Insurance | Law Of Large Numbers

Requisites for an Insurable Risk

CHAD
C: Losses must not pose a Catastrophic risk for the insurer.
H: A large number of similar (Homogenous) exposure units
A: Losses must be accidental from insureds viewpoint
D: Losses must be measurable and determinable so that the insurer can accuratel

Elements of a Valid Contract

COALL
-Competent parties
-Offer and acceptance
-Legal consideration
-Lawful purpose

Coinsurance

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Implied Authority

is based upon the agents business card, letterhead, and insurance company sign on the door

Apparent Authority

is when no authority actually exists.
example: Jason decides to pay tom $1,000 for a new auto policy. Unfortunately, toms agency agreement was terminated the prior day.

Express Authority

is the agency agreement between the insurance agent and insurance company.

Principle of Indemnity

An insured is only entitled to compensation to the extent of the insureds financial loss

Subrogation Clause

The insured cannot receive compensation from both the insurer and a third party for the same claim

What are the 5 Dividend Options?

CRAP-O
-Cash option
-Reduce Premiums
-Accumulate at interest
-Paid-up additions
-One year term

Life Insurance Nonforfeiture Options

- Cash surrender value
- Reduced paid up insurance
-Extended term insurance

ex of an employee who must impute taxable income for benefits in excess of 50K
Frank, age 40, earns $75,000 per year and has group term life insurance through his employer equal to twice his salary. How much income needs to be imputed?
Based on Table 1 fo

$75,000 x 2 = $150,000 death benefit
$150,000-50,000 exclusion = $100,000 in excess coverage
(100,000 / 1,000) x 0.10 x 12 = $120 imputed income

taxation of Installment option for life insurance proceeds or annuity payments.

The taxable income is calculated using the exclusion/inclusion ratio:
Monthly payment x 12 months x life expectancy = Total Payments
(Basis / total payments) = Exclusion Ratio
(Exclusion Ratio x Monthly payments) = Amount excluded from Monthly Income

Strategies to utilize in the event of medical coverage changes?

Switch jobs within 62 days
-Utilize HIPAA, coverage begins with no, or a limited, preexisting condition timeframe
Switch Jobs with Unknown Timeframe
-Utilize COBRA to extend coverage and minimize the "break" period. Utilize HIPAA to obtain a new policy.
R

To be Eligible for COBRA, group coverage must terminate because?

-covered employee dies
-employee is voluntarily or involuntarily terminated
-hours are reduced from full-time to part-time
-covered employees separate from spouse
-Employee becomes eligible for medicare
-A dependent child is no longer eligible for coverag

The employer must offer coverage for a specific period of time based on the following qualifying events:

- 18 months for reduction in hours or normal/involuntarily termination.
- 36 months for Death
- 36 months for divorce
- 36 months for Medicare eligibility
- 36 months for loss of dependency status by children of emplyee
- Up to 29 months if employee meets

The best life insurance policy for the payment of federal estate taxes for a 50-year old couple with illiquid assets is:
A) An individual whole-life policy on each spouse on a cross-ownership basis.
B) A joint and last-to-die life insurance policy owned b

Rationale
The correct answer is "B." The "last-to-die" will pay on the second death, and if it is held in a trust, it will not add to the insured estate tax due because it will not increase the taxable estate.

Bill Commisky is an agent for the Advantage Insurance Company. For the last year, the company has informed its agents not to write auto insurance policies on flower shops. However, when Flowers R Us applied for a policy, Bill bound the coverage. Flowers R

Rationale
The correct answer is "B. There are two forces at play here which cause liability for the insurer. First, Bill was an agent with clear binding authority. As a result, the policy must be bound. The second thing that occurs which renders the exist

Dave is 46, married and has an annual salary of $60,000. His employer offers group term life insurance coverage equal to 2 times his annual salary. The employer's cost for Dave is $.40 per $1,000 of which Dave pays $.15 per month per $1,000. The Table 1 (

The correct answer is "A." Dave is paying $216 each year for the coverage ($120 x 0.15 x 12). The Table I cost is calculated by subtracting $50,000 (the tax-free amount allowed under Section 79) from the $120,000 actually purchased, dividing the remainder

Which of the following are duties of insurance commissioners in regulating insurers?
I. To rule on the constitutionality of insurance laws
II. To determine if an insurer meets the requirements to obtain a license
III. To render decisions on the meaning of

Rationale
The correct answer is "D." Options "I" and "III" are under the purview of the state courts.

