is
required before a conversion is permitted.

Answer: D

Which of the following statements about a decreasing term insurance
policy is true?
A) The face amount of the policy decreases during the policy
period, and the premium increases. B) The face amount of
the policy decreases during the policy period, but the premium
remains level. C) The premium decreases during the policy
period, but the face amount remains constant. D) Both the
premium and the face amount of the policy decrease gradually over
the policy period.

Answer: B

The purchase of term insurance is justified by which of the following circumstances?
The insured wants to save money through the policy for a
specific need. 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

Answer: B

A legal reserve in life insurance is a result of
A) premium taxes payable by life insurance companies being
postponed during the early policy years. B) dividends being
paid to policyholders. C) inadequate premiums in the early
policy years being subsidized by investment earnings. D)
excess premiums in the early policy years being invested at compound
interest.

Answer: D

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.

Answer: C

Which of the following statements about life insurance cash values is
(are) true?
Cash values are a result of the level premium method of
purchasing life insurance. The cash value of a policy must
always exceed the policy's legal reserve. A) I only
B) II only C) both I and II D) neither I nor
II

Answer: A

All of the following statements about ordinary life insurance are
true EXCEPT
A) Premiums are level throughout the policy period.
B) The face amount of the policy is paid if the insured lives to
age 65. C) There is a build-up of cash value that can be
borrowed by the policyholder. D) It offers the policyholder
the flexibility to meet a wide variety of financial objectives.

Answer: B

Which of the following statements about limited-payment life
insurance is true?
A) It is a form of term insurance. B) It matures at
the end of the premium-payment period. C) The premium
decreases each year during the premium-payment period. D)
Its use may be appropriate if a person wants paid-up life insurance
during retirement.

Answer: D

Which of the following statements about endowment insurance policies
is (are) true?
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. 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

Answer: A

Which of the following statements about variable life insurance is true?
A) Premium payments are flexible. B) The death
benefit cannot be higher or lower than a guaranteed, specified,
value. C) The policyowner has the option of investing the
cash value in several investment accounts. D) The cash
surrender value of the policy is guaranteed.

Answer: C

All of the following statements about universal life insurance are
true EXCEPT
A) Interest is credited to the policy's cash value each
month. B) Any withdrawal of a policy's cash value reduces the
amount of the death benefit. C) Interest credited to a
policy's cash value is taxable for the policyowner in the year
credited. D) The policyowner can add to a policy's cash value
at any time subject to policy guidelines.

Answer: C

Which of the following statements about universal life insurance is
(are) true?
The current interest rate credited to the cash value at the
time the policy is issued remains fixed for the life of the
policy. A monthly deduction is made from the policy's cash
value for the cost of insurance protection. A) I only
B) II only C) both I and II D) neither I nor
II

Answer: B

All of the following statements describe the flexibility available to
the owner of a universal life insurance policy EXCEPT
A) Policy loans are permitted on an interest-free basis.
B) The frequency of premium payments can be varied. C)
The death benefit can be increased with evidence of
insurability. D) Premium payments can be any amount provided
there is sufficient cash value to keep the policy in force.

Answer: A

Which of the following statements about a variable universal life
insurance policy is (are) true?
There is a minimum guaranteed interest rate for the cash
value. 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

Answer: B

All of the following statements about current assumption whole life
insurance are true EXCEPT
A) It is a form of participating whole life insurance that
pays annual dividends. B) An accumulation account is
credited with an interest rate based on present market conditions
and company experience. C) Under the low-premium version,
the premium is subject to change after an initial guaranteed
period. D) Under the high-premium version, the premium may be
discontinued after a period of time.

Answer: A

A whole life insurance policy in which premiums are reduced for an
initial period (e.g. 3 years) and are higher thereafter is an example
of a
A) level-term policy. B) modified life policy.
C) limited-payment whole life policy. D) variable life
policy.

Answer: B

Which of the following statements about policies sold to preferred
risks is (are) true?
Preferred risks are people whose mortality experience (deaths
per thousand at a given age) is expected to be more favorable than
average. Insurers require preferred risks to purchase at
least a minimum amount of life insurance, such as $250,000.
A) I only B) II only C) both I and II
D) neither I nor II

Answer: C

Which of the following statements about second-to-die life insurance
is (are) true?
The insurance is a form of endowment coverage. The
premium is lower than the combined cost of purchasing a life
insurance policy on each insured. A) I only B) II
only C) both I and II D) neither I nor II

Answer: B

Which of the following statements about savings bank life insurance
is true?
A) The maximum amount that a depositor can purchase is
$50,000. B) The maximum amount of insurance that a depositor
can purchase is limited to the amount of money on deposit in his or
her savings account with the savings bank. C) The objective
of savings bank life insurance is to provide protection to the bank
in case a borrower dies before a loan is repaid. D) The
objective of savings bank life insurance is to provide low-cost
insurance to consumers by holding down expenses.

Answer: D

Which of the following statements about home service life insurance,
which evolved over time from a type of life insurance called
industrial life insurance, is true?
A) Most policies have a face value exceeding $100,000.
B) Premiums are usually not collected at the insured�s home and
are remitted directly to the agent or the insurer. C)
Industrial life insurance is group term insurance coverage marketed
to employees at the work site. D) This popular product
accounts for over 40 percent of the life insurance sold today.

