Insurance Operations: Understanding Life and Health Insurance Concepts, Study notes of Finance

Download Insurance Operations: Understanding Life and Health Insurance Concepts and more Study notes Finance in PDF only on Docsity! Finance 160:163 Sample Exam Questions Spring 2003 These questions are designed to test your understanding of insurance operations within the context of life and health insurance. Each question is given equal weight. Choose the best possible answer from the responses that are available. 1. Which of the following is a need for cash rather than a need for income? a. Estate clearance fund b. Readjustment period c. Dependency period d. Life income to a spouse 2. The level premium method: a. Involves overpaying during the early years of the contract b. Provides lifetime protection c. Requires development of a legal reserve d. Has cash value as a by-product of savings in the policy e. All of the above 3. All of the following are true about the yearly renewable term method except: a. The premium represents each insured’s share of the cost of mortality b. Term premiums increase as one gets older c. The premiums tend to increase at an increasing rate d. It is a practical means of affording lifetime protection e. None of the above 4. A woman who has taught music all her life and has no close relatives or friends should buy which type of annuity? (assume the woman wants to maximize annuity income) a. Join and last survivor b. Whole life c. Cash refund d. Fifteen years certain and life e. Twenty years certain and life 5. A 20-payment life insurance policy differs from a 20-year endowment in how many of the following respects? I. The amount payable in the event that death occurs within the 20-year period II. The amount payable to the insured if he is alive at the end of 20 years III The number of premiums paid a. I only b. II only c. I and II d. I and III e. I, II and III 6. If a beneficiary’s designation is irrevocable? a. It can not be changed without the consent of the beneficiary b. All rights revert back to the policyowner if the irrevocable beneficiary predeceases the insured c. Both a and b d. Neither a nor b 7. X has a $25,000 whole life policy with double indemnity for accidental death. The light plane he is in crash lands on a lake. He is uninjured. He attempts to swim to shore and, fatally misjudging the distance, drowns. His insurer will pay the beneficiary: a. All of the premiums paid b. $25,000 c. $50,000 d. $50,000 plus all the premiums paid e. none of the above 8. Problems with having minor children as beneficiaries can be solved by: a. Appointing a guardian of the property of minor children in your will b. Having the proceeds payable to a trust set up in the child’s name c. Either a or b d. Neither a nor b 9. The most desirable continuance provisions with the life insurance contract from the consumer’s point of view are found in a health insurance policy that is: a. Cancelable b. Optionally renewable c. Conditionally renewable d. Non-cancelable, guaranteed renewable e. None of the above 10. Blue Shield plans are: a. Nonprofit associations b. Strongly supported and controlled by local physicians and their state medical societies c. Prepayment plans that provide coverage primarily for fees of physicians and surgeons d. All of the above e. None of the above 11. Critics of HMOs stress which of the following as disadvantages of this form of health care delivery system? a. They are expensive to form b. You give up freedom of choice of physician c. They lack the personal touch of a single doctor/patient relationship d. All of the above e. None of the above 24. The chance of being disabled is: a. Less than the chance of death at any age b. Greater than the chance of death during working years c. About the same as the chance of death d. Less than the chance of death during the middle years 25. Hospital expense coverage is written: a. Only on an indemnity basis b. Only on a valued basis c. Only on a service basis d. On a service basis, indemnity basis, or cash payment basis e. None of the above 26. Which of the following is an advantage the buyer of life and health insurance? a. Assists in the development of Savings b. Provides a safe and profitable investment c. Helps with estate preservation d. All of the above e. Only A and C 27. What comparable advantages do insurers provide that are similar to financial Intermediaries? a. Reduction of transaction costs b. Creation of liquidity c. Economies of scale c. All of the above d. Only A and B 28. Which of the following is Not deemed to be a primary factor affecting life and health insurance consumption? a. Income b. Inflation c. Interest Rates d. Market Concentration e. Price 29. Insurance penetration is the ratio of yearly direct premiums written to? a. Life insurance premiums received b. Property/Casualty premiums received c. Gross Domestic Product d. Net Asset Value e. Capital and Surplus 30 From an economic perspective insurance is: a. A loss control mechanism whereby an individual pays an unknown sum to be indemnified against large uncertain losses. b. A financial intermediation function by which individuals exposed to specified risks of loss contribute to a pool from which covered losses are paid. c. A financial agreement whereby an individual pays a large certain amount called the contingent premium to be indemnified against small uncertain losses. d. A risk avoidance mechanism whereby an individual avoids having to share in losses covered under contract e. A risk assumption mechanism whereby the insured assumes large uncertain loss by paying a small certain premium to the insurer. 31. From a legal perspective, insurance is an agreement: a. Whereby the policyholder pays a stipulated amount called the premium to the insurer, in return for which the insurer agrees to pay a defined amount to the policyholder should a covered event occur. b. That allows the policyholder to pay a small certain amount called the premium, in order to be insured against small certain losses. c. Whereby the policyholder may pay a variable premium in order to be indemnified against small variable losses d. That allows the insured to pay a fixed premium to be insured against small certain losses. e. Whereby the insured assumes a large uncertain loss by paying a small certain amount called the premium. 