Chapter 8 finance

The basic purpose of all insurance is to a. protect your health. b. protect you from losses. c. supplement your income. d. shield you from bad decisions. e. do none of these. B
Insurance is a tool that can lessen ____ risk. a. social b. mental c. economic d. accident e. exposure C
The purchase of insurance is a common form of which risk management technique: a. risk retention b. risk transfer c. risk assumption d. risk avoidance e. loss control B
Underwriting is best described as a. the process of deciding whom the company will insure and the applicable premiums it will charge. b. actuarial science. c. production-related activities performed primarily by agents in the field. d. the process of developing pricing structures for insurance, often performed by an actuary. e. a function most often performed by adjusters. A
From the standpoint of the person buying insurance, the central purpose of insurance should be: a. to collect for all accidental losses b. to transfer risks of serious losses c. to support the prevention of losses d. to accumulate savings e. to reduce payments for the most frequently occurring losses B
Which of the following types of policies is most likely to allow you to switch investments? a. limited pay life b. whole life c. variable life d. term life e. adjustable whole life C
Kurt purchased a policy with an initial premium of $3,000 and may elect how much he desires to pay in premiums from now on. He has purchased a face value of $100,000 and can accumulate cash value. What type of life insurance has Kurt purchased? a. universal life b. whole life c. modified whole life d. term life e. adjustable whole life A
Which of the following companies does not rate the financial strength of life insurance companies? a. A.M. Best b. Moody’s c. Standard & Poor’s d. Fitch e. Welch’s E
If a life insurance policy pays dividends, it is said to be a. universal life b. participating c. investment grade d. paid-up e. extended B
The most valuable single technique in determining how much life insurance is needed is: a. Computing the Human Life Value. b. Using the probability of death each year, prevailing interest rates, and assumed inflation rates to find the discounted present value of a future income stream. c. Assessing the family’s total economic needs and subtracting financial resources available to meet those needs. d. Estimating the sum of money which, when paid in installments, will produce the same income as the person would have earned, after deducting assumed amounts for taxes and personal maintenance expenses. e. Using a multiple of earnings adjusted for occupation. C
Underwriting helps protect life insurance companies from which of the following? a. Major downturns in the economy b. Short-term shocks in the investment markets c. Adverse selection d. Having too many healthy people buy life insurance e. Shifts in the macro-social structure of the population C
The probability of a loss occurring can be reduced by a. risk observance. b. loss prevention. c. risk assumption. d. risk retention. e. insurance. B
Through insurance, society is able to a. reduce costs. b. increase rewards. c. reduce financial risks and share losses. d. change financial risks and reduce losses. e. anticipate risks. C
The best way to handle risk is to a. avoid risk b. assume risk. c. try to prevent losses. d. transfer risk to an insurance company. e. use some combination of these. E
The underwriting function is designed to be sure that premiums are based on a. income levels. b. the value of the loss. c. the value of the gain. d. the chance of loss. e. expense levels. D
The primary purpose of life insurance is to provide a. financial security for dependents in the event of death. b. protection from creditors and lawsuits. c. tax-advantaged investments. d. high-yield investments. e. all of the above. A
Using the ___ method is the most accurate approach for assessing life insurance needs. a. human life value b. multiple earnings c. risk assessment d. economic identification e. needs analysis E
The needs analysis method of determining the amount of life insurance considers a. needed income. b. debt liquidation. c. extra expenses if income producer dies. d. special needs of dependents. e. all of these. E
In determining available resources that would be available after death, you would generally not consider a. social security benefits. b. earning potential of surviving children. c. earning potential of surviving spouse. d. savings. e. market value of home in which survivors will reside. E
Term life insurance is characterized by a. level annual premiums throughout life. b. premium amounts related to age. c. inappropriateness for most person’s life insurance needs. d. non-convertibility. e. cash value. B
____ is not descriptive of an option of term life insurance. a. Limited payment b. Decreasing c. Convertible d. Renewable e. Annual A
The settlement option chosen by most beneficiaries is a. lump sum. b. interest only. c. fixed amount. d. fixed time. e. life income. A
____ is a common provision in many term policies. a. A reward clause b. A renewable clause c. Cash value d. A limited clause e. An arbitration clause B
If life insurance is convertible, the policy can be a. transferred to the life of another person. b. exchanged for cash. c. changed to health or disability protection d. changed to another type of life insurance. e. revised as needed. D
Decreasing term insurance usually has a decreasing face value and a. a decreasing premium. b. a level premium. c. an increasing premium. d. a fluctuating premium. e. none of the above. B
Rodney and Toni are a young couple with two small children. They are doing well financially but their life insurance needs are high and their budget is tight. What type of life insurance will give them the most protection for their money? a. continuous premium b. universal life c. paid up life d. term life e. variable life D
The least expensive form of whole life insurance protection is a. term. b. straight life. c. limited payment. d. universal. B
