PFIN5 5th Edition Billingsley Test Bank

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Chapter 08 Insuring Your Life

TRUEFALSE

1. Deciding to sell a motorcycle would be an example of risk avoidance.

(A) True

(B) False

Answer : (A)

2. Risk avoidance means asking an insurance company to take over the risk for a small payment (the
premium).

(A) True

(B) False

Answer : (B)

3. Underwriters can predict whether or not you will suffer a loss this year.

(A) True

(B) False

Answer : (B)

4. Avoiding alcoholic beverages while driving is an example of loss prevention.

(A) True

(B) False

Answer : (A)

5. Generally, the primary purpose of life insurance is to provide a tax-advantaged investment plan.

(A) True

(B) False

Answer : (B)

6. The life insurance needs of beneficiaries are secondary since most proceeds are paid to living
policyholders.
(A) True

(B) False

Answer : (B)

7. The primary purpose of life insurance is to protect family members financially after one's death.

(A) True

(B) False

Answer : (A)

8. Lump-sum distributions of death benefits are generally excluded from federal income tax.

(A) True

(B) False

Answer : (A)

9. The need for life insurance increases with children.

(A) True

(B) False

Answer : (A)

10. The need for additional life insurance can be determined by looking at the difference between
available resources and family monetary needs.

(A) True

(B) False

Answer : (A)

11. Social security benefits are often available resources to the family after the death of a family
member.

(A) True

(B) False

Answer : (A)
12. Underwriters use life expectancy figures to look at overall longevity for various age groups and
also consider specific factors related to the applicant's health, habits, and experiences.

(A) True

(B) False

Answer : (A)

13. If the insured has a high-risk hobby then he/she should expect to pay less for life insurance.

(A) True

(B) False

Answer : (B)

14. The availability of group coverage through employee benefit programs should be considered
when developing a life insurance program.

(A) True

(B) False

Answer : (A)

15. Guaranteed renewable term insurance allows you to renew the policy for another term without
qualifying medically.

(A) True

(B) False

Answer : (A)

16. Insurance agents always disclose their commissions in the insurance policy.

(A) True

(B) False

Answer : (B)

17. Only one agent should be consulted to discuss personal financial needs and insurance
requirements while buying life insurance.

(A) True

(B) False
Answer : (B)

MULTICHOICE

18. ​The basic purpose of insurance is to _____.

(A) ​protect your health

(B) ​protect yourself from economic losses

(C) ​supplement your income

(D) ​shield you from bad decisions

(E) ​protect yourself from non-financial losses

Answer : (B)

19. ​Insurance is a tool that can reduce _____ risk.

(A) ​social

(B) ​mental

(C) ​economic

(D) ​accident

(E) ​exposure

Answer : (C)

20. ​The purchase of insurance is a common form of _____ by the insured.

(A) ​risk retention

(B) ​risk transfer

(C) ​risk assumption

(D) ​risk avoidance

(E) ​loss control

Answer : (B)

21. ​Insurance underwriting is best described as:

(A) ​the process used by insurers to decide who can be insured and to determine applicable rates that
will be charged for premiums.

(B) ​a set of activities used to identify the risk and rewards of investing the insured's funds on
marketable securities.

(C) ​production-related activities performed primarily by agents on the field.

(D) ​the process of developing pricing structures for insurance, often performed by an actuary.

(E) ​a function most often performed by an actuarial.

Answer : (A)

22. ​The probability of a loss occurring can be reduced by_____.

(A) ​risk observance

(B) ​loss prevention

(C) ​risk assumption

(D) ​risk retention

(E) ​insurance

Answer : (B)

23. ​Underwriting is_____:

(A) ​selling insurance at a premium less than that of the competition.

(B) ​the payment of a claim

(C) ​a method for developing policy wording.

(D) ​the determination of which exposures to insure.

(E) ​restoring the claimant to the financial condition prior to loss.

Answer : (D)

24. ​The underwriting function is designed to be sure that premiums are based on_____.

