Chapter 8—Insuring Your Life
1. The basic purpose of insurance is to protect you from the financial consequences of losing assets or income due to
accident, illness, or death.
a.
True
b.
False
True
Easy
2. Spreading risk among a large number of people is a major principle of insurance.
a.
True
b.
False
True
Easy
3. Risk avoidance means asking an insurance company to take over the risk for a small payment (the premium).
a.
True
b.
False
False
Challenging
4. Underwriters can predict whether or not you will suffer a loss this year.
a.
True
b.
False
False
Moderate
Chapter 8—Insuring Your Life
5. Credit life insurance is often a requirement of credit card issuers.
a.
True
b.
False
False
Easy
6. Generally, the primary purpose of life insurance is to provide a tax-advantaged investment plan.
a.
True
b.
False
False
Moderate
7.
The multiple-of-earnings method of determining life insurance needs is simple but can be unreliable.
a.
True
b.
False
True
Easy
8. The needs analysis method is the most accurate approach to determining the proper amount of life insurance to buy.
a.
True
b.
False
True
Chapter 8—Insuring Your Life
9. The needs analysis method can be used to determine your life insurance requirements with a single step.
a.
True
b.
False
False
Easy
10. The life insurance needs of beneficiaries are secondary since most proceeds are paid to living policyholders.
a.
True
b.
False
False
Easy
11. The primary purpose of life insurance is to protect family members financially after one’s death.
a.
True
b.
False
True
Easy
12. The need for additional life insurance can be determined by looking at the difference between available resources and
Easy
Chapter 8—Insuring Your Life
family monetary needs.
a.
True
b.
False
True
Easy
13. Social security benefits are often available resources to the family after the death of a family member.
a.
True
b.
False
True
Easy
14. The three major categories of life insurance are term, straight life, and limited payment.
a.
True
b.
False
False
Challenging
15. Term insurance is generally the most economical form of life insurance for young families.
a.
True
b.
False
True
Easy
Chapter 8—Insuring Your Life
16. Guaranteed renewable term insurance allows you to renew the policy for another term without qualifying medically.
a.
True
b.
False
True
Moderate
17. Life insurance needs change dramatically over one’s lifetime.
a.
True
b.
False
True
Easy
18. The right of the policyholder to the cash value of a whole life policy is a nonforfeiture right.
a.
True
b.
False
True
Challenging
19. Annual term insurance premiums increase as you get older while whole life insurance premiums remain constant.
a.
True
b.
False
True
Moderate
Chapter 8—Insuring Your Life
20. Limited payment whole life insurance is a contract written for a given number of years after which the face value is
automatically paid to the insured.
a.
True
b.
False
False
Moderate
21. When you stop making premium payments on a whole life policy, the policy’s cash value is forfeited.
a.
True
b.
False
False
Challenging
22. Unbundling in universal life insurance means that the cost of the insurance and savings elements are identified
separately for the policy owner to see.
a.
True
b.
False
True
Moderate
23. The waiver-of-premium benefit excuses premium payment while the insured is experiencing short-term illness.
Chapter 8—Insuring Your Life
a.
True
b.
False
False
Moderate
24. Whole life policies typically provide a high investment rate of return.
a.
True
b.
False
False
Moderate
25. The returns on term life insurance policies receive favorable tax treatment.
a.
True
b.
False
False
Easy
26. A variable life policy combines life insurance coverage with investment options.
a.
True
b.
False
True
Moderate
Chapter 8—Insuring Your Life
27. Like universal life insurance, variable life insurance provides a minimum guaranteed return.
a.
True
b.
False
False
Moderate
28. Group life insurance is often provided as a fringe benefit by employers.
a.
True
b.
False
True
Easy
29. Group life insurance is usually term life insurance.
a.
True
b.
False
True
Easy
30. Credit life insurance is sold in conjunction with installment loans.
a.
True
b.
False
True
Moderate
Chapter 8—Insuring Your Life
31. Because premiums get higher as you age, it is probably advisable for you to buy life insurance at age 20 to save
money whether or not you need the insurance then.
a.
True
b.
False
False
Challenging
32. Universal life insurance is often suitable for single college students since the cost is quite low.
a.
True
b.
False
False
Moderate
33. If a named beneficiary does not survive an insured, the proceeds of the policy revert to the insurance company.
a.
True
b.
False
False
Moderate
34. One should typically name both primary and contingent beneficiaries for life insurance policies.
a.
True
b.
False
Chapter 8—Insuring Your Life
True
Easy
35. The life-income-with-period-certain option guarantees a specified number of settlement payments that are passable to
secondary beneficiaries.
a.
True
b.
False
True
Challenging
36. An attractive feature of whole life insurance is the availability of loans from the cash value.
a.
True
b.
False
True
Easy
37. Loans are available from term life insurance policies.
a.
True
b.
False
False
Easy
Chapter 8—Insuring Your Life
38. You may reinstate your lapsed life insurance policy without passing a physical examination.
a.
True
b.
False
False
Moderate
39. A waiver-of-premium benefit excuses premium payments if the insured becomes totally and permanently disabled.
a.
True
b.