Your client, John Kent, purchased a limited payment whole life policy 15 years ago. He would like to stop paying the premiums on his policy, but continues to need the same amount of insurance. If he did so, which one of the following is a non-forfeiture o

Rationale
The correct answer is "B." An extended term insurance is correct because extended term insurance is the only choice that is a non-forfeiture option. Option "A" - Although this is a non-forfeiture provision, the amount of insurance coverage would

2126Question 25 of 25Insurance Quiz 1
Which of the following statements accurately describes a fully insured group health insurance plan?
A) Dismemberment benefits from accidental death and dismemberment coverage (AD&D) are taxable to the employee.
B) Ben

Rationale
The correct answer is "B." Option "A" - AD&D benefits are not taxable to the employee's beneficiaries. Option "C" is false. Option "D" - Premiums are always deductible to the employer. In a self-funded plan which is discriminatory, some or all o

HO-3 special form

-Provides coverage on dwelling and other structures on an OPEN PERILS basis resulting in coverage against all physical loss other than those specifically excluded.
-Personal property is covered on a named peril basis
allows loss of use on a OPEN PERIL bas

Section I coverages

-Coverage A: Dwelling
-Coverage B: Other structures
-Coverage C: Personal property
-Coverage D: :Loss of Use

Section II Coverages

-Coverage E: Personal Liability
-Coverage F: Medical payments to others

Section II of a HO-3 policy provides what type of protection for the homeowner?
A. Dwelling
B. Damage to others property
C. Loss of Use
D. Personal Property

B.

Which of the following offers identical coverage for all forms of a homeowners insurance policy?
A. Section I
B. Section II

B.
Liability and Medical Payments are identical

Family members are covered for the purpose of part A (Liability coverage) for a PAP when operating all of the following except?
A. Your covered auto
B. Rented auto
C. Borrowed car
D. Replacement car after 31 days

D.
You have a duty to notify the insurance company within first 30 days of purchasing a new car

All of the following statements are correct regarding a PAP Part C (Uninsured motorists) coverage except?
A. payment for property damage
B. Payment for lose wages
C. payment for pain and suffering
D. Payment for Punitive damages

D.
Does not pay for Punitive damages. you cannot sue yourself for liability.

PAP Part D: Coverage for damage to your Auto:
Collision
Comprehensive or other than collision
Exclusions

-Collusion: Protects against an accident involving another car, running off the road, into a lake, tree or wall
-Comprehensive: Falling objects, fire, theft, explosion, earthquake, windstorm, hail, water, flood, mischief, vandalism, riot, contact with a B

All of the following statements are correct regarding a personal umbrella liability policy except?
A. provides protection above and beyond the liability limits of your homeowners and PAP.

...

All of the following statements concerning social security beneficiaries are correct except?
A. Monthly benefits can be paid to a disabled insured worker under age 65.
B. Benefits can be paid to the divorced spouse of a retired or disabled worker entitled

D
Benefits can be paid to the dependent parents of a deceased worker at age 62 or over

Which of the following statements is false?
A. Federal law does not require those selling a group annuity contract with multiple investment choices including equity funds to have a securities license or to provide a prospectus if it is sold to a qualified

B.
Individual states regulate the insurance industry. An insurance agent must be licenses by that state to sell insurance in that state

Rank from lowest to the highest the risk of annual premiums increasing on the following life insurance policies on a male age 35. Premium are projected to vanish at 65. after a careful review of each company's insurance questionnaire, it is concluded that

C.
The Illustrated interest rate is too high for the premiums illustrated. Essentially the higher the illustrated rate, the more risk associated with premiums increasing if the interest rate is not attained. the whole life has a fixed premium. the variabl

Regarding the characteristics of insurance, which of the following is/are fundamental?
1. Probability (Possibility and predictability of a loss)
2. Law of Large Numbers
3. Transfer of risk from individual to group
4. Insurance is a form of speculation
A.

C.
All of the above are true, except insurance is not designed to cover speculative risk. speculative risk involves loss, no loss or gain. Insurance only covers pure risk, loss or no loss

The National Association of Insurance Commissioners (NAIC) is involved in the regulation of insurance by
1. Direct involvement through the development of specific regulations for all states to follow.
2. The regulation of the insurance commissioners of al

C.

