PFIN 6th Edition by Billingsley – Test Bank

PFIN 6th Edition by Billingsley – Test Bank

Chapter 08: Insuring Your Life

1. Risk avoidance is attractive when the cost of avoidance is less than the cost of handling it some other way.

a.

True

b.

False

ANSWER:

True

2. Risk avoidance involves asking an insurance company to take over the risk for a small payment (the premium).

a.

True

b.

False

ANSWER:

False

3. Underwriters can predict whether or not you will suffer a loss this year.

a.

True

b.

False

ANSWER:

False

4. Avoiding alcoholic beverages while driving is an example of loss prevention.

a.

True

b.

False

ANSWER:

True

5. Generally, the primary purpose of life insurance is to provide a tax-advantaged investment plan.

a.

True

b.

False

ANSWER:

False

6. The life insurance needs of beneficiaries are secondary since most proceeds are paid to policyholders.

a.

True

b.

False

ANSWER:

False

7. The primary purpose of life insurance is to protect family members of the insured from financial loss in the event of his or her untimely death.

a.

True

b.

False

ANSWER:

True

8. Life insurance proceeds paid to your heirs are not usually subject to state or federal income taxes.

a.

True

b.

False

ANSWER:

True

9. The need for life insurance increases with children.

a.

True

b.

False

ANSWER:

True

10. An individual’s need for additional life insurance can be determined by looking at the difference between his or her family’s available financial resources after his or her death and his or her family’s total economic needs.

a.

True

b.

False

ANSWER:

True

11. Social Security survivor’s benefits are intended to provide basic, minimum support to families faced with the loss of the principal wage earner.

a.

True

b.

False

ANSWER:

True

12. Underwriters use life expectancy figures to look at overall longevity for various age groups and also consider specific factors related to an applicant’s health, habits, and experiences.

a.

True

b.

False

ANSWER:

True

13. If an insured has a high-risk hobby, then he or she should expect to pay less for life insurance.

a.

True

b.

False

ANSWER:

False

14. The availability of group coverage through employee benefit programs should be considered when developing a life insurance program.

a.

True

b.

False

ANSWER:

True

15. Guaranteed renewable term insurance allows you to renew a policy for another term without qualifying medically.

a.

True

b.

False

ANSWER:

True

16. Insurance agents always disclose their commissions in an insurance policy.

a.

True

b.

False

ANSWER:

False

17. Only one agent should be consulted for discussing personal financial needs and insurance requirements while buying life insurance.

a.

True

b.

False

ANSWER:

False

18. The basic purpose of insurance is to _____.

a.

protect your health

b.

protect yourself from economic losses

c.

supplement your income

d.

shield you from bad decisions

e.

protect yourself from non-financial losses

ANSWER:

b

19. Insurance is a tool that can reduce one’s _____ risk.

a.

social

b.

mental

c.

economic

d.

accident

e.

exposure

ANSWER:

c

20. The purchase of insurance is a common form of _____ by the insured.

a.

loss prevention

b.

risk transfer

c.

risk assumption

d.

risk avoidance

e.

loss control

ANSWER:

b

21. Insurance underwriting is best described as:

a.

the process used by insurers to decide who can be insured and to determine applicable rates that will be charged for premiums.

b.

a set of activities used to identify the risk and rewards of investing an insured’s funds on marketable securities.

c.

production-related activities performed primarily by agents on the field.

d.

a process of developing taxing structures for insurance policies.

e.

a function most often performed by an actuary.

ANSWER:

a

22. Which of the following is true of insurance underwriting?

a.

Insurance underwriting is any activity that reduces the chance that a loss will occur.

b.

Insurance underwriting is a process used to avoid an act that would create a risk.

c.

Insurance underwriting is a process that helps insurers determine the insurance needs of the potential insured.

d.

Insurance underwriting is any activity that lessens the severity of loss once it occurs.

e.

Underwriters design rate classification schedules so that people pay premiums that reflect their chance of loss.

ANSWER:

e

23. The probability of a loss occurring can be reduced by_____.

a.

risk observance

b.

loss prevention

c.

risk assumption

d.

loss retention

e.

insurance

ANSWER:

b

24. Underwriting refers to _____:

a.

selling insurance at a premium less than that of the competitors.

b.

the payment of a claim.

c.

a method for developing policy wording.

d.

the determination of which exposures to insure.

e.

restoring the claimant to the financial condition prior to loss.

ANSWER:

d

25. The underwriting function of insurance companies is designed to ensure that premiums are based on_____.

a.

income levels

b.

the value of losses

c.

the value of gains

d.

the chance of losses

e.

expense levels

ANSWER:

d

26. 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.

liquidity to expand business operations.

