WFG Final Exam - Questions, Answers and Rationales (Complete Solutions) John owns an insurance policy that gives him the right to share in the insurer's
... [Show More] surplus. What kind of policy is this? -Non-participating -Contributory -Participating -Surplus Participating policies give the policyowner the right to share in the insurer's surplus. Which of the following is NOT a benefit of insurance? -Reduces the uncertainty of loss exposures -Losses due to fraud are eliminated -Makes a loss whole again -Source of investment funds is NOT a benefit of insurance. What is a participating life insurance policy? -Contract that allows the policyowner to receive a share of surplus in the form of policy dividends -Agreement that allows two or more beneficiaries to share in the death benefit -Agreement that insures two or more lives -Contract that gives beneficiaries the right to participate in any dividends A participating life insurance policy is defined as a contract that allows the policyowner to receive a share of surplus in the form of policy dividends. Which of the following is a type of insurance where an insurer transfers loss exposures from policies written for its insureds? -Treaty insurance -Mutual insurance -Reinsurance -Captive insurance Reinsurance is an arrangement by which an insurance company transfers a portion of a risk it has assumed to another insurer. A participating company is also referred to as which type of insurer? -Mutual insurer -Reciprocal insurer -Domestic insurer -Re-insurer A mutual insurer is also referred to as a participating company. When a mutual insurer becomes a stock company, the process is called -Demutualization -Reinsurance -Mutualization -Reorganization The process whereby a mutual insurer becomes a stock company is called demutualization. Which of the following is a contract that involves one party which indemnifies another when a loss arises from an unknown event? -Insurance policy -Indemnification arrangement -Loss contract -Warranty arrangement An insurance policy is a contract where one party promises to indemnify another against loss that arises from an unknown event. Which of the following statements regarding a life insurance policy dividend is TRUE? -It represents the build-up of cash value in a permanent insurance policy -It is a stockholders return on his investment in the company -It represents a refund of overcharged premium in a non-participating whole life policy -It is the distribution of excess of funds accumulated by the insurer on participating policies Dividends paid to policyowners of participating contracts represent a refund of excess premiums charged. Remember, since the premiums were initially paid with after-tax dollars, there is no income tax consequence to the policyowner. One important function of an insurance company is to identify and sell to potential customers. Which of these BEST describes this function? -Underwriting -Regulation -Reinsurance -Marketing Marketing can be best defined as identifying and selling to potential customers. Which of the following is an insurer established by a parent company for the purpose of insuring the parent company's loss exposures? -Mutual insurer -Participating insurer -Fraternal insurer -Captive insurer An insurer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposures is known as a captive insurer. AAA Insurance Company has transferred a portion of its loss exposure to BBB Insurance Company. In this reinsurance transaction, what is AAA Insurance Company called? -Primary insurer -Captive insurer -Tertiary insurer -Secondary insurer In a reinsurance agreement, the insurance company that transfers its loss exposure to another insurer is called the primary insurer. An insurer owned by its policyholders is called a -multi-line insurer -stock insurer -reinsurer -mutual insurer A mutual insurer is owned by its policyholders. An insurer enters into a contract with a third party to insure itself against losses from insurance policies it issues. What is this agreement called? -Mutual -Reserves -Multi-line -Reinsurance Reinsurance is an arrangement by which an insurance company transfers a portion of a risk it has assumed to another insurer. Which of the following is NOT a characteristic of reinsurance? -Enables insurer to meet certain objectives -A specialized branch of the insurance industry -Increases the unearned premium reserve -Protects against a very large claim All of these are reinsurance features except "Increase the unaccrued Premium reserve". Moral hazard is described as the ~ increased chance of loss because of an insured's recklessness -increased ability to predict loss because of a higher exposure to loss -increased risk of adverse selection -increased chance of a loss because of an insured's dishonest tendencies Moral hazard can be defined as the increased chance of a loss occurring due to the insured's dishonest tendencies. Which of these statements correctly describes risk? -Pure risk is the only insurable risk -Speculative risk is the only insurable risk -An example of pure risk would be a legal wager -Pure and speculative risks are both insurable Only pure risks are insurable. Which of the following is NOT considered a definition of risk? -The potential for loss -The cause of a loss -Exposure to danger -Uncertainty Something that can cause a loss, such as an earthquake or tornado, is referred to as a peril, not a risk. Which type of risk is gambling? -Pure risk -Risk transfer -Risk pooling -Speculative risk Gambling is considered to be speculative risk. Which of the following is NOT considered to be a definition of the term "loss"? -Probability that an event will occur -An insurable event