(A) ​income levels

(B) ​the value of the loss

(C) ​the value of the gain

(D) ​the chance of loss

(E) ​expense levels

Answer : (D)

25. ​The primary purpose of life insurance is to provide:

(A) ​financial security for dependents in the event of death.

(B) ​protection from creditors and lawsuits.

(C) ​tax-advantaged investments.

(D) ​high-yield investments.

(E) ​liquidity to expand business operations.

Answer : (A)

26. ​Actuarial data is used to measure:

(A) ​the creditworthiness of a population.

(B) ​the risk of loss for a population.

(C) ​the wealth of a population.

(D) ​the gross productivity of a population.

(E) ​the consumer price index of a population.

Answer : (B)

27. ​From the standpoint of the person buying insurance, the central purpose of insurance should be:

(A) ​to transfer risks of serious losses.

(B) ​to collect for all accidental losses.

(C) ​to make profit out of uncertain future events.

(D) ​to contribute for charitable purposes.

(E) ​to reduce payments for the most frequently occurring losses.

Answer : (A)

28. ​Insurance companies make profit by accepting the insured's risk by:

(A) ​charging consultation fees to the insured.

(B) ​avoiding the risk of loss of the insured.

(C) ​collecting premiums and earning interest on them.

(D) ​paying out less than the sum of the premiums and the earnings on them.

(E) ​giving less than the amount mentioned in the policy to the insured.

Answer : (D)

29. ​_____ policy is a contract between an individual and a company under which the company agrees
to reimburse the individual for losses suffered by him or her according to specified terms.

(A) ​Underwriting

(B) ​Risk

(C) ​Insurance

(D) ​Debt

(E) ​Reimbursement

Answer : (C)

30. ​_____ is an activity that reduces the chance that a loss will occur.

(A) ​Risk avoidance

(B) ​Loss prevention

(C) ​Loss control

(D) ​Risk assumption

(E) ​Premium collection

Answer : (A)

31. ​The primary purpose of a life insurance plan is:

(A) ​risk assumption of the insured in the event of his/her untimely death.

(B) ​to protect the dependents of the insured from financial loss in the event of his/her untimely
death.

(C) ​loss prevention of the insured in the event of his/her untimely death.

(D) ​loss control of the insured from financial loss in the event of his/her untimely death.

(E) ​risk avoidance of the insured in the event of his/her untimely death.

Answer : (B)

32. ​A life insurance policy structured so that the death benefits are paid directly to a named
beneficiary means that _____.

(A) ​the life proceeds are paid directly to named beneficiaries after payment of state or federal
income taxes

(B) ​the cash benefits from your life insurance policy cannot be claimed by creditors

(C) ​the life proceeds are invested as premium for the life insurance of the beneficiary

(D) ​the cash benefits are remitted to the beneficiary only after the beneficiary pays estate taxes

(E) ​the life insurance company makes additional payments to the family of the insured so that they
continue to live comfortably

Answer : (B)

33. ​The single most valuable technique in personal risk management to assist an individual 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 the financial resources available to
meet those needs.

(D) ​estimating the sum of money which, when paid in instalments, will produce the same income as
the person would have earned, after deducting assumed amounts for taxes and personal
maintenance expenses.

(E) ​using the multiple-of-earnings method adjusted for occupation.

Answer : (C)

34. ​Using the _____ approach is the most accurate method to determine life insurance needs.

(A) ​human life value

(B) ​multiple earnings

(C) ​risk assessment

(D) ​economic identification

(E) ​needs analysis

Answer : (E)

35. ​In determining available resources to offset economic needs, you would generally not consider:
(A) ​social security benefits.

(B) ​the educational qualification of the children.

(C) ​the earning potential of the surviving spouse.

(D) ​savings.

(E) ​the employer-provided group life insurance.

Answer : (B)

36. ​Identify a true statement about the multiple-of-earnings method.

(A) ​The multiple-of-earnings method divides the gross annual earnings of the insured by some
arbitrary number.

(B) ​The multiple-of-earnings method considers the insurance coverage to be 5 to 10 times the annual
income.

(C) ​The multiple-of-earnings method considers the insured's financial obligations to compute the
insurance premium amount.

