Chapter 44
Insurance, Wills, and Trusts
N.B.: TYPE indicates that a question is new, modified, or unchanged, as
follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. A business firm may have an insurable interest in the life of any of its
employees, except a key employee.
2. The consideration paid to an insurer to obtain an insurance policy is the
premium.
3. Insurance is classified according to the amount of the payment on a claim.
4. A person can insure anything in which he or she has an insurable interest.
5. A party must own property to have an insurable interest in it.
6. Liability insurance protects against liability imposed on the insured as a result
of injuries to the person or property of another.
7. An insurance application is part of the insurance contract.
8. A loss sustained between the time of application and the delivery of an
insurance policy may not be covered.
9. If a life insurance applicant pays a premium but dies before the physical exam,
there is obviously no coverage.
10. A coinsurance clause provides that two or more people will be covered by the
same life insurance policy.
11. Insurance coverage is never effective until a formal written policy is issued.
12. State law may mandate that an incontestability clause be included in an insur–
ance policy.
13. The words used in an insurance contract are interpreted against the party who
applied for the policy.
14. An applicant for insurance has a duty to disclose only material facts that the
insurer asks for.
15. An insurer has a duty to avoid the payment of claims.
16. Because insurance law follows contract law, bad faith tort actions against
insurers are not allowed.
17. In defense against payment, an insurance company can raise any of the de–
fenses that would be valid in an ordinary action on a contract.
18. An insured’s lack of an insurable interest is an absolute defense against
payment.
19. If no heirs are found, the property of a decedent is transferred to a charitable
organization.
20. An executor is a personal representative appointed by a court for a decedent
who dies without a will.
21. A testator is a decedent who dies without a will.
22. In most states, a person must be sixteen years of age to execute a valid will.
23. To execute a valid will, a testator must remember the “natural objects of his or
her bounty.”
24. Undue influence can occur when a named beneficiary is in a position to
influence the making of a will.
25. A will must normally be attested to by two or three witnesses.
26. An “X” can qualify as a signature on a will.
27. A nuncupative will is a will that is completely in the handwriting of the testator.
28. To “publish” a will means to release it to the media.
29. A divorce revokes an entire will.
30. A will is probated in part to establish its validity.
31. If no children or grandchildren survive a decedent who dies without a will, a
surviving spouse is entitled to the entire estate.
32. An express trust is created or declared in explicit terms.
33. A spendthrift trust provides for a beneficiary’s transfer of his or her right to
future payments of trust funds.
34. A constructive trust is “constructed” by a property owner to fulfill certain unique
functions outside the usual bounds of a trust.
35. The trustee is the person for whose benefit a trust is held.
MULTIPLE CHOICE QUESTIONS
1. Bret obtains a fire insurance policy on his rental house with Continental
Insurance Company. Like all insurance, this policy is an arrangement for
a. avoiding the assumption of responsibility.
b. predicting a potential loss based on unknown factors.
c. shifting the imposition of liability.
d. transferring and allocating risk.
2. Grace applies for a homeowners’ insurance policy on her house with Heroic
Insurance Company through Ian, a broker. In this transaction, Ian is
a. an agent for both parties.
b. Grace’s agent, and not Heroic’s agent.
c. Heroic’s agent, and not Grace’s agent.
d. not an agent.
3. Reno is the beneficiary of a life insurance policy on Sula’s life obtained from
Traditional Insurance Company. The underwriter of this policy is
a. Reno.
b. Sula.
c. Traditional.
d. the agent or broker through whom the policy was obtained.
4. Shingle & Tile Roofing Contractor, LLC, obtains an insurance policy against
liability for injuries or losses sustained by employees during the course of their
employment. The policy covers claims not covered by workers’ compensation
insurance. This is
CHAPTER 44: INSURANCE, WILLS, AND TRUSTS 7
a. casualty insurance.
b. fidelity or guaranty insurance.
c. key-person life insurance.
d. employer’s liability insurance.
5. Feta is a partner in the game design firm GR8 Games, Inc., which obtains key-
person life insurance on Feta in the amount of $1 million from Halo Insurance
Company. Feta quits GR8 Games to join Icy Applications, Inc. Feta dies. Under
the principle of insurable interest, Halo must pay the $1 million to
a. Feta’s spouse Jo.
b. GR8 Games.
c. Icy Applications.
d. no one.
6. Doctors Medical Associates obtains an insurance policy that protects its
members against negligence claims by their patients. This is
a. casualty insurance.
b. fidelity or guaranty insurance.
c. malpractice insurance.
d. workers’ compensation insurance.
7. Donald applies for a life insurance policy with Equity Insurance Company
through Fletch, an agent who works for Equity. Donald pays the initial premium.
