1
CHAPTER 17
TRUE/FALSE QUESTIONS
insurance companies because life companies have greater certainty of claims.
large portfolio of state and municipal, tax-exempt securities.
expenses and/or the loss of income from illness or disability.
because interest rates on universal life policies vary with market rates.
under funded.
may issue.
size of life insurance companies.
dominant in terms of assets and insurance in force.
given amount of premium.
2
companies to pay losses and pension benefits.
insured.
enough policy holders.
of returns. Therefore, the insured can possibly have a gain or a loss from the insurance
policies.
insurance industry increases cost of bearing risk in society.
be homogeneous, similar, fortuitous, and occurring by chance.
not get to keep previous contributions to your pension made by your employer.
3
MULTIPLE-CHOICE QUESTIONS
amount of funds for investment in capital market securities?
a. term insurance
b. whole life insurance
c. annuity
d. universal life insurance
a. they have relatively predictable inflows and outflows.
b. their liabilities are long-term in nature.
c. they invest heavily in short-term highly marketable securities.
d. they sell contracts that offer financial protection against premature death and
against living too long.
a. they are subject to federal income tax.
b. they invest heavily in municipal bonds.
c. they have more predictable cash flows related to claims than life insurance
companies.
d. they invest in corporate stock.
wants to protect itself against economic loss from bank tellers who might embezzle cash?
a. liability insurance
b. fidelity bond
c. surety bond
d. marine insurance
a. major insurance company liabilities are called reserves.
b. most life insurance companies are stock companies.
c. mutual insurance accounts for about half of all the life insurance in force.
d. all of the above are true.
a. government-insured
b. defined contribution
c. fully contributory
d. defined benefit
to be paid out when all employees retires are termed:
a. unvested.
b. vested.
c. under funded.
d. funded.
4
income, even if the employee terminates employment, is called:
a. unvested.
b. vested.
c. under funded.
d. funded.
except:
a. safety education programs.
b. selective underwriting of insureds.
c. investment in investment grade securities only.
d. use of deductibles.
a. government sponsored retirement programs.
b. noninsured retirement plans.
c. individual retirement programs.
d. pay-as–you-go programs.
a. its policyholders.
b. its shareholders.
c. its managers.
d. both a and b above.
a. their special income tax exclusions.
b. the characteristics of their term policies.
c. the inability to accumulate policyholders.
d. the long-term, accumulative nature of whole life policies.
a. loan provision
b. participating
c. convertible
d. renewable
a. whole life policies.
b. annuities.
c. thirty-year term policies.
d. one-year renewable term policies.
a. probably earns a rate of return on cash values greater than in an equivalent
universal life policy.
b. pays the same premium for the same amount of term coverage.
c. is able to accumulate tax-free interest earnings on cash values.
d. buys more insurance for a given premium compared to term.
5
contracts?
a. moderate inflation (5%) and high economic growth (6%)
b. high inflation (10%) and cyclical instability
c. low inflation (3%) with stable economic growth (4%)
d. none of the above.
a. Cash contributions, net of term premiums, are invested at market rates.
b. The policyholder may vary the level of insurance coverage.
c. The policy does not qualify for the special federal tax exclusion of income built
up inside the contract.
d. The amount of policyholder contribution each year is the difference between the
contributions and the price of a one-year term policy.
insurance companies hold more of their investments in .
a. corporate stock; corporate stock
b. corporate stock; government securities
c. corporate bonds; municipal bonds
d. mortgages, municipal bonds
for the future retiree?
a. under funded, vested, uninsured
b. insured, fully funded, vested
c. unfunded, private, company managed
d. trustee managed, under funded, and vested
a. default risk
b. interest rate risk
c. pure risk
d. liquidity risk
risk offers returns above and below an average?
a. speculative; pure
b. objective; pure
c. default risk; pure
d. pure; speculative
a. insuring against death and pension fund management.
b. providing life insurance and wealth accumulation for retirement such as a term
policy provides.
c. providing life insurance and wealth accumulation for retirement such as a whole
life or universal life policy provides.
d. reinsurance
6
insurance services to the concern of the insurance industry?
a. finance companies
b. credit unions
c. investment banks
d. commercial banks
regulators interested in the ________ of insurance regulation.