(D) ​The multiple-of-earnings method divides the gross annual earnings by the insurance coverage to
determine the amount of annual insurance premium.

(E) ​The multiple-of-earnings method determines the amount of tax benefits available to the insured
by availing the life insurance coverage.

Answer : (B)

37. ​_____ determines the amount of life insurance coverage required by considering a person's
financial obligations and available financial resources in addition to life insurance.

(A) ​The savings analysis method

(B) ​The needs analysis method

(C) ​The earnings analysis method

(D) ​The liabilities analysis method

(E) ​The borrowings analysis method

Answer : (B)

38. ​Families faced with the loss of a principal wage earner receive Social Security benefits _____.

(A) ​which are deducted from the payments of death claims from insurance coverage

(B) ​after paying additional taxes on the benefit amount

(C) ​by the government that is intended to provide basic, minimum support

(D) ​that is 5 to 10 times the current income of the principal wage earner

(E) after the repayment of all financial obligations of the principal wage earner

Answer : (C)

39. Jonathan estimates the total financial resources worth $2,000,000 necessary after his death to
protect his family. What is the amount of insurance, as per the needs analysis method, that Jonathan
should purchase if he has current financial resources worth $1,000,000?​

(A) ​$1,000,000

(B) ​$2,000,000

(C) ​$2,500,000

(D) ​$1,500,000

(E) ​$500,000

Answer : (A)

40. ​Insurance companies use _____ to determine whom they will insure and what they will charge for
the coverage.

(A) ​the Social Security survivor's benefits

(B) ​need analysis

(C) ​underwriting

(D) ​risk assumption

(E) ​loss control

Answer : (C)

41. ​Which of the following leads to the payment of more insurance premium by the potential
insured?

(A) ​Promotion of the potential insured

(B) ​High paying career of the potential insured

(C) ​Obesity of the potential insured

(D) ​Childbirth in the family of the potential insured

(E) ​Wedding of the potential insured

Answer : (C)

42. ​Term life insurance is characterized by _____.

(A) ​level annual premiums throughout one's life

(B) ​premium amounts related to age

(C) ​its inappropriateness for most people's life insurance needs

(D) ​non-convertibility

(E) ​cash value

Answer : (B)

43. A(An)_____ policy is a type of term insurance.​

(A) ​straight term

(B) ​whole life

(C) ​increasing term

(D) ​loss control

(E) ​risk assumption

Answer : (A)

44. _____ is a common provision in many term policies.

(A) A reward clause

(B) A renewable clause

(C) A loss prevention clause

(D) A limited risk clause

(E) An arbitration clause

Answer : (B)

45. ​If a term life insurance is convertible, the policy can be:

(A) ​transferred to the life of another person.

(B) ​exchanged for cash.

(C) ​changed to health or disability protection.

(D) ​converted to a comparable whole life policy.

(E) ​revised as needed.

Answer : (D)

46. ​You want to pay premiums for 20 years and have your insurance premium obligations finished at
that time. But you feel you will need life insurance for the rest of your life. You should choose a ____
insurance.

(A) ​continuous premium

(B) ​limited pay

(C) ​single premium

(D) ​multiple premium

(E) ​universal

Answer : (B)

47. ​Which of the following is a characteristic of a universal life insurance policy?

(A) ​Fixed premiums

(B) ​Choice of how the accumulation account is invested

(C) ​Absence of a savings feature

(D) ​Fixed premiums and protection levels

(E) ​Lighter fees as compared to other insurance policies

Answer : (B)

48. ​Henry must make set premium payments on his insurance policy until he dies, and if he cancels
the policy, he will receive the cash value. His plan is a _____ policy.

(A) ​term life

(B) ​whole life

(C) ​limited payment life

(D) ​universal life

(E) ​group life insurance

Answer : (B)
49. ​The insurance portion of a universal life policy is most analogous to:

(A) ​mortgage insurance.

(B) ​group insurance.

(C) ​whole life insurance.

(D) ​term insurance.

(E) ​variable insurance.