Which of the following statements are true regarding the ownership of individual life insurance?
I. A policy can only be issued to the insured.
II. Generally, assigning a policy requires proof that the insured is still "insurable" (meaning still in good h

Rationale
The correct answer is "D." Option "I" - An individual with an insurable interest in the insured can purchase a policy. Option "II" - Policy assignments can be made regardless of the insured's health as long as the policy is in force. Option "III

Tracy Cardinale was named by her sister, Lisa, as irrevocable beneficiary of Lisa's life insurance policy. After this was set up, Lisa wanted to borrow from the policy's cash value. What right does Lisa have to the cash value? Consider carefully the suppo

Rationale
The correct answer is "D." Even though Lisa is the owner of the policy, she can be denied permission to borrow from the cash value since Tracy (the irrevocable beneficiary) has a vested interest in the policy.

Which of the following represents the LEAST favorable means of securing long-term care coverage?
A) Continuing Care Retirement Communities.
B) Disability Income Policy Rider.
C) Association Arrangements.
D) Life Insurance Policy Rider.

Rationale
The correct answer is "D." Continuing Care Retirement communities are structured specifically for Long-Term Care (LTC) coverage, as are the individual policies. Association arrangements are also LTC specific. These three all provide excellent me

When a property claim has been submitted, the adjuster is called in to do which of the following:
I. Assist the insured in the preparing the proof-of-loss statement.
II. Determine whether there was a loss covered by the policy.
III. Classify the loss as s

Rationale
The correct answer is "A." Options "I" and "II" are roles of an adjuster. Option "III" is incorrect because the classification is the underwriter's job. Option "IV" is incorrect because the adjuster determines the amount of loss. An arbiter woul

Non-forfeiture rights of policyholders guarantee that there will be a:
A) Policy face value.
B) Death benefits for survivors.
C) Cash value.
D) Premium refund.

Rationale
The correct answer is "C." Non-forfeiture rights (or provisions) arrange an orderly legal structure to assure monies paid on an insurance policy are not simply absorbed by the company without recourse in the event that an insured decides to term

Six years ago, Sonny Gates purchased a building for $400,000. Its current replacement cost is $800,000. The building is covered for fire-related perils by Commercial Carriers Insurance Company to $400,000, with an 80% coinsurance provision and a $2,000 st

Rationale
The correct answer is "B."
(Face value � coninsurance) x Loss - Deductible
[400,000 � (.80 x 800,000)] x 600,000 - 2,000
](400,000 � 640,000) x 600,000] - 2,000
(.6250 x 600,000) - 2,000
375,000 - 2,000
373,000

George, age 45, is the beneficiary of his deceased father's $250,000 life insurance policy. The insurer has requested that he select a settlement option for payment of the proceeds. What factors should he consider before making the election?
I. His curren

Rationale
The correct answer is "A." Based on the information given, there is no estate tax (barring an amount above the exemption equivalent) or income tax on the proceeds of the policy. All other factors should be of concern and impact his decision.

This level of authority takes place between the agent and the company, but deals with what a third party is led to believe based on letterhead and signs on the wall:
A) Express authority.
B) Implied authority.
C) Apparent authority.
D) None of the above.

Rationale
The correct answer is "B." Express authority is written in the contract. Implied authority are actions assumed to be part of an agent's repertoire within his or her rights, including signs on the wall and letterhead. Apparent authority is when a

When Pete Morin purchased his $100,000 home, he insured it at the required coinsurance amount of 80% of the value. Over the last five years, the value of his home has increased and is now $160,000, but he has not increased his coverage. Pete has a $500 de

Rationale
The correct answer is "B." The amount carried divided by the amount required (80% of current value) times the loss, minus the deductible equals the payment. One of the tricks on this one is that he purchased $80,000 of coverage initially (80% of

The group model of the HMO:
A) Is a corporation and medical staff members including doctors, nurses and clerical staff are employees of the HMO.
B) Is a type of HMO organization that is made up of physicians who have their own office locations.
C) Is an a

Rationale
The correct answer is "C." The group model of the HMO is an arrangement that is sometimes known as the network model. Option "A" describes a staff model. Option "B" describes an IPA. Option "D" is incorrect as ALL HMOs employ gatekeepers.

Direct recognition programs used with life insurance policies are best described in the following statement:
A) Any amount of cash that is removed from the policy is reflected in a decrease in the amount of dividends and interest paid on that policy.
B) M

Rationale
The correct answer is "A." Direct recognition programs are best described as follows: Any amount of cash that is removed from the policy is reflected in a decrease in the amount of dividends and interest paid on that policy.

The policy which insures an individual when "the insured is unable to perform the duties pertaining to any gainful occupation for which they are suited by education, experience, or training" best describes what definition of disability?
A) Any Occupation.