ANSWER:

a

27. Insurance companies use actuarial data to measure:

a.

the creditworthiness of a given population.

b.

the risk of loss for a given population.

c.

the wealth of a given population.

d.

the gross productivity of a given population.

e.

the consumer price index of a given population.

ANSWER:

b

28. From the standpoint of a person buying insurance, the central purpose of insurance should be:

a.

to transfer the risk of serious losses.

b.

to collect for all accidental losses.

c.

to profit from uncertain future events.

d.

to contribute to charitable purposes.

e.

to reduce payouts for the small risks taken.

ANSWER:

a

29. Insurance companies make profit by:

a.

charging consultation fees to the insured.

b.

avoiding the risk of loss of the insured.

c.

charging underwriting fees from insurance agents.

d.

paying out less than the sum of the premiums and the earnings on them.

e.

giving less than the amount mentioned in the policy to the insured.

ANSWER:

d

30. A(n) _____ policy is a contract between an individual and a company under which the company agrees to reimburse the individual for losses suffered by him or her according to specified terms.

a.

underwriting

b.

risk

c.

insurance

d.

debt

e.

reimbursement

ANSWER:

c

31. _____ involves abstaining from any activity that will affect an individual financially.

a.

Risk avoidance

b.

Loss prevention

c.

Loss control

d.

Risk assumption

e.

Premium collection

ANSWER:

a

32. Which of the following is true of risk avoidance?

a.

Risk avoidance is any activity that helps evade an act that creates a risk.

b.

Risk avoidance is any activity that increases the chance that a loss will occur.

c.

Risk avoidance is any activity that lessens the severity of loss once it occurs.

d.

Risk avoidance is an act that reduces the probability that a loss will occur.

e.

Risk avoidance is an effective way to handle small exposures to loss when insurance is too expensive.

ANSWER:

a

33. The primary purpose of a life insurance plan is to help:

a.

provide tax benefit to the beneficiaries of the policy in the event of the insured’s untimely death.

b.

in the protection of the dependents of the insured from financial loss in the event of his or her untimely death.

c.

in the loss prevention of the insured in the event of his or her untimely death.

d.

in controlling the loss of the insured in the event of his or her untimely death.

e.

in the risk avoidance of the insured in the event of his or her untimely death.

ANSWER:

b

34. A life insurance policy can be structured so that the death benefits are paid directly to a named beneficiary, which means that _____.

a.

the life insurance proceeds are paid directly to named beneficiaries after payment of state or federal income taxes

b.

the cash benefits from your life insurance policy cannot be claimed by creditors

c.

the life insurance proceeds are invested as premiums for the life insurance of the beneficiary

d.

the cash benefits are remitted to the beneficiary only after the beneficiary pays estate taxes

e.

the life insurance company makes additional payments to the family of the insured so that they continue to live comfortably

ANSWER:

b

35. The most preferred technique for determining how much life insurance coverage is needed for an individual 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 the 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 the multiple-of-earnings method adjusted for occupation.

ANSWER:

c

36. While using the needs analysis approach, we _____.

a.

add an individual’s available resources to his or her family’s total economic needs to calculate how much life insurance he or she requires

b.

multiply an individual’s gross annual earnings by some selected number to arrive at an estimate of adequate life insurance coverage

c.

get only a loose approximation of life insurance needs of an individual

d.

divide an individual’s gross annual earnings by some selected number to arrive at an estimate of adequate life insurance coverage

e.

deduct an individual’s available resources from his or her family’s total economic needs to calculate how much life insurance he or she requires

ANSWER:

e

37. The _____ method is the most accurate method of determining the amount of life insurance coverage needed for an individual.

a.

human life value

b.

multiple earnings

c.

risk assessment

d.

economic identification

e.

needs analysis

ANSWER:

e

38. While performing needs analysis, when determining the available resources to offset the economic needs, you would generally ignore:

a.

Social Security benefits.

b.

the educational qualification of the children.

c.

the earning potential of the surviving spouse.

d.

savings corpus.

e.

the employer-provided group life insurance.

ANSWER:

b

39. Which of the following is true of the multiple-of-earnings method?

a.

The multiple-of-earnings method determines the amount of life insurance coverage needed by multiplying the net annual earnings of the insured by some selected number.

b.

The multiple-of-earnings method determines the amount of life insurance coverage needed by multiplying the gross annual earnings of the insured by some selected number.

c.

The multiple-of-earnings method considers the insured’s financial obligations to compute the insurance premium amount.

d.