that takes place which results in a payment made by the insurance company -Unintentional decrease in the value of an asset due to a peril -The amount an insurance company must pay because of an insurable event The term "loss" can be defined as all of these EXCEPT "Probability that an event will occur". Which of the following best describes the statement "The more times an event is repeated, the more predictable the outcome becomes"? -Law of large numbers -Adverse selection -Average variance -Speculative retention "The more times an event is repeated, the more predictable the outcome becomes" is an example of the law of large numbers. Which of the following describes the increase in the probability of a loss due to an insured's dishonest tendencies? -Morale hazard -Physical hazard -Moral hazard -Speculative hazard The increase in the probability of a loss resulting from an insured's dishonest tendencies is known as moral hazard. Restoring an insured to the same condition as before a loss is known as -Law of large numbers -Fiduciary retention -Adverse selection -Principle of indemnity The principle of indemnity involves making an insured whole by restoring them to the same condition as before a loss. Which of the following would NOT be accomplished with the purchase of an insurance policy? -Greater peace of mind -Risk is eliminated -Payments made for covered losses -Uncertainty is reduced All of these would be accomplished with the purchase of an insurance policy EXCEPT "risk is eliminated". A situation in which there is ONLY a chance of loss or no loss is a -pure risk -particular risk -speculative risk -fundamental risk A situation in which there is ONLY a chance of loss or no loss is a pure risk. Which of the following is NOT an element of an insurable risk? -Loss must be due to chance -Loss frequency must be predictable -Loss must be measurable -Loss must be catastrophic All of these are elements of an insurable risk EXCEPT "Loss must be catastrophic". Which of the following is any situation that presents the possibility of a loss? -Adverse selection -Risk pooling -Loss exposure -Insured loss Any situation that presents the possibility of a loss is known as a loss exposure. Which of the following is a situation where there is a possibility of either a loss or a gain? -Hazard -Pure risk -Speculative risk -Peril A situation in which there is a possibility of a loss or a gain is a speculative risk. Which of the following refers to a condition that may increase the chance of a loss? -Adverse selection -Hazard -Risk -Peril A hazard is a condition or situation that creates or increases a chance of loss. Which of the following is considered to be any situation that has the potential for loss? -Law of large numbers -Adverse Selection -Loss exposure -Risk transfer Loss exposures are situations which have the potential for loss. An insurer having a large number of similar exposure units is considered important because -the insurer can decrease its reserves -the greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums -its financial rating will improve -the greater the number insured, the more premiums it collects The greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums. A hazard can be best described as -the potential for loss -the tendency for poorer than average risks to seek out insurance -a condition that may increase the likelihood of a loss occurring -a risk that has the potential for both loss and gain A condition or situation that creates or increases a chance of loss is called a hazard. Examples include icy roads, driving while intoxicated, and improperly stored toxic waste. Moral hazard is described as the -increased chance of loss because of an insured's recklessness -increased ability to predict loss because of a higher exposure to loss -increased risk of adverse selection -increased chance of a loss because of an insured's dishonest tendencies Moral hazard can be defined as the increased chance of a loss occurring due to the insured's dishonest tendencies. All of the following circumstances must be met for loss retention to be an effective risk management technique, EXCEPT -Loss cannot be catastrophic -Probability of loss is unknown -Highly predictable losses -Loss must be measurable Loss retention is an effective risk management technique with all of these conditions exist EXCEPT when the probability of loss is unknown. The loss MUST be predictable. Which course of action is the insurer entitled to when deliberate concealment is committed by the insured? -Rescinding the contract -Charge a higher premium -Charge a penalty -Nothing Intentional concealment committed by the insured entitles the insurance company to void the policy. Which of the following is NOT required in the content of a policy? -Parties involved in the contract -Period to which the coverage exists -Probability of loss -Risk insured against The probability of loss is not required in the content of a policy. Which of the following is NOT a requirement of a contract? -Parties involved must be competent -Equal consideration is required between the involved parties -Contract must have a legal purpose -Offer and acceptance must be involved Equal consideration between parties is NOT a requirement of a contract. What does the insurance term "indemnity" refer to? -Make whole -Unequal consideration -Law of large numbers -Competent parties Contracts of indemnity attempt to return the insured to their original financial position, or "made whole". Which of the following statements correctly describes a contract of indemnity? -One party is restored to the same financial position the party was in before the loss occurred -The unequal exchange