Life & Health Insurance
In insurance, a type of risk that involves the chance of loss or gain and which is therefore
uninsurable is called - ANSWER-speculative risk: Speculative risk is risk that may result in loss
or gain. This type of risk is generally uninsurable.
A hurricane is an example of a(n) - ANSWER-Peril: A hurricane is an example of a peril. A peril
is a condition that involves danger or risk and is the cause of a loss. Insurance policies are
written to provide financial protection against losses from stated perils.
Which of the following is an example of pure risk? - ANSWER-the loss of life: The loss of a life
is a good example of pure risk because there is no possible gain in this situation.
Which of the following is defined as increasing the severity or frequency of loss? - ANSWER-
Hazard: A hazard does indeed increase the number of, or the severity of, losses.
Mary refuses to fly on a commercial airplane for her business. This is an example of risk
________. - ANSWER-Avoidance: Mary refuses to fly on a commercial airplane for her
business. This is an example of risk avoidance.
The banding together of individuals who collectively agree to cover a loss suffered by any group
member is the definition of which method of handling risk? - ANSWER-share the risk: Under
risk-sharing each member of a group agrees to share the financial burden of a loss that could be
suffered by any member.
Pamela replaces the batteries in her smoke alarms throughout the house and tests them once a
year. This is an example of - ANSWER-risk reduction: Risk reduction is an option to lessen the
possibility of loss when a risk cannot be avoided. In this case, the risk of fire that could result in
severe loss is reduced through having active fire alarms.
Which of the following is considered an element of insurable risk? - ANSWER-The risk of loss
must be measurable with a dollar value defined.
Adverse selection can be described as - ANSWER-the fact that people in poor health are more
likely to buy and keep insurance. Adverse selection is selection against an insurer. It refers to the
tendency of persons who are likely to make a claim based on their circumstances to buy and keep
insurance. For example, a person who is sick is more likely to buy health insurance and to keep
the policy in force than a healthy person.
This term is the principle that the greater the number of incidents of a random process, the more
likely that the expected number of incidents and the actual numbers of incidents will be the
same. - ANSWER-law of large numbers: The law of large numbers describes the principle that
the greater the number of incidents of a random process, the more likely that the expected
number of incidents and the actual numbers of incidents will be the same. This fact allows the
insurer to predict the extent of risk.
,Both mutual insurance companies and stock insurance companies have which of the following
features in common? - ANSWER-Both can issue dividends:The stock company can issue
dividends to its stockholders; the mutual company can issue dividends to its policyowners.
The Grand Halvorson Lodge has 250 members, united by a common Danish heritage. For 50
years they have also run an annual carnival for the purpose of sponsoring families in need of
medical care for their children. All the money brought in through dues and fund-raising events is
used to support their non-profit work with needy families. The Grand Halvorson Lodge offers
life insurance to its members. What type of insurer is it considered? - ANSWER-fraternal benefit
society: The members of a lodge or fraternal organization can provide life insurance for their
members.
A group of people who agree to pro-rate and share the losses suffered by other members is called
a(an) ______________ insurer. - ANSWER-Reciprocal: A group of people who agree to pro-rate
and share the losses suffered by other members is called a reciprocal insurer.
Which of the following services does Lloyd's of London provide? - ANSWER-a common
meeting ground where member associations can conduct insurance business: Lloyd's of London
provides a common meeting ground where member associations can conduct insurance business.
When a state bars the sale of a particular coverage within its boundaries, a typical insurance
company cannot cover it. In this case, an insurer not licensed in the state can underwrite this
insurance through a third party broker. What type of insurer can underwrite the coverage in this
case? - ANSWER-a surplus lines insurer: A surplus lines insurer is not licensed to do business in
the state. However, it must be eligible to provide unique coverage when requested through the
surplus lines market.
When an insurance company cedes part of an insurance risk to another insurance company, the
process is known as - ANSWER-reinsurance: When an insurance company wants to transfer
some or all of the risks represented by its insureds, the process is known as reinsurance. The
company accepting the risk being transferred is the reinsurance company.