Answer: B

Michael wants to make sure that life insurance proceeds are available
to pay his outstanding mortgage balance if he dies. He purchased a
type of life insurance in which the amount of coverage gradually
declines, just as his outstanding mortgage balance gradually declines.
This type of life insurance is called
A) modified life insurance. B) decreasing term
insurance. C) re-entry term insurance. D) current
assumption whole life.

Answer: B

Carl would like to purchase life insurance. He would also like to
invest in a mutual fund. An agent told Carl about a form of life
insurance in which Carl could select where the saving component is
invested. This form of life insurance has fixed premiums and the cash
value is not guaranteed. This type of life insurance is called
A) universal life insurance. B) whole life
insurance. C) variable life insurance. D) current
assumption whole life.

Answer: C

Tamara purchased a term insurance policy when she had high life
insurance needs and limited income. Now Tamara can afford whole life
insurance. What term life insurance provision will permit Tamara to
switch her term insurance to whole life insurance without having to
show that she is still insurable?
A) renewal provision B) tax-free exchange
provision C) conversion provision D) free look
provision

Answer: C

Alex, age 26, purchased a 20-payment whole life insurance policy.
After Alex has made 20 premium payments, his life insurance policy is considered
A) matured. B) reduced. C) expired.
D) paid-up.

Answer: D

Ann is considering the purchase of a life insurance policy with these
characteristics: flexible premium payments, the insurance and savings
components are separate, the interest rate credited to the cash value
is tied to a changing market interest rate but a minimum interest rate
is guaranteed, and a monthly administrative fee is charged. Ann is
considering buying
A) whole life insurance. B) variable life
insurance. C) universal life insurance. D) current
assumption whole life.

Answer: C

Dave purchased a life insurance policy. The policy is
nonparticipating and the cash values are based on the insurer's
present mortality, investment, and expense experience. After 2 years,
the insurer will recalculate the premium based on the mortality,
investment, and expense experience at that time. Dave purchased
A) current assumption whole life. B) variable life
insurance. C) universal life insurance. D) variable
universal life insurance.

Answer: A

Which of the following $100,000 whole life insurance policies, issued
by the same company to a man age 32, would require the highest
first-year premium?
A) continuous premium (ordinary) life B) whole life
paid-up at 65 C) 10-payment whole life D)
20-payment whole life

Answer: C

Which of the following statements about variable universal life
insurance is (are) true?
I Variable universal life insurance has fixed premium payments.
Variable universal life insurance allows the policyowner to
decide where the premiums are invested. A) I only
B) II only C) both I and II D) neither I nor
II

Answer: B

Which statement is true concerning the economic problem of premature
death in the United States?
The economic impact of premature death of the breadwinner
varies for different types of families. Increased life
expectancy has increased the economic problem of premature death
over time. A) I only B) II only C) both I
and II D) neither I nor II

Answer: A

Which of the following statements is (are) true regarding the results
of the 2014 study by the Life Insurance Market Research Association
(LIMRA) on the adequacy of life insurance owned by households in the
United States?
The average household is adequately insured against the risk
of premature death. The average household is significantly
underinsured against the risk of premature death. A) I
only B) II only C) both I and II D) neither
I nor II

Answer: B

Which of the following statements is true regarding return of premium
term insurance?
A) The insurance is free because premiums are refunded at the
end of the coverage period. B) Life insurers charge less
for this coverage than for regular term insurance that does not
include a refund provision. C) The return of premium is
only offered on one-year term insurance policies. D) The
coverage is expensive and is not free when time value of money is
considered.

Answer: D

The difference between the legal reserve of a whole life policy and
the face amount of insurance is the
A) cash value. B) net amount at risk. C)
premium. D) dividend accumulations.

Answer: B

Gwen purchased an interesting life insurance policy. A minimum
interest rate is guaranteed on the cash value, but additional interest
may be credited based on the investment performance of a group of
common stocks. There is also a cap on the additional interest credited
to the policy. Based on this information, what type of life insurance
did Gwen purchase?
A) variable life insurance B) indexed universal life
insurance C) current assumption whole life insurance
D) variable universal life insurance

Answer: B

A common use of second-to-die life insurance is
A) insuring children. B) insuring "double income
with kids" families. C) estate planning. D)
insuring key employees of a business.

Answer: C

Which of the following statements about indexed universal life
insurance is true?
A) It is another name for variable life insurance. B)
Although a minimum interest rate is guaranteed, the rate credited
can be higher if a specified stock index performs well. C)
The cash value is usually credited with 100 percent of the return on
the equity index, including dividends paid on the stocks in the
index. D) The formula used to determine the additional
interest credited to the policy places no limit on the additional
interest that can be credited.

Answer: B

All of the following statements about employer-provided group life
insurance are true EXCEPT
A) Individual evidence of insurability, through a medical
exam, is usually required. B) Group life insurance is a
common employee benefit. C) A single contact between the
employer and the insurer is issued. D) Employees are given
certificates of insurance as evidence of the coverage.

Answer: A