Rationale
The correct answer is "B." Option "A" - Any occupation would say you are employable even in the severest disabilities. Option "C" - Split definition uses own occupation to begin with and moves toward modified any occupation. This allows for trai

A client recently purchased a new home from a builder for $150,000 including the lot valued at $40,000. How much insurance would you recommend that your client purchase to cover full replacement of the house in the event of a loss?
A) $88,000
B) $110,000

Rationale
The correct answer is "B." This is the value of the entire package minus the value of the land (e.g., $150,000 - $40,000 = $110,000).

A supplier of your company experiences fire damage at their plant. They cannot provide an essential part to you for a number of weeks. This, of course, delays your operation. You are covered by a very extensive insurance. For this reason, you would go to

Rationale
The correct answer is "A." You would go to collect from your contingent business interruption insurance because it is a business which you do not own that has a direct effect on your own business.

If one of the adult members of a family with children were to die today, the amount of money that would be calculated prior to the children turning 18 would satisfy the needs of the family during the:
A) Blackout period.
B) Emergency period.
C) Pre-retire

Rationale
The correct answer is "D." The dependency period is also known as the "critical period." The blackout period occurs after the youngest child leaves home.

Inland marine insurance covers all of the following except:
A) Imports.
B) Floaters.
C) Domestics shipments.
D) The hull of the ship.

Rationale
The correct answer is "D." The hull of the ship is covered under ocean marine insurance.

In the Commercial General Liability contract, which of the following parts does not belong:
A) Coverage A, bodily injury and property damage liability.
B) Coverage B, personal and advertising liability.
C) Coverage C, medical payments.
D) Coverage D, othe

Rationale
The correct answer is "D." There is no "other structures" coverage on a CGL contract.

While John is working on his garage roof, he slips, falls off the roof, and lands on the driveway next to the car. John broke his arm in the fall. He should seek to collect and will be successful in doing so from which of his insurance policies?
A) Covera

Rationale
The correct answer is "C." Option "A" - Homeowners does not pay for injury to the insured. Option "B" - Medical pay auto pays for the insured if he or she is injured "in, on, or about the covered auto." Here he was close, but not close enough. H

Which one of the following accurately describes the characteristics of group term life insurance?
A) The minimum size group is 10, unless specific requirements are met.
B) A medical exam is generally required to secure coverage.
C) Coverage amounts may be

Rationale
The correct answer is "A." Option "B" - Medical exams may not be required for group term. Option "C" - Coverage amounts may be (and many times are) based upon salary level, not job classification and length of service. Option "D" - Payouts are a

Which one of the following statements about life insurance, endowments, and annuity products and their tax attributes is correct?
A) Modified endowment contracts do NOT provide a tax-free death benefit if the policyholder dies prior to age 59 1/2.
B) Tax-

Rationale
The correct answer is "D." Option "D" is correct because immediate annuities are not subject to a premature distribution penalty tax. This only applies to deferred annuities. In a MEC all withdrawals are considered to be above the basis (earning

Where no-fault auto insurance is involved, which of the following is a correct match?
A) Pure no-fault: Several states have enacted this system.
B) Verbal threshold: Law suits may be allowed when there is a fatal injury.
C) Modified no-fault: In no way im

Rationale
The correct answer is "B." There is no "pure no-fault" in existence in any state in the U.S. Modified no-fault allows suits when verbal and dollar thresholds have been crossed. Dollar threshold is damage occurring above a certain amount, not a l

If the insured under a disability income insurance policy moves to a more hazardous job and receives an increase in compensation with the job change, what will be the likely effect on the disability coverage?
A) The relation of earnings to insurance claus

Rationale
The correct answer is "D." In the case of increased risk on a disability policy the insurer will generally reduce coverage to match what the premium will purchase at the new, riskier position.

Which of the following statements best describes the probation period in a disability income policy?
A) The period of time that must elapse before the policy is activated.
B) The period of time available for the insurer to cancel coverage under the policy

Rationale
The correct answer is "C." The probation period, when included in a Disability Income policy, is the time the insured must wait after the issue of the policy before specified conditions will be covered.

Which of the following statements about the conversion privilege is/are true regarding group life insurance plan provided by employers?
I. The policy may be converted from a permanent product to a term product.
II. The policy may be converted if the insur

Rationale
The correct answer is "D." Option "I" - Switching from a permanent to a term product is not a conversion available in any group life insurance. Option "II" - These group plan term-to-permanent conversions will occur without evidence of insurabil

Which of the following is NOT a factor that affects (and in some cases limits) the liability of the insurer?
A) Insurable interest.
B) Policy face value.
C) Rate structure.
D) Deductibles.