Which of the following statements is TRUE about government insurers? - ANSWER-The
populace, through taxation, funds the insurance program. Government insurance is funded
through taxation.
An insurance company that has received a certificate of authority from the state to sell insurance
in that state is known as a(an) ___________ insurer. - ANSWER-Admitted: An insurance
company that has received a certificate of authority from the state to sell insurance in that state is
known as a(an) admitted insurer. Agents who, within a given state, sell insurance for a non-
admitted insurance company face severe penalties.
In an insurance transaction, the insurance salesperson in the agency system who legally
represents the insurer is known as the __________. - ANSWER-Agent: In an insurance
transaction, the insurance salesperson in the agency system who legally represents the insurer is
known as the agent. (A broker, on the other hand, has traditionally and legally been viewed as a
representative of the applicant rather than of the insurer.)
,XYZ Insurance, incorporated in Texas, has agents authorized to sell life insurance in Arkansas.
In Arkansas, XYZ Insurance is categorized as which of the following? - ANSWER-a foreign
insurer: In Arkansas, XYZ Insurance is categorized as a foreign insurer.
Under the rules of agency, the party for whom the agent acts is called the ______. - ANSWER-
Principal: Under the rules of agency, the party for whom the agent acts is called the principal. An
agent and principal are the two parties involved in the agency relationship.
The agent holds three types of authorities. The authority that a customer believes that an agent
holds based on the agent's statements and which may make the insurer liable for the agent's acts
is called _________ authority. - ANSWER-Apparent: The authority that a customer believes that
an agent holds based on the agent's statements and which may make the insurer liable for the
agent's acts is called apparent authority.
Which of the following statements is TRUE about a legal contract? - ANSWER-A contract is
enforceable at law. A contract is enforceable by law. Once all of the elements of the contract have
been met then the contract is binding on all parties.
Based on the definition of a legal contract, which of the following statements represents an offer?
- ANSWER-an application for coverage presented by the applicant with the first premium. An
application for coverage presented by the applicant with the first premium constitutes a legal
offer.
ABC Insurance reviews Henry Garrett's application for insurance and decides to insure Henry for
an amount that is less than what Henry applied for. It presents Henry with a policy for $100,000
instead of the $200,000 he requested. The legal term that refers to the action taken by ABC
Insurance is __________. - ANSWER-Counteroffer: ABC Insurance has rejected Henry's offer
and made a counteroffer.
The terms of an insurance policy must be accepted or rejected as presented; they are not open to
negotiation. Which term describes this characteristic of insurance policies? - ANSWER-
Adhesion: An insurance contract is a contract of adhesion. This means it is drafted by the insurer
and offered to the prospective policyowner on a take-it-or-leave-it basis.
Which of the following statements is TRUE about insurance policies? - ANSWER-Only the
insurer is required to make an enforceable promise. In a unilateral contract such as an insurance
contract, only the insurer is required to make an enforceable promise.
With regard to an insurance contract, which of the following would constitute grounds to void
the contract? - ANSWER-Fraud: Fraud is the act of deceiving with the intent to gain something
of value. It is grounds to void a contract.
Fred's policy clearly states that he must send his premiums directly to the insurer's home office in
Columbus, Ohio. For five years, however, Fred always paid his life insurance premiums to his
agent instead. The agent then passed them on to the home office. Last month, on the 20th, Fred
was hit by a truck and killed two days after receipt by the agent of Fred's latest annual premium.
The insurer denied the death claim by stating the contract premium was not paid. However, the
, beneficiary is able to collect the death benefit based on application of which of the following
legal principles? - ANSWER-Estoppel: Estoppel involves one party's giving up of a right,
involuntarily. In this case, the insurer gives up the right to deny a claim based on the issue of
where premiums are paid because he has accepted the arrangement for the prior five years.
Which of the following best describes an agent's responsibilities? - ANSWER-An agent has to
act in the best interests of insureds, applicants, and insurers. In addition to the duties an agent
owes to the insurer, the agent also must act only in the best interests of the applicant or insured.
