Q&A Hero

Q: Which one of the following economic conditions is best suited for the sale of whole life 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.

Q: A person who saves money for the future by buying a whole life policy 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.

Q: A life insurance company needs more liquidity when selling a high proportion of: a. whole life policies. b. annuities. c. thirty-year term policies. d. one-year renewable term policies.

Q: Which contract provision below is NOT likely to be associated with a term life policy? a. loan provision b. participating c. convertible d. renewable

Q: Life insurance companies tend to be larger than casualty insurance companies because of 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.

Q: A "stock" life insurance company is owned by a. its policyholders. b. its shareholders. c. its managers. d. both a and b above.

Q: Keogh plans and IRAs are a. government sponsored retirement programs. b. noninsured retirement plans. c. individual retirement programs. d. pay-as-you-go programs.

Q: All of the following are methods used by insurance companies to reduce objective risk except: a. safety education programs. b. selective underwriting of insureds. c. investment in investment grade securities only. d. use of deductibles.

Q: A pension plan feature that provides employees with the right to future retirement income, even if the employee terminates employment, is called: a. unvested. b. vested. c. under funded. d. funded.

Q: Pension funds whose contributions are NOTlarge enough to actually cover the benefits to be paid out when all employees retires are termed: a. unvested. b. vested. c. under funded. d. funded.

Q: Traditionally, pension funds were: a. government-insured b. defined contribution c. fully contributory d. defined benefit

Q: Which one of the following statements best describes the insurance industry? 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.

Q: Which one of the following types of casualty insurance policy would a bank purchase if it 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

Q: Which statement is not true about casualty insurance companies? 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.

Q: Which statement is not true about life insurance companies? 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.

Q: Of the following, which type of life insurance policy would probably accumulate the least amount of funds for investment in capital market securities? a. term insurance b. whole life insurance c. annuity d. universal life insurance

Q: If you are terminated before you are fully vested in an employer-sponsored plan, you may not get to keep previous contributions to your pension made by your employer.

Q: Since insurance is an application of theorem of large number, the risk to be insured must be homogeneous, similar, fortuitous, and occurring by chance.

Q: Policy reserves are the major asset of the typical life insurance companies.

Q: The insured need to pay premium for insurance to protect their financial loss. Therefore, insurance industry increases cost of bearing risk in society.

Q: Pure risk is very similar to speculative or investment risk that is related to the variability of returns. Therefore, the insured can possibly have a gain or a loss from the insurance policies.

Q: Insurance is almost entirely regulated by state, not federal law.

Q: "Superannuation" is an unwelcome development to the underwriter of a life annuty.

Q: All insurers must deal with the problem of adverse selection.

Q: "Fully contributory plans" are funded with employee contributions only.

Q: The law of large numbers practically guarantees that an insurer will be profitable if it has enough policy holders.

Q: Liability risk is much easier to gauge than property risk.

Q: Municipal bonds are a logical investment for "qualified" pension plans.

Q: Property/casualty insurers have a tax incentive to hold preferred stock.

Q: Any risk is insurable for a high enough premium.

Q: Business interruption is an example of an indirect loss.

Q: Investment income tends to offset premium income, thus reducing premiums for the insured.

Q: Life insurance and pension reserves are liquid asset balances held by life insurance companies to pay losses and pension benefits.

Q: Term life policies provide maximum life insurance dollar protection for consumers for a given amount of premium.

Q: A deductible is a form of loss-sharing.

Q: Though stock companies dominated the number of life insurance companies, mutuals are dominant in terms of assets and insurance in force.

Q: The liability of Lloyds of London members on assumed risks are unlimited.

Q: Insurance premiums are directly related to expected dollar losses.

Q: Pure risk and objective risk are both assumed by life insurance companies.

Q: The sale of term life insurance was an important factor explaining the growth and large size of life insurance companies.

Q: The nature of the assets of life insurance companies influence the type of liabilities they may issue.

Q: Pension funds, which count on current contributions to make payments to retirees, are under funded.

Q: Universal life became popular in the inflationary, high interest periods of the 1980s because interest rates on universal life policies vary with market rates.

Q: Objective risk is the deviation of actual from expected.

Q: Health insurance includes protection against the risk of large, unexpected medical expenses and/or the loss of income from illness or disability.

Q: Social Security is a fully funded pension program.

Q: Property/liability insurance companies pay little federal income tax, thus explaining their large portfolio of state and municipal, tax-exempt securities.

Q: An annuity provides both insurance against premature death and savings features.

Q: The assets of life insurance companies are not as marketable as those of casualty/property insurance companies because life companies have greater certainty of claims.

Q: Life insurance companies are the oldest financial intermediary in the United States.

Q: Life insurance companies provide protection against death.

Q: 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?

Q: What is a "Lloyd's association"?

Q: Discuss a way in which contractual financial institutions contribute to society.

Q: John will retire seven years later and would like to have a 10-payment annual annuity that 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

Q: In the U.S., the major regulator of insurance firms is thea.State insurance regulatorb.Treasury Departmentc.FDICd.Federal Reserve Bankse. SEC

Q: Cootie, a 65 year-old disable retiree, has saved $1,250,000. He expects he will survive 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

Q: The difference between an insured versus a noninsured pension plan is 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.

Q: All but one of the following was an important result of the ERISA Act of 1974: 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.

Q: Social security is a _________ pension plan. a. fully funded b. private c. pay-as-you go d. noncontributory

Q: Social security, formally called OASDHI, stands for 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

Q: The largest amount of pension assets are associated with a. trusteed, private pension funds. b. social security. c. government-administered pension funds. d. insured pension plans with life insurance companies.

Q: A noninsured pension plan will 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.

Q: Private pension plans are 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.

Q: While life insurance provides economic protection in case of premature death, pensions provide coverage against a. superannuation b. working too long. c. disability. d. unemployment.

Q: All but one of the following are important areas of insurance regulation: 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.

Q: Insurance regulation is concerned with all but one of the following: 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

Q: Life insurance companies have a portion of their assets invested in common stocks most 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.

Q: To protect against moral hazard, disability income policies 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.

Q: While life insurance protects the insured against the economic consequences of 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.

Q: A convertibility option added to a term policy gives the insured the option of 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.

Q: A level-premium, whole life policy is a combination of 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.

Q: Insurance companies have to deal with the concept of adverse selection, which is 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.

Q: Purchasing insurance may alter the behavior of the insured and is known as a. default risk and adverse selection. b. pure risk and speculative risk c. moral hazard and adverse selection. d. moral hazard and speculative risk

Q: Life insurance protects the insured from a. premature death. b. the economic consequences of death. c. beneficiaries. d. pure risks faced by the insured.

Q: The National Association of Insurance Commissioners is an organization of _______ regulators interested in the ________ of insurance regulation. a. state; consistency b. state; federalization c. federal; effectiveness d. state and federal; efficiency

Q: In the last few years, which noninsurance financial institution has been able to offer insurance services to the concern of the insurance industry? a. finance companies b. credit unions c. investment banks d. commercial banks

Q: The major areas of business for a life insurance company are 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

Q: 50. Please list the major advantages and challenges that credit unions enjoy over banks.

Q: Explain how finance companies and depository institutions might differ in managing credit risk.