a. state; consistency
b. state; federalization
c. federal; effectiveness
d. state and federal; efficiency
a. premature death.
b. the economic consequences of death.
c. beneficiaries.
d. pure risks faced by the insured.
a. default risk and adverse selection.
b. pure risk and speculative risk
c. moral hazard and adverse selection.
d. moral hazard and speculative risk
a. the practice of low-risk insured seeking low premiums.
b. high-risk persons are more likely to purchase insurance.
c. insureds are likely to increase their risky behavior.
d. Insurance salespersons try to sell their most profitable policies.
a. an annuity and a pension.
b. universal life and an annuity.
c. decreasing term insurance and building a future sum of savings.
d. life and casualty insurance on the insured life and property.
a. converting the term insurance to common stock of the insurance company.
b. converting the term policy into cash.
c. converting the term policy to a whole life, level premium policy.
d. canceling the policy at any time.
premature death, annuities protects against
a. the economic consequences of living too long.
b. varying interest rates.
c. aggressive beneficiaries.
d. default by life insurance companies.
7
a. do not cover disabilities from moral problems.
b. do not provide a high percentage of pre-disability income and require a waiting
period.
c. usually pay more than 100 per cent of an insured‘s income.
d. usually require a five-year waiting period before benefits begin.
likely because
a. there’s no other way to finance whole life insurance policies.
b. the company probably offers variable-life insurance policies.
c. it reduces the risk of the corporate bond portfolio.
d. common stockholders desire a small amount of their return in life insurance.
a. capital adequacy of insurance companies
b. making sure that the perils covered under insurance do not occur too frequently
c. protecting and informing consumers
d. keeping insurance available and affordable
a. licensing of insurance companies and agents.
b. review of the financial condition of insurance companies.
c. annual safety inspection of insurance offices in each state.
d. the orderly liquidation of insolvent insurers.
provide coverage against
a. superannuation
b. working too long.
c. disability.
d. unemployment.
a. available only to people who work.
b. illegal.
c. pensions provided by and to non-governmental, private sector businesses,
organizations, and their workers.
d. a personal financial plan provided for a fee by a financial planner.
a. not be covered under the Pension Benefit Guaranty Corporation.
b. always be underfunded.
c. be managed by an appointed trustee to invest funds contributed for the benefit of
future pensioners.
d. will be covered by term insurance, not whole life.
8
a. trusteed, private pension funds.
b. social security.
c. government-administered pension funds.
d. insured pension plans with life insurance companies.
a. Office of Aging Survivors, Disabled and Health Insurance
b. Office of Active Standards for the Disabled, Healthy and Infirmed
c. Old Age, Survivors, Disability, and Health Insurance System
d. Old Age Standards for Disability Health Insurance
a. fully funded
b. private
c. pay-as-you go
d. noncontributory
a. strengthen the fiduciary responsibilities of pension fund trustees.
b. increased the number of pension funds at small businesses
c. established reporting and disclosure requirements
d. provided insurance for failed pension funds.
a. the insured plan is insured under the Pension Benefit Guaranty Corporation,
while the noninsured is not.
b. the insured plan is a government pension fund; the noninsured is in the private
sector.
c. the insured plan obligations are issued by a life insurance company with promises
to pay specific amounts in the future, while the noninsured are managed by a
trustee with no guarantee of amounts distributed in the future.
d. the employer of the insured guarantees payments, but not so in the case of the
uninsured.
another 10 years and wishes to receive 10 annual annuity payments, beginning in one
year later. If the interest rate is 5.75%, how much does he can expect to receive per year?
a. $123,988
b. $133,345
c. $149,987
d. $167,829
e. $178,692
a. State insurance regulator
b. Treasury Department
c. FDIC
d. Federal Reserve Banks
e. SEC
9
will have its first payment at the moment when he retires. If the payment amount is
$50,000 a year and the interest rate is 12%, what is the fair value should be paid today for
this annuity?
a. $282,511
b. $143,129
c. $141,667
d. $316,412
e. $160,304
ESSAY QUESTIONS
1. Discuss a way in which contractual financial institutions contribute to society.
2. What is a “Lloyd’s association”?
3. Why do property/casualty insurance companies place a large percentage of their investments in
bonds? Why they also need to maintain large surpluses in certain years?