Rationale
The correct answer is "C." Without an insurable interest, the insurance will not be sold. This affects liability of an insurer. Face value is the most (limit) an insurer will pay. Deductibles are paid by the insured, and other insurance is taken

Insured buy-sell agreements have the following characteristics, except:
A) Stock redemptions (entity agreeements) increase the cost basis of the surviving shareholders.
B) Insured cross-purchase plans involve shareholders buying life insurance on each oth

Rationale
The correct answer is "A." The cost basis of surviving shareholder does not increase in an "entity" or stock redemption buy-sell, but would increase, in part, in a cross-purchase.

Lisa is a condo owner and has an HO-6 policy. She purchased the condo for $400,000. Her HO-6 policy is an open peril policy and has a face value of $360,000. Her contents are covered on a named peril basis with $100,000 in coverage. She also has an 80% co

Rationale
The correct answer is "A." An HO-6 policy does not provide coverage for the building or roof. The building and roof are covered by the condo association policy, which covers all exterior walls and roof. The HO-6 policy covers all interior walls

Which of the following statements regarding assignments is/are true?
I. A collateral assignment is a temporary transfer of some or all of the ownership rights on condition such rights revert to the assignee.
II. A collateral assignment is a temporary tran

Rationale
The correct answer is "C." Option "I" describes an absolute assignment, and Option "III" almost describes a collateral assignment, but reversion of rights return to the insured, not the insurance company.

Derek Baldwin purchased a 20-year limited payment whole life policy 15 years ago. He would like to stop paying the premiums on his policy. If he does so, which one of the following is a nonforfeiture option he could possibly use?
A) Installments for a fix

Rationale
The correct answer is "D." Ideally the insured should simply use dividends to meet premium obligations over the next five years and have a fully paid-up policy. However, this is not one of the choices. Therefore, the best possible answer would b

Your client, Dennis and Daughter, Inc. (often referred to as DAD by the owners) is a C corporation with gross receipts of $3,000,000 for the past four years. The net earnings to the firm for the most recent fiscal year were $120,000. There are two shareho

Rationale
The correct answer is "B." Insurance premiums to fund buy-sell agreements in a cross-purchase plan are not tax deductible. In the case of an entity agreement, where the firm owns the policies, the premium would also NOT be tax deductible.

Kathleen recently died. She was currently insured for Social Security. Which of the following persons would be entitled to survivorship benefits based on her work record?
A) Her husband, Robert, who is age 65.
B) Her mother, Joy, age 70, who was a depende

Rationale
The correct answer is "C." Since she was only currently insured Robert and Joy are not entitled to survivorship benefits. Her daughter is still eligible for benefits even though she is 18 because she is in high school.
Retirement Survivorship Su

Jerry, age 66 is a U.S. citizen, an avid cyclist and currently has Medicare part A and B. He recently spent two-weeks traveling through France and cycling through some of the country side. One day while cycling he had an accident and required an ambulance

Rationale
The correct answer is "A." In most situations, Medicare does not provide health care coverage for services received outside of the U.S. There are three exceptions to this rule: 1 - You're in the U.S. when you have a medical emergency and the for

What benefits are available to the survivors of a deceased worker who was currently insured but not fully insured at death?
I. Lump sum death benefit of $255.
II. Mother or father's spousal benefit for caring for a qualifying child under age 16.
III. Inco

Rationale
The correct answer is "C." There are no survivor benefits to a surviving spouse with no qualifying child.

Your client, Dennis and Daughter, Inc. (often referred to as DAD by the assuming owners) is a C corporation with gross receipts of $3,000,000 for the past four years. The net earnings to the firm for the most recent fiscal year were $120,000. There are tw

Rationale
The correct answer is "D." DAD does qualify for the small business exemption to AMT, so the life insurance won't trigger AMT.

Kathleen recently died. She was fully insured and left behind her husband Robert (age 60), their two children, Nora (age 18 and in college) and David (age 13), and her dependent single mother Joy (age 70). All of the following are true, except?
A) Robert

Rationale
The correct answer is "A." Her husband, Robert, who is age 60 is entitled to a survivorship benefit of 71.5% of Kathleen's PIA based on retirement but he would be entitled to 75% since he is caring for a child under 16 (David). Her mother, Joy,

Reasons to use life insurance to fund business continuation agreements include which of the following:
I. It provides sufficient assets for the buyer to perform on the contract.
II. Insurance protects the company and its shareholder because the IRS cannot

Rationale
The correct answer is "B." The IRS may challenge the valuation of stock in business continuation agreements, with or without insurance; the IRS is not bound by any contractual agreement between the company and its shareholders.