The multiple-of-earnings method divides the gross annual earnings of the insured by the insurance coverage available to the insured to determine the amount of annual insurance premium.

e.

The multiple-of-earnings method determines the amount of tax benefits available to the insured when the life insurance coverage is availed.

ANSWER:

b

40. _____ determines the amount of life insurance coverage required for an individual by considering his or her financial obligations and available financial resources in addition to life insurance.

a.

The savings analysis method

b.

The needs analysis method

c.

The earnings analysis method

d.

The liabilities analysis method

e.

The borrowings analysis method

ANSWER:

b

41. Families faced with the loss of a principal wage earner receive Social Security benefits _____.

a.

that are deducted from the insurance proceeds, for the purpose of tax calculation

b.

after paying additional taxes on the benefit amount

c.

from the government that are intended to provide basic, minimum support

d.

that amount to 5 to 10 times the current income of the principal wage earner

e.

after the repayment of all the financial obligations of the principal wage earner

ANSWER:

c

42. Jonathan estimates that financial resources worth $2,000,000 will be necessary to protect his family after his death. What is the amount of insurance, as per the needs analysis method, that Jonathan should purchase if he has current financial resources worth $1,000,000?

a.

$1,000,000

b.

$2,000,000

c.

$2,500,000

d.

$1,500,000

e.

$500,000

ANSWER:

a

43. Insurance companies use _____ to determine whom they will insure and what they will charge for the coverage.

a.

Social Security survivor’s benefits

b.

the needs analysis method

c.

underwriting

d.

risk assumption

e.

loss control

ANSWER:

c

44. Which of the following leads to the payment of a higher insurance premium by the potential insured?

a.

Job promotion of the potential insured

b.

High-paying career of the potential insured

c.

Obesity of the potential insured

d.

Childbirth in the family of the potential insured

e.

Wedding of the potential insured

ANSWER:

c

45. Term life insurance is characterized by _____.

a.

level annual premiums throughout one’s life

b.

premium amounts related to the age of the insureds

c.

its inappropriateness for most people’s life insurance needs

d.

non-convertibility

e.

cash value accumulation

ANSWER:

b

46. A(n) _____ policy is a type of term insurance.

a.

straight term

b.

whole life

c.

increasing term

d.

variable term

e.

risk assumption

ANSWER:

a

47. A(n) _____ is a common provision in many term policies.

a.

reward clause

b.

renewable clause

c.

loss prevention clause

d.

limited risk clause

e.

arbitration clause

ANSWER:

b

48. If a term 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 a comparable whole life policy.

e.

revised as needed by the insurer.

ANSWER:

d

49. You want to pay premiums for 20 years and have your insurance premium obligations finished at that time. However, you feel you will need life insurance for the rest of your life. You should choose a _____ insurance.

a.

continuous premium whole life

b.

limited payment whole life

c.

single premium whole life

d.

renewable premium whole life

e.

convertible whole life

ANSWER:

b

50. Which of the following is a characteristic of a universal life insurance policy?

a.

No flexible premiums

b.

No choice in how the accumulation account is invested

c.

Absence of a savings feature

d.

Fixed premiums and protection levels

e.

Lighter fees than other insurance policies

ANSWER:

b

51. 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 _____ policy.

a.

term life

b.

continuous whole life

c.

limited payment whole life

d.

viatical life

e.

group life insurance

ANSWER:

b

52. 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.

ANSWER:

d

53. Group life insurance is:

a.

a term policy designed to pay off the mortgage balance in the event of the borrower’s death.

b.

an insurance that is sold in conjunction with the sale of a group of assets.

c.

an insurance in which benefits are a function of the returns being generated on the investments selected by the policyholder.

d.

an insurance that provides a master policy for a group.

e.

an insurance that issues many master policies for an insured.

ANSWER:

d

54. 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.

less expensive than other policy types.

ANSWER:

c

55. _____ can be both an advantage and a disadvantage of universal life insurance.

a.

Flexible premiums

b.

Tax features

c.

High returns

d.

Unbundling premiums

e.

Underwriting

ANSWER:

a

56. The death benefit of a(n) _____ life insurance policy may go down because of poor investment returns.

a.

limited payment

b.

whole

c.

variable

d.

group

e.

industrial

ANSWER:

c

57. _____ 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

ANSWER:

b

58. A life insurance policy with a small face amount where the premium may be collected weekly by agents is termed _____.

a.

credit life insurance

b.

mortgage life insurance

c.

industrial life insurance

d.

special purpose insurance

e.

group life insurance

ANSWER:

c