Julie accepts Tom's application for a life insurance policy. She also takes his premium and sends
it directly to the insurance company's home office. Her agency contract does not mention the
handling of premiums. Which type of authority allows Julie's actions? - ANSWER-Implied
Authority: Julie's handling of the premium is an example of implied authority. While not
specifically mentioned in her agent's contract, the contract implies Julie's authority to collect and
remit premiums because it is required to carry out her duties as an agent.
What authority does an insurer give to an agent through the agent's contract? - ANSWER-
express authority: The contract between the agent and insurer gives the agent express authority.
An agent's contract specifies the activities the agent can perform and outlines the agent's duties.
Under the captive agency system, who employs an agent? - ANSWER-one insurance company.
Under the captive (or career) agency system, one insurance company employs the agent. The
agent works at a branch of the company and earns commissions for sales. A general agent
supervises the agent.
What is a person's alcoholism? - ANSWER-Hazard: A hazard is a condition that increases the
frequency or severity of the loss. Therefore, a person's alcoholism is a health hazard that may
cause illness or early death.
Adverse selection arises from which of the following? - ANSWER-The fact that people in poor
health are more likely to buy and keep insurance. Adverse selection is the tendency of people
more likely to have a claim to buy and keep insurance. These people are selecting against the
insurance company. For example, a person who is sick is more likely to buy health insurance and
to keep the policy in force than a healthy person.
An insurer receives a "B" rating from a rating organization. Based on that rating, what is its
ability to meet its contract obligations? - ANSWER-speculative under stressful circumstances: If
an insurer receives a "B" rating, then the rating organization sees its ability to honor its insurance
obligations under stressful circumstances as speculative.
How do insurers treat a flood? - ANSWER-as a peril: A flood is a peril, which is a condition that
involves danger or risk and causes a loss. Insurance policies offer financial protection against
losses caused by perils.
Which of the following statements is TRUE regarding insurable interest? - ANSWER-An
applicant can take out a policy on a business partner in a small business. Business partners have a
In insurance, a type of risk that involves the chance of loss or gain and which is therefore
uninsurable is called - ANSWER-speculative risk: Speculative risk is risk that may result in loss
or gain. This type of risk is generally uninsurable.
A hurricane is an example of a(n) - ANSWER-Peril: A hurricane is an example of a peril. A peril
is a condition that involves danger or risk and is the cause of a loss. Insurance policies are
written to provide financial protection against losses from stated perils.
Which of the following is an example of pure risk? - ANSWER-the loss of life: The loss of a life
is a good example of pure risk because there is no possible gain in this situation.
Which of the following is defined as increasing the severity or frequency of loss? - ANSWER-
Hazard: A hazard does indeed increase the number of, or the severity of, losses.
Mary refuses to fly on a commercial airplane for her business. This is an example of risk
________. - ANSWER-Avoidance: Mary refuses to fly on a commercial airplane for her
business. This is an example of risk avoidance.
The banding together of individuals who collectively agree to cover a loss suffered by any group
member is the definition of which method of handling risk? - ANSWER-share the risk: Under
risk-sharing each member of a group agrees to share the financial burden of a loss that could be
suffered by any member.
Pamela replaces the batteries in her smoke alarms throughout the house and tests them once a
year. This is an example of - ANSWER-risk reduction: Risk reduction is an option to lessen the
possibility of loss when a risk cannot be avoided. In this case, the risk of fire that could result in
severe loss is reduced through having active fire alarms.
Which of the following is considered an element of insurable risk? - ANSWER-The risk of loss
must be measurable with a dollar value defined.
Adverse selection can be described as - ANSWER-the fact that people in poor health are more
likely to buy and keep insurance. Adverse selection is selection against an insurer. It refers to the
tendency of persons who are likely to make a claim based on their circumstances to buy and keep
insurance. For example, a person who is sick is more likely to buy health insurance and to keep
the policy in force than a healthy person.