Fletch writes a binder, which
a. acknowledges the application and promises to consider it.
b. attests to the truth of each statement in the application
c. evidences receipt of the payment of the initial premium.
d. indicates that a policy is pending and states its essential terms.
8. Rolling Transport & Storage Corporation wants to insure its warehouse to
obtain the maximum possible recovery for the lowest possible premium. To
obtain the maximum recovery under a coinsurance clause, the percentage of
the value of the property that should be insured is
a. 80 percent.
b. 90 percent.
c. 100 percent.
d. 120 percent.
9. Root & Branch Lumber Company obtains a fire insurance policy from Statistical
Insurers, Inc., on a $400,000 warehouse. The policy includes an 80-percent
coinsurance clause. Root & Branch insures the property for $320,000. In a fire,
the warehouse suffers $200,000 in damage. Root & Branch can recover
a. $400,000.
b. $320,000.
c. $200,000.
d. $80,000.
10. Ginny obtains a health-insurance policy for her family from Hope Insurance
Company. The policy includes an incontestability clause. Under such a clause,
after a policy has been in force for a specified period or time, such as two or
three years
a. Ginny cannot contest Hope’s insurable interest.
b. Ginny cannot contest Hope’s refusal to pay a claim under the policy.
c. Hope cannot contest Ginny’s eligibility for continued coverage.
d. Hope cannot contest Ginny’s statements in the application.
11. Isabel obtains a fire insurance policy on her home from Justice Insurance
Company. The home is lost in a fire, but the parties dispute the amount of
Justice’s liability under an ambiguous clause in the policy. A court would most
likely
a. interpret the clause against Isabel.
b. interpret the clause against Justice.
c. rewrite the clause and apply it as rewritten.
d. strike the clause from the policy.
12. Kerin obtains a property insurance policy for her art collection from Lawton
Insurance Company. Kerin can cancel the policy
a. at any time.
b. only at the end of a period for which a premium has been paid.
10 UNIT SEVEN: PROPERTY AND ITS PROTECTION
c. only if Kerin no longer has an insurable interest in the property.
d. only on advance written notice.
13. Haya obtains an insurance policy from Inviolable Insurance Corporation (IIC).
IIC may cancel, or refuse to renew, the policy because of
a. Haya’s appearance as a witness against IIC.
b. Haya’s gender.
c. Haya’s national origin.
d. none of the choices.
14. Myles obtains a property insurance policy from Nova Insurance Company for
Myles’s restored 1957 Chevy. Nova can cancel the policy
a. if Myles increases the risk assumed by the Nova.
b. if Myles files a claim under the policy.
c. if Myles appears as a witness in a case brought against Nova.
d. under no circumstances.
15. Edy obtains a property insurance policy with First Source Insurance Company
for Edy’s fishing trawler. First Source can cancel the policy
a. if Edy appears as a witness in a case against First Source.
b. if Edy fails to pay the premiums.
c. if Edy makes changes that add to the trawler’s value.
d. under no circumstances.
16. Kelsey obtains a business liability insurance policy from Loyal Insurance
Company for Kelsey’s Framing & Art Supplies store. When an event occurs
that gives rise to a claim, Loyal has a duty to
a. investigate to determine the facts.
b. file a suit against Kelsey so that a court can settle the claim.
c. find a third party on whom to impose liability.
d. refund any unearned amount of the premium.
17. Speedy Shipping Corporation applies to TransInsurance Company for a fire
insurance policy on Speedy’s warehouse. On the application, Speedy
misrepresents the age of the property to obtain a lower premium. When a fire
soon destroys the warehouse, TransInsurance can
a. deny payment, because a fire destroyed Speedy’s warehouse.
b. deny payment, because of Speedy’s fraud in the application.
c. not deny payment, because a fire destroyed Speedy’s warehouse.
d. not deny payment, because the application is not part of the policy.
18. Garth dies without a will. The distribution of Garth’s property, including his
eleven forested acres near Hope, Arkansas, is prescribed by
a. a court-appointed executor.
b. federal probate statutes.
c. state intestacy laws.
d. Garth’s relatives.
19. Skyler dies after having made a valid will. Skyler has died
a. in escheat.
b. in probate.
c. intestate.
d. testate.
20. The assets in Hong’s estate, including the value of his home on Elm Street and
its contents, are insufficient to pay in full all of the gifts provided for in his will.
His heirs will receive
a. full payment in order of seniority until the assets are exhausted.
b. nothing—the assets will descend to the state.
c. reduced benefits.
d. the option of distributing the assets according to their wishes.
21. Philomena dies without a will. A court appoints Quigley to handle the probate of
Philomena’s estate. The administrator of the estate is
a. Philomena’s closest blood relative.
b. Philomena.
c. Quigley.
d. the court.