32. Under life insurance policies, the person to whom the payment is made upon the insured’s death is called the: a. Annuitant b. Beneficiary c. Insured d. Contingent claims representative e. None of the above 33. An insurance contract the promises to pay the insured a periodic payment based on survival is called: a. Life Insurance b. Health Insurance c. A Life Annuity d. Homeowner’s Insurance e. Life Settlement Insurance 34. Which of the following represent various categories of life and health insurance a. Group insurance b. Ordinary insurance c. Credit insurance d. All of the above e. Only a and c 35. Which of the following are not necessary for a perfectly competitive insurance market: a. A large number of buyers and sellers such that no one buyer or seller nor any other group can influence the market b. Insurance sellers have freedom of entry and exit from the market c. Buyers and sellers are well informed about the products d. Government regulators are able to specify the pricing on guaranteed coverages to prospective insureds e. Sellers produce identical products 36. Economies of scale exist in the insurance market when: a. An insurer’s average cost of production falls with increasing production b. An insurer’s average cost of production increases with increasing production c. An insurer’s average cost of production decreases with decreasing production d. An insurer’s marginal cost of production is less than the average cost of sales e. An insurer’s marginal cost of production increases with decreasing sales 37. Price discrimination occurs when: a. Buyers prefer one firm’s products over those of its rivals b. A single firm can produce multiple products or services at lower costs than can multiple firms c. A firm offers effectively identical products at different prices to different groups d. An insurer’s average cost of production decreases with increasing production e. Buyers prefer none of a firm’s products over those of its rivals 38. The “lemons” problem in insurance occurs when: a. The insurance customer knows less than the insurer (seller) about the insurance company and its products b. The insurance customer knows more than the insurer (seller) about the insurance company and its products c. Poorer than average risks seek to obtain insurance at higher than average rates d. Individuals alter their behavior because of the existence of insurance e. Insurers attempt to sell customers policies that offer higher coverage at below normal rates 48. A table that shows the yearly probabilities and/or information related to loss of health for individuals is: a. A Mortality Table b. A Annuity Table c. A Morbidity Table d. Commissioner’s Ordinary Life Table e. U.S. Select Life Table 49. The calculation of life and health insurance rates and values requires all of the following information except: a. Probability of insured event occurring b. Time value of money c. The benefits promised d. Loadings to cover expenses ,taxes, profits and contingencies e. The financial strength of the insurer 50. Gross rates are life insurance rates calculated to recognize: a. The probability of an insured event b. Time value of money c. Financial strength of the insurer d. The net rate plus a loading for expenses, contingencies, profits and taxes e. The cash surrender value of the policy less and paid-up additions 51. You are given the following mortality, present value factors and death claim information for 95 year old males, what would be the present value of total death claims in the second policy year if each insured has a $1,000 policy? Policy Year # Dying Total Death Claims Present Value PV Death Claims 1 33,000 .9525 2 25,795 .9070 a. $31,429,200 b. $23,396,065 c. $17,084,236 d. $11,599,247 e. None of the above 52. The amount that represents the savings element in the cash-value life insurance policy that is available to a terminating policyowner is referred to as: a. The policy’s cash surrender value b. The cash savings value c. The policyholder reserve d. The net asset value e. None of the above 53. The actual amount of pure life insurance protection which is the difference between the policy reserve at a given point and the face amount insurance is called: a. The policy’s net reserve b. The cash surrender value c. The net amount at risk d. The net asset value e. The cash savings value 54. An example of a flexible-premium plan insurance is: a. A whole life policy b. A term policy c. An endowment policy d. A universal life policy e. None of the above 55. Life insurance policies that allow policy values to vary either favorably or unfavorably based on an insurer’s anticipated future experience are: a. Retrospective insurance reserve policies b. Nonparticipating policies c. Reversionary insurance policies d. Current assumption policies e. Modified term life policies 56. A type of insurance simulation which utilizes estimates of operating experience for a block of policies, and individual factors on policies to determine whether profit, reserving and other insurance objectives are being met is: a. An asset share calculation b. An interest reserve calculation c. A cash value calculation d. Prospective reserve analysis e. A premium affordability calculation Please use this information drawn from the 1983 IAM Table for Male Lives in answering the following questions. Age Number Living (lx) Number Dying (dx) Prob. Dying (qx) Prob. Living (px) 60 9,013,785 .008338 61 8,938,628 80,296 62 8,858332 63 8,772,052 64 8,678,805 65 8,577,575 57. The number of people dying between ages 60 and 61 is: (a) 80,296 (b) 75,157 (c) 66,712 (d ) 86,280 (e) none of these its not possible to determine 58. The probability that a person age 60 lives to age 61 is: (a) .991662 (b) .992218 (c) .992710 (d) .008983 (e) .991017 59. The probability that a person age 60 lives to age 65 is: (a) .991662 (b).992218 (c) .951606 (d) .008983 (e) .991017 60. The probability that a person now age 60 dies before age 65 is: (a) .048393 (b) .008983 (c) .951606 (d) .065713 (e) .991017 Answers: 1. A 2. E 3. D 4. B 5. B 6. C 7. B 8. C 9. E 10. D 11. D 12. E 13. C 14. C 15. D 16. E 17. C 18. B 19. B 20. C 21. C 22. C 23. D 24. B 25. D 26. D 27. D 28. D 29. C 30. B 31. A 32. B 33 C 34 C. 35. D 36 A 37. C 38. A 39 E 40. B 41 C 42 B 43. A 44 C. 45. A 46. E 47. B 48. C 49. E 50. D 51. B 52. A 53. C 54 D 55. D 56. A 57. B 58. A 59. C 60. A