If the objective of your life insurance program is to get the greatest death protection now for your insurance dollars, you should choose ____ insurance. a. term b. universal c. limited pay d. industrial e. whole life A
Whole life insurance is designed to provide a. protection only. b. savings only. c. savings and loan value. d. protection and savings. e. loan value only. D
You want to pay premiums for 20 years and have your insurance premium obligations finished at that time, but you feel you will need life insurance for the rest of your life. You should choose ____ insurance. a. continuous premium b. limited pay c. single premium d. multiple premium e. universal B
Which of the following is not characteristic of universal life insurance? a. flexible premiums b. choice of how the accumulation account is invested c. Option A level death benefit d. Option B stated coverage plus accumulated cash value e. separate identification of death protection and savings portions B
Henry must make set premium payments on his insurance policy until he dies, and if he cancels the policy he will receive the cash value. His plan is a ____ life policy. a. term b. whole life c. limited payment d. universal e. none of the above B
The insurance portion of a universal life policy is most analogous to a. mortgage insurance. b. group insurance. c. whole life insurance. d. term insurance. e. variable insurance. D
Universal life insurance is a. a deferred premium payment policy. b. primarily sold to college students. c. a combined investment plan and insurance policy. d. a provision for a secondary beneficiary. e. all of the above. C
An insured usually chooses variable life insurance in order to a. provide more flexible coverage. b. emphasize the savings portion while still having death protection. c. lessen the savings feature of life insurance. d. substitute for fixed-dollar insurance protection. e. reduce insurance premiums. B
____ can be both an advantage and a disadvantage of universal life insurance. a. Flexible premiums b. Tax features c. High returns d. Unbundling e. Fixed returns A
The death benefit of ____ life insurance may go down due to poor investment returns. a. limited pay b. whole c. universal d. variable e. c and d E
____ and ____ are both relatively expensive types of decreasing-term life insurance. a. Group life; credit life b. Credit life; mortgage life c. Mortgage life; industrial life d. Industrial life; special-purpose policies e. Special-purpose policies; group life B
Life insurance policies with small face amounts where the premium may be collected weekly by agents is a. credit life insurance. b. mortgage life insurance. c. industrial life insurance. d. special purpose insurance. e. group life insurance. C
A grace period permits the policyholder to retain full protection for usually _____ after missing a payment. a. 31 days b. 65 days c. 90 days d. 120 days e. 180 days A
Marilyn Simms died with a $200,000 life insurance policy. Her husband, Jack, was the primary beneficiary and their children, Mimi (age 24) and Ann (age 30), were the contingent beneficiaries. All three survived Marilyn. How would the policy proceeds be distributed? a. $200,000 to Jack b. $100,000 each to Mimi and Ann c. $100,000 to Jack and $50,000 each to Mimi and Ann d. $66,666 each to Jack, Mimi, and Ann e. $150,000 to Jack and $25,000 each to Mimi and Ann A
Which of the following policy features allow the insured to increase coverage periodically without showing proof of insurability? a. multiple indemnity clause b. guaranteed purchase options c. disability clause d. paid-up insurance option e. extended-term option B
The _________ option allows a terminally ill insured to receive a percentage of the death benefit for immediate use. a. multiple indemnity b. living benefits c. viatical settlement d. needs analysis e. b and c E
Key features found in most life insurance contracts include a. settlement options. b. policy reinstatement. c. change of policy. d. all of the above. e. none of the above. D
Nonforfeiture rights guarantee that a policyholder will not lose his or her ____. a. face value. b. death benefits for survivors. c. cash value. d. premium refunds. e. premium reductions. C
A participating policy a. has no incontestability clause. b. is a form of endowment insurance. c. may pay dividends. d. requires a savings function. e. contains no tax benefits. C
Nonforfeiture rights guarantee that a policyholder will not lose his or her ____. a. face value. b. death benefits for survivors. c. cash value. d. premium refunds. e. premium reductions. C
A participating policy a. has no incontestability clause. b. is a form of endowment insurance. c. may pay dividends. d. requires a savings function. e. contains no tax benefits. C
With most insurers, paying life insurance premiums on a(n) ____ basis will allow you to avoid a fee. a. annual b. semiannual c. quarterly d. monthly e. biennial A
When a primary beneficiary dies before the insured, proceeds are payable to a. the state b. the probate court c. the insured’s estate d. the contingent beneficiary or beneficiaries e. the insurance company keeps the proceeds D
The basic assumptions that the company uses to compute its insurance illustrations include all except a. age. b. sex. c. health status. d. income. D
A life insurance policy should contain all the following except a. Policy description b. Underwriting discussion c. Column definitions and key terms d. Coinsurance clause e. Disclaimer D
Which type of settlement option pays the beneficiary over a specified time frame? a. Lump sum b. Interest only c. Lifetime income d. Fixed period e. Fixed amount D
A ____ option allows a terminally ill insurance holder to sell an interest in the life insurance policy to an investor. a. participating policy b. living benefit c. viatical settlement d. guaranteed purchase e. none of the above C
With traditional whole life policies sold by an agent, sales commissions and marketing expenses account for at least ___ % of the first year’s premium and at least ___% of total premiums paid over the life of the policy. a. 20, 5 b. 50, 10 c. 75, 25 d. 100, 20 e. 200, 50 D

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