This term is the principle that the greater the number of incidents of a random process, the more
likely that the expected number of incidents and the actual numbers of incidents will be the
same. - ANSWER-law of large numbers: The law of large numbers describes the principle that
the greater the number of incidents of a random process, the more likely that the expected
number of incidents and the actual numbers of incidents will be the same. This fact allows the
insurer to predict the extent of risk.
,Both mutual insurance companies and stock insurance companies have which of the following
features in common? - ANSWER-Both can issue dividends:The stock company can issue
dividends to its stockholders; the mutual company can issue dividends to its policyowners.
The Grand Halvorson Lodge has 250 members, united by a common Danish heritage. For 50
years they have also run an annual carnival for the purpose of sponsoring families in need of
medical care for their children. All the money brought in through dues and fund-raising events is
used to support their non-profit work with needy families. The Grand Halvorson Lodge offers
life insurance to its members. What type of insurer is it considered? - ANSWER-fraternal benefit
society: The members of a lodge or fraternal organization can provide life insurance for their
members.
A group of people who agree to pro-rate and share the losses suffered by other members is called
a(an) ______________ insurer. - ANSWER-Reciprocal: A group of people who agree to pro-rate
and share the losses suffered by other members is called a reciprocal insurer.
Which of the following services does Lloyd's of London provide? - ANSWER-a common
meeting ground where member associations can conduct insurance business: Lloyd's of London
provides a common meeting ground where member associations can conduct insurance business.
When a state bars the sale of a particular coverage within its boundaries, a typical insurance
company cannot cover it. In this case, an insurer not licensed in the state can underwrite this
insurance through a third party broker. What type of insurer can underwrite the coverage in this
case? - ANSWER-a surplus lines insurer: A surplus lines insurer is not licensed to do business in
the state. However, it must be eligible to provide unique coverage when requested through the
surplus lines market.
When an insurance company cedes part of an insurance risk to another insurance company, the
process is known as - ANSWER-reinsurance: When an insurance company wants to transfer
some or all of the risks represented by its insureds, the process is known as reinsurance. The
company accepting the risk being transferred is the reinsurance company.
Which of the following statements is TRUE about government insurers? - ANSWER-The
populace, through taxation, funds the insurance program. Government insurance is funded
through taxation.
An insurance company that has received a certificate of authority from the state to sell insurance
in that state is known as a(an) ___________ insurer. - ANSWER-Admitted: An insurance
company that has received a certificate of authority from the state to sell insurance in that state is
known as a(an) admitted insurer. Agents who, within a given state, sell insurance for a non-
admitted insurance company face severe penalties.
In an insurance transaction, the insurance salesperson in the agency system who legally
represents the insurer is known as the __________. - ANSWER-Agent: In an insurance
transaction, the insurance salesperson in the agency system who legally represents the insurer is
known as the agent. (A broker, on the other hand, has traditionally and legally been viewed as a
representative of the applicant rather than of the insurer.)
,XYZ Insurance, incorporated in Texas, has agents authorized to sell life insurance in Arkansas.
In Arkansas, XYZ Insurance is categorized as which of the following? - ANSWER-a foreign
insurer: In Arkansas, XYZ Insurance is categorized as a foreign insurer.
Under the rules of agency, the party for whom the agent acts is called the ______. - ANSWER-
Principal: Under the rules of agency, the party for whom the agent acts is called the principal. An
agent and principal are the two parties involved in the agency relationship.
The agent holds three types of authorities. The authority that a customer believes that an agent
holds based on the agent's statements and which may make the insurer liable for the agent's acts
is called _________ authority. - ANSWER-Apparent: The authority that a customer believes that
an agent holds based on the agent's statements and which may make the insurer liable for the
agent's acts is called apparent authority.
Which of the following statements is TRUE about a legal contract? - ANSWER-A contract is
enforceable at law. A contract is enforceable by law. Once all of the elements of the contract have
been met then the contract is binding on all parties.
Based on the definition of a legal contract, which of the following statements represents an offer?
- ANSWER-an application for coverage presented by the applicant with the first premium. An
application for coverage presented by the applicant with the first premium constitutes a legal
offer.