False
True
40. All types of life insurance offer a cash surrender value.
a.
True
b.
False
False
Challenging
41. Life insurance death benefits are, as a rule, subject to income taxes.
a.
True
b.
False
False
Easy
Chapter 8—Insuring Your Life
42. Policy dividends paid on participating policies are a return of unused premium based upon the claims experience of
the insurance company.
a.
True
b.
False
True
Challenging
43. Bobby Lee died of cancer. His $40,000 policy had a triple indemnity clause. His beneficiary will receive $120,000.
a.
True
b.
False
False
Challenging
44. It is advisable to purchase life insurance from a relatively small, newly formed company.
a.
True
b.
False
False
Easy
45. A life insurance policy’s cash value may be collected by terminating the policy.
a.
True
b.
False
True
Chapter 8—Insuring Your Life
Moderate
46. Low-load whole life policies grow cash values more quickly than traditional whole life policies.
a.
True
b.
False
True
Moderate
47. Cash value is an important component of whole life, universal life, and variable life but is never a component of term
life insurance.
a.
True
b.
False
True
Moderate
48. Term life insurance becomes less expensive as you grow older.
a.
True
b.
False
False
Challenging
49. Life insurance premiums are generally tax deductible by the insured.
Chapter 8—Insuring Your Life
a.
True
b.
False
False
Easy
50. If the insured dies during the grace period, the face amount of the policy less the unpaid premium is paid to the
beneficiary.
a.
True
b.
False
True
Easy
51. Should the cash value grow to an unusually large amount, the amount of insurance coverage must be increased in
order for the policy to retain its favorable tax treatment.
a.
True
b.
False
True
Moderate
52. Life insurance policy loans are generally not taxable in the year taken and not deductible in the year repaid.
a.
True
b.
False
True
Moderate
Chapter 8—Insuring Your Life
53. The face value on a whole life policy is likely to change over time.
a.
True
b.
False
False
Easy
54. Life insurance designed to pay the balance on a mortgage is an example of a good use decreasing term policy.
a.
True
b.
False
True
Moderate
55. Level premium term policies have become much more popular than annual renewable term policies in recent years.
a.
True
b.
False
True
Easy
56. Nearly all life insurance policies have a two-year suicide clause.
a.
True
b.
False
True
Challenging
Chapter 8—Insuring Your Life
57. If an insured commits suicide within two years of the policy’s inception, the company will return the premiums paid.
a.
True
b.
False
True
Moderate
58. A guaranteed purchase option is when an insured sells an interest in the life insurance policy to an investor, who then
becomes the policy’s beneficiary.
a.
True
b.
False
False
Challenging
59. With traditional whole life policies sold by an agent, sales commissions and marketing expenses account for between
100% and 150% of the first year’s premium.
a.
True
b.
False
True
Challenging
60. With low-load whole life policies, sales commissions and marketing expenses account for between 20% to 25% of
total premiums paid over the life of the policy.
a.
True
b.
False
False
Chapter 8—Insuring Your Life
61. 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.
Easy
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United States – BUSPROG: Reflective Thinking
Bloom’s: Understanding
62. Insurance is a tool that can lessen ____ risk.
a.
b.
c.
d.
e.
c
Easy
PFIN.BILL.17.8-1 – LO: 8-1
United States – BUSPROG: Reflective Thinking
Bloom’s: Understanding
63. 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
Challenging
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United States – BUSPROG: Reflective Thinking
United States – KS – DISC: Risk and Return
Bloom’s: Remembering
Chapter 8—Insuring Your Life
64. 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.
PFIN.BILL.17.8-1 – LO: 8-1
United States – BUSPROG: Reflective Thinking
Bloom’s: Understanding
65. 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
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United States – BUSPROG: Reflective Thinking
Bloom’s: Understanding
66. 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
PFIN.BILL.17.8-1 – LO: 8-1
United States – BUSPROG: Reflective Thinking
Bloom’s: Remembering
Chapter 8—Insuring Your Life
c
Challenging
PFIN.BILL.17.8-4 – LO: 8-4
United States – BUSPROG: Reflective Thinking
Bloom’s: Understanding
67. 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
Challenging
PFIN.BILL.17.8-4 – LO: 8-4
United States – BUSPROG: Reflective Thinking
Bloom’s: Applying
68. 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
Challenging
PFIN.BILL.17.8-5 – LO: 8-5
United States – BUSPROG: Reflective Thinking
Bloom’s: Remembering
69. If a life insurance policy pays dividends, it is said to be
a.
universal life
b.
participating
c.
investment grade
Chapter 8—Insuring Your Life
d.
paid-up
e.
extended
Moderate
PFIN.BILL.17.8-4 – LO: 8-4
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Risk and return
United States – KS – DISC: Risk and Return
Bloom’s: Remembering
70. 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
Moderate
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United States – AK – DISC: Risk and return
United States – KS – DISC: Risk and Return
Bloom’s: Remembering
71. 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
Moderate
PFIN.BILL.17.8-1 – LO: 8-1
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Risk and return
United States – KS – DISC: Risk and Return
Bloom’s: Understanding
72. The probability of a loss occurring can be reduced by
a.
risk observance.