Answer : (D)

50. ​Group life insurance is:

(A) ​a term policy designed to pay off the mortgage balance in the event of the borrower's death.

(B) ​an insurance that is sold in conjunction with the sale of a group of assets.

(C) ​an insurance in which benefits are a function of the returns being generated on the investments
selected by the policyholder.

(D) ​an insurance that provides a master policy for a group.

(E) ​an insurance that issues many master policies for an insured.

Answer : (D)

51. ​Universal life insurance is:

(A) ​a deferred premium payment policy.

(B) ​primarily sold to college students.

(C) ​a combined investment plan and insurance policy.

(D) ​a provision for a secondary beneficiary.

(E) ​also an investment vehicle

Answer : (C)

52. ​_____ can be both an advantage and a disadvantage of universal life insurance.

(A) ​Flexible premiums

(B) ​Tax features

(C) ​High returns

(D) ​Unbundling
(E) ​Fixed returns

Answer : (A)

53. ​The death benefit of _____ life insurance policy/policies may go down due to poor investment
returns.

(A) limited pay​

(B) ​whole

(C) ​variable

(D) ​group

(E) ​industrial

Answer : (C)

54. ​_____ and _____ are both relatively expensive types of decreasing term life insurance.

(A) ​Group life; credit life

(B) ​Credit life; mortgage life

(C) ​Mortgage life; industrial life

(D) ​Industrial life; special-purpose policies

(E) ​Special-purpose policies; group life

Answer : (B)

55. ​Life insurance policies with small face amounts where the premium may be collected weekly by
agents is termed as a (n) _____.

(A) ​credit life insurance

(B) ​mortgage life insurance

(C) ​industrial life insurance

(D) ​special purpose insurance

(E) ​group life insurance

Answer : (C)

56. ​Employers often provide _____ life insurance as a fringe benefit for their employees.

(A) ​group
(B) ​credit

(C) ​mortgage

(D) ​standard

(E) ​home-service

Answer : (A)

57. ​Which of the following types of insurance policies provides temporary coverage for a set period?

(A) ​Universal life insurance policy

(B) ​Whole life insurance policy

(C) ​Variable life insurance policy

(D) ​Term life insurance policy

(E) ​Extended life insurance policy

Answer : (D)

58. ​It is advisable to purchase life insurance from an insurance company that has been in business
for at least _____ years.

(A) ​5

(B) ​10

(C) 1​9

(D) ​15

(E) ​25

Answer : (A)

59. ​Sales commissions and marketing expenses increase the costs of a fully loaded _____ policy.

(A) ​term life insurance

(B) ​whole life insurance

(C) ​universal life insurance

(D) ​variable life insurance

(E) ​mortgage life insurance

Answer : (B)
60. ​It can be difficult to evaluate the true cost of a _____ at the time of purchase.

(A) ​term life insurance

(B) ​whole life insurance

(C) ​universal life insurance

(D) ​variable life insurance

(E) ​mortgage life insurance

Answer : (C)

61. ​Which of the following is a characteristic of a good insurance agent?

(A) ​Agent is aggressive in pursuing business from the potential insured.

(B) ​Agent is recommended by professionals like bankers and attorneys.

(C) ​Agent charges high commissions for providing insurance coverage.

(D) ​Agent replies in fancy buzzwords and generic answers to the questions.

(E) ​Agent is the first one to solicit the potential insured's patronage.

Answer : (B)

62. ​The settlement option chosen by most beneficiaries is:

(A) ​lump sum.

(B) ​interest only.

(C) ​fixed amount.

(D) ​fixed time.

(E) ​life income.

Answer : (A)

63. ​A grace period permits the policy holder to retain insurance even though the premium has not
been paid for:

(A) ​12 months.

(B) ​6 months.

(C) ​3 months.

(D) ​50 days.

(E) ​31 days.

Answer : (E)

64. ​Marilyn Simms died with a $200,000 life insurance policy. Her husband, Jack, was the primary
beneficiary and their children, Mimi (age 24) and Ann (age 30), were the contingent beneficiaries.
All three survived Marilyn. How would the policy proceeds be distributed?