ABC Insurance reviews Henry Garrett's application for insurance and decides to insure Henry for
an amount that is less than what Henry applied for. It presents Henry with a policy for $100,000
instead of the $200,000 he requested. The legal term that refers to the action taken by ABC
Insurance is __________. - ANSWER-Counteroffer: ABC Insurance has rejected Henry's offer
and made a counteroffer.
The terms of an insurance policy must be accepted or rejected as presented; they are not open to
negotiation. Which term describes this characteristic of insurance policies? - ANSWER-
Adhesion: An insurance contract is a contract of adhesion. This means it is drafted by the insurer
and offered to the prospective policyowner on a take-it-or-leave-it basis.
Which of the following statements is TRUE about insurance policies? - ANSWER-Only the
insurer is required to make an enforceable promise. In a unilateral contract such as an insurance
contract, only the insurer is required to make an enforceable promise.
With regard to an insurance contract, which of the following would constitute grounds to void
the contract? - ANSWER-Fraud: Fraud is the act of deceiving with the intent to gain something
of value. It is grounds to void a contract.
Fred's policy clearly states that he must send his premiums directly to the insurer's home office in
Columbus, Ohio. For five years, however, Fred always paid his life insurance premiums to his
agent instead. The agent then passed them on to the home office. Last month, on the 20th, Fred
was hit by a truck and killed two days after receipt by the agent of Fred's latest annual premium.
The insurer denied the death claim by stating the contract premium was not paid. However, the
, beneficiary is able to collect the death benefit based on application of which of the following
legal principles? - ANSWER-Estoppel: Estoppel involves one party's giving up of a right,
involuntarily. In this case, the insurer gives up the right to deny a claim based on the issue of
where premiums are paid because he has accepted the arrangement for the prior five years.
Which of the following best describes an agent's responsibilities? - ANSWER-An agent has to
act in the best interests of insureds, applicants, and insurers. In addition to the duties an agent
owes to the insurer, the agent also must act only in the best interests of the applicant or insured.
Julie accepts Tom's application for a life insurance policy. She also takes his premium and sends
it directly to the insurance company's home office. Her agency contract does not mention the
handling of premiums. Which type of authority allows Julie's actions? - ANSWER-Implied
Authority: Julie's handling of the premium is an example of implied authority. While not
specifically mentioned in her agent's contract, the contract implies Julie's authority to collect and
remit premiums because it is required to carry out her duties as an agent.
What authority does an insurer give to an agent through the agent's contract? - ANSWER-
express authority: The contract between the agent and insurer gives the agent express authority.
An agent's contract specifies the activities the agent can perform and outlines the agent's duties.
Under the captive agency system, who employs an agent? - ANSWER-one insurance company.
Under the captive (or career) agency system, one insurance company employs the agent. The
agent works at a branch of the company and earns commissions for sales. A general agent
supervises the agent.
What is a person's alcoholism? - ANSWER-Hazard: A hazard is a condition that increases the
frequency or severity of the loss. Therefore, a person's alcoholism is a health hazard that may
cause illness or early death.
Adverse selection arises from which of the following? - ANSWER-The fact that people in poor
health are more likely to buy and keep insurance. Adverse selection is the tendency of people
more likely to have a claim to buy and keep insurance. These people are selecting against the
insurance company. For example, a person who is sick is more likely to buy health insurance and
to keep the policy in force than a healthy person.
An insurer receives a "B" rating from a rating organization. Based on that rating, what is its
ability to meet its contract obligations? - ANSWER-speculative under stressful circumstances: If
an insurer receives a "B" rating, then the rating organization sees its ability to honor its insurance
obligations under stressful circumstances as speculative.
How do insurers treat a flood? - ANSWER-as a peril: A flood is a peril, which is a condition that
involves danger or risk and causes a loss. Insurance policies offer financial protection against
losses caused by perils.
Which of the following statements is TRUE regarding insurable interest? - ANSWER-An
applicant can take out a policy on a business partner in a small business. Business partners have a