of value or consideration for both parties -One party (the insurance company) prepares the contract with no negotiation between the applicant and insurer -Only one party (the insurer) makes any kind of enforceable promise A contract of indemnity is a contract in which one party is restored to the same financial position the party was In before the loss occurred. Which of the following contracts is defined as "one that restores an injured party to the condition that was present before the loss"? -Unilateral contract -Contract of adhesion -Indemnity contract -Personal contract A contract that restores an injured party to the condition that was present before the loss is an indemnity contract. Express power given to an agent in an agency agreement is -the appearance of authority an insurer gives to its agent -the unwritten authority that the agent is assumed to have -the authority to represent the insurer -the authority to add provisions to a contract Express authority is granted by means of the agent's contract, which is the insurer's appointment of the agent to act on its behalf. Which statement is CORRECT when describing a contract of adhesion? -Contract may be accepted or rejected by the insured -Contract involves negotiation between insurer and insured -Any confusing language in the contract would be interpreted in favor of the insurer -Contract cannot be modified by the insurer With a contract of adhesion, a contract may be accepted or rejected by the insured. The importance of a representation is demonstrated in what rule? -Insurable interest -Law of adhesion -Materiality of concealment -Consideration clause The materiality of concealment is used to determine the importance of a representation. Reasonably necessary acts that an agent must perform for carrying out his/her expressly authorized duties are covered by an agent's -Express authority -Implied authority -Apparent authority -Evident authority Implied authority is the unwritten authority that is not expressly granted, but which the agent is assumed to have in order to transact the business of the insurer. Which of the following statements about aleatory contracts is NOT true? -Insurance contracts are considered aleatory -The insured and the insurer have the potential for unequal contributions -The insured and the insurer contribute equally to the contract -Aleatory contracts are conditioned upon the occurrence of an event This statement is NOT true. An aleatory contract has the potential for the unequal exchange of value or consideration for both parties. For example, an individual who is covered under a disability insurance policy will collect benefits upon disability. However, if no disability occurs, benefits are not paid. If a material warranty violation on the part of the insured is found, what recourse does an insurer have? -Sue the insured -Rescind the policy -Charge more premium -Terminate the agent A warranty in insurance is a statement made by the applicant that is guaranteed to be true in every respect. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract. Which principle is accurately described with the statement "Insureds are entitled to recover an amount NOT greater than the amount of their loss"? -Unilateral -Indemnity -Aleatory -Utmost good faith Insureds are entitled to recover an amount NOT greater than the amount of their loss under the principle of indemnity. A unilateral contract is one in which -there is an element of chance and potential for unequal exchange of value or consideration for both parties -only one party (the insurer) makes any kind of legally enforceable promise -the contract has been prepared by one party (the insurance company) with no negotiation between the applicant and insurer -both the policyowner and the insurer must know all material facts and relevant information Insurance contracts are unilateral. This means that only one party (the insurer) makes any kind of enforceable promise. Restoring an insured to the same condition as before a loss is an example of the principle of -Utmost good faith -Adhesion -Legal purpose -Indemnity Making an insured whole restoring them to the same condition as before a loss is an example of the principle of indemnity. When handling premiums for an insured, an agent is acting in which capacity? -Adhesion -Fiduciary -Conditional -Aleatory An agent who is acting as an insurance agent, broker, solicitor, life agent accident and health, or bail agent acts in fiduciary capacity when handling premiums or return premiums for an insured. A contract requires -implied authority -only an offer -negotiation between the involved parties -an offer and acceptance of the contract terms A contract requires an offer and acceptance of the contract terms. Which of the following is NOT true regarding a family policy that covers children? -Additional children can be added at no cost -Adopted children can be covered -Conversion of child's coverage to permanent insurance requires evidence of insurability -Term insurance is used for the children's rider Conversion of child's coverage to permanent insurance does NOT require evidence of insurability. Which of the following is NOT a true description of non-medical life insurance? -Quicker processing of life insurance application -Less cost involved with underwritjng the application -Applicants are not required to answer medical questions on the application -Demand on the medical profession reduced Medical questions can still be asked on an application of non-medical life insurance. A life insurance policy where the insured can choose where the cash value can be invested is called -whole life -variable life -modified life -universal life [Show Less]