22. According to the terms of Diego’s will, specific gifts are made, and taxes and
other estate expenses and debts are paid. The assets of Diego’s estate that
remain are most likely to be distributed
a. by codicil.
b. holographically.
c. per capita.
d. through a residuary clause.
23. Eighty-year-old Clark exhibits confusion, forgetfulness, and disorientation.
Dave, Clark’s doctor, believes that the symptoms indicate dementia. Elsa, who
has significant contact with Clark, believes that he is in a state of mental
decline. These facts indicate
a. an urgency that Clark distribute his assets.
b. Clark’s lack of capacity.
c. Dave’s misdiagnosis.
d. Elsa’s intent to take advantage of Clark.
24. Gigi, a twenty-year-old, wants to execute a will before she undertakes a moun–
tain-climbing trip on a peak in the Himalaya Mountains. In most states, the legal
age for executing a will is
a. sixteen years of age.
b. eighteen years of age.
c. twenty-one years of age.
d. twenty-five years of age.
25. Lost in a canyon near Gila, Arizona, Hester writes her will in crayon, on a paper
bag, while Ivan states orally how he wants his estate distributed. Most states
do not permit
a. an olographic will.
b. a nuncupative will.
c. a will written on a paper bag.
d. a will written in crayon.
26. Juli types onto a computer what she intends to be “My Will” and prints it out.
Juli has capacity. “My Will” is
a. invalid.
b. valid if Juli signs it.
c. valid if Juli signs it and has three witnesses sign it.
d. valid if Juli signs it, has three witnesses sign it, and files it in a certain
state office.
27. Lani is asked to serve as a witness to Mona’s will. To qualify, Lani must be
a. a collateral heir.
b. a lineal descendant.
c. eighteen years of age or older.
d. mentally competent.
28. Ratzo is asked to be a witness to Sade’s will. Before attesting to the will,
a. Ratzo does not have to read the will or be informed of its contents.
b. Ratzo must read the will and recite its contents.
c. Sade must orally tell Ratzo of the will’s contents.
d. Sade’s attorney must read the will aloud to Ratzo.
29. Amelia executes a separate written instrument to amend her prior will. This
separate document is
a. a codicil.
b. a holographic will.
c. a living will.
d. a nuncupative will.
30. Dyan executes her will to give “to my nephew Esau my stock in Fargo, Inc.”
Later, Dyan writes separately, with the same formalities required for a will, to
leave the stock to her niece Ginny and cash to Esau. This writing
a. does not affect the will’s gift of the stock to Esau.
b. requires a gift of the stock in equal shares to Esau and Ginny.
c. revokes the whole will, which must be redrafted.
d. revokes the will’s gift of the stock to Esau.
31. Orin creates a living trust to pass his assets, including stock in Petro Oil
Company and other business investments, to his heirs. One advantage of this
arrangement is that
a. income taxes do not have to be paid on trust earnings.
b. the assets are sheltered from the payment of estate taxes.
c. the assets can be transferred without going through probate.
d. the trust does not come into existence until the grantor’s death .
32. Sherman dies without a will, survived by his granddaughter Roxy and Roxy’s
brother Pio. Roxy and Pio are Sherman’s
a. collateral heirs.
b. settlors.
c. trustees.
d. lineal descendants.
33. Cliff dies without a will. His survivors include his spouse Dana and his two
children, Efrem and Fay. Under applicable laws, Dana will probably receive
a. all of Cliff’s estate.
b. none of Cliff’s estate.
c. one–half of Cliff’s estate.
d. one–third of Cliff’s estate.
34. Benny dies without a will, with no surviving spouse or child. Benny’s survivors
include his granddaughter Callie, his nephew Duncan, and his cousin Earl. In
most states, his estate would pass to
a. Callie.
b. Duncan.
c. Earl.
d. the state.
35. Mason creates a trust to prevent his son, Newt, the beneficiary, from assigning
his rights to future payments of income from the trust. This is
a. a charitable trust.
b. a constructive trust.
c. a spendthrift trust.
d. an illegal trust.
ESSAY QUESTIONS
1. Patty, who is divorced, owns a house. She has no reasonable expectation of
benefit from the life of Quinn, her ex-spouse, but she applies for insurance on
his life anyway. She also obtains a fire insurance policy on the house, which
she later sells. Five years later, Quinn dies and the house is destroyed in a fire.
Can Patty obtain payment on either the death of Quinn or the loss of the
house? Explain.
18 UNIT SEVEN: PROPERTY AND ITS PROTECTION
2. Dieter’s will provides for a distribution of his assets on his death. Who will
“distribute” Dieter’s property, and what are the steps involved?