(A) ​$200,000 to Jack

(B) ​$100,000 each to Mimi and Ann

(C) ​$100,000 to Jack and $50,000 each to Mimi and Ann

(D) ​$66,666 each to Jack, Mimi, and Ann

(E) ​$150,000 to Jack and $25,000 each to Mimi and Ann

Answer : (A)

65. ​Which of the following policy features allow the insured to increase coverage periodically
without showing proof of insurability?

(A) ​The multiple indemnity clause

(B) ​Guaranteed purchase options

(C) ​The disability clause

(D) ​The paid-up insurance option

(E) ​The extended-term option

Answer : (B)

66. ​Nonforfeiture rights guarantee that a policy owner will not lose his or her _____.

(A) ​face value

(B) ​death benefits for survivors

(C) ​cash value

(D) ​premium refunds

(E) ​premium reductions

Answer : (C)
SHORTANSWER

67. _________ is the choice to accept and bear the risk of loss.A. Loss assumption
B. Risk assumption
C. Risk avoidance
D. Loss avoidance
Answer : Risk assumption

68. It is not possible to avoid _________.A. unnecessary payments

B. most risks in your life
C. accumulating savings
D. making investments
Answer : most risks in your life

69. An activity that reduces the chance that a loss will occur is _________.A. risk shifting
B. risk transfer
C. loss prevention
D. risk avoidance

Answer : loss prevention

70. _________ is any activity that reduces the chance that a loss will occur.A. Loss control
B. Loss prevention
C. Risk control
D. Risk avoidance
Answer : Loss prevention

71. _________ is an effective way to handle small exposures to loss when insurance is too expensive.A.
Loss assumption
B. Risk assumption
C. Risk prevention
D. Loss control
Answer : Risk assumption

72. In order to predict the number of losses that will occur in a given time accurately, insurance
companies must study _________ numbers of cases.A. medium
B. small
C. large
D. few
Answer : large

73. By _________, insurance companies decide who will be insured by them.A. loss prevention
B. risk assumption
C. underwriting
D. needs analysis

Answer : underwriting

74. A life insurance policy can be structured so that death benefits are paid directly to a(n)
_________.A. insurance agent
B. beneficiary
C. underwriter
D. insurance broker
Answer : beneficiary

75. Using the needs approach, we _________ resources from needs to calculate how much life
insurance an individual requires.A. add
B. multiply
C. deduct
D. divide
Answer : deduct

76. The most accurate way to determine how much life insurance you need is to use the _________
method.A. multiple-of-earnings
B. needs analysis
C. disposable income
D. savings and investment
Answer : needs analysis

77. The policy owner assumes the investment risk with a _________ insurance policy.A. whole life
B. term life
C. variable life
D. universal life
Answer : variable life

78. _________ insurance is a type of insurance which is issued in policies with small face amounts,
often $1,000 or less.A. Credit life
B. Industrial life
C. Mortgage life
D. Variable life
Answer : Industrial life

79. Group life insurance is most likely to be for _________.A. variable life
B. special-purpose life policy
C. whole life
D. a term
Answer : a term

80. You can learn about the financial strength of an insurance company by checking _________ rating
system.A. the insurance agent's
B. the U.S. Securities and Exchange Commission's
C. Standard & Poor's
D. the Federal Bureau of Investigation's
Answer : Standard & Poor's

81. A life insurance agent who takes her profession seriously is likely to have earned a professional
certification like the _________.A. Chartered Financial Analyst
B. Chartered Life Underwriter
C. Chartered Financial Advisor
D. Certified Insurance Agent
Answer : Chartered Life Underwriter
ESSAY

82. Alice is 40 years old and earns $35,000 annually. The multiple-of-earnings approach to
determine the amount of life insurance needed shows that she should have 6.5 times her earnings.
How much insurance should Alice have? (Show all work.)

Graders Info :

In the multiple-of-earnings approach, the amount of insurance is the product of the amount of
earnings of $35,000 and 6.5. Hence, Alice should have the insurance coverage of $227,500.