ALU 202 Exam Study Guide – 100 Practice Questions &
Answer Review
Section 1: Product Pricing & Underwriting Relationship
(Questions 1–12)
Question 1: Underwriting criteria generally used in the pricing of preferred policies
include which of the following?
A. Blood pressure
B. Cholesterol/HDL ratios
C. Family history
D. All of the above
Correct Answer: D
Rationale: Blood pressure, cholesterol/HDL ratios, and family history are all standard
underwriting criteria used in the pricing of preferred life insurance policies .
Question 2: All of the following are life insurance pricing components established by
regulation EXCEPT:
A. Reserve basis
B. Tax law
C. Nonforfeiture laws
D. Asset risk
Correct Answer: D
,Rationale: Reserve basis, tax law, and nonforfeiture laws are established by regulation.
Asset risk is a type of risk covered by allocated surplus, not a regulatory pricing
component .
Question 3: What are the four types of risk that must be covered by allocated surplus in
product development and pricing?
A. Asset risk, insurance risk, interest rate risk, business risk
B. Mortality risk, morbidity risk, lapse risk, expense risk
C. Credit risk, market risk, operational risk, liquidity risk
D. Underwriting risk, pricing risk, claims risk, reinsurance risk
Correct Answer: A
Rationale: The four types of risk covered by allocated surplus are asset risk, insurance
risk, interest rate risk, and business risk .
Question 4: What is asset risk in the context of product pricing?
A. The risk that the price for the insurance product is inadequate
B. The risk that assets supporting the product line lose some or all of their value
C. The risk that assets must be sold at a loss to meet policyholder needs
D. A catch-all category of risk management
Correct Answer: B
Rationale: Asset risk is the risk that the assets supporting the product line lose some or
all of their value .
,Question 5: What is insurance risk?
A. The risk that assets lose value
B. The risk that the price for the insurance product is inadequate due to mis-estimation
of expected mortality
C. The risk that assets must be sold at a loss
D. A catch-all category of risk management
Correct Answer: B
Rationale: Insurance risk is the risk that the price for the insurance product is
inadequate, caused by mis-estimation of expected mortality .
Question 6: What is interest rate risk?
A. The risk that assets lose value
B. The risk that the price is inadequate
C. The risk that assets must be sold at a loss to meet the cash needs of the policyholder
D. A catch-all category of risk management
Correct Answer: C
Rationale: Interest rate risk is the risk that assets must be sold at a loss in order to meet
the cash needs of the policyholder .
Question 7: What is business risk?
, A. The risk that assets lose value
B. The risk that the price is inadequate
C. The risk that assets must be sold at a loss
D. A catch-all category of risk management to cover anything not included in the first
three categories
Correct Answer: D
Rationale: Business risk is a catch-all category of risk management to cover anything
not included in asset risk, insurance risk, or interest rate risk .
Question 8: Stringent underwriting causes which two things to happen?
A. Expected mortality decreases, and fewer people qualify
B. Expected mortality increases, and more people qualify
C. Expected mortality decreases, and more people qualify
D. Expected mortality increases, and fewer people qualify
Correct Answer: A
Rationale: More stringent underwriting causes: (1) expected mortality decreases on the
block of policies that qualify, resulting in lower, more competitive prices; and (2) fewer
people will qualify under the more stringent requirements .
Question 9: What is the largest decrement on policies in force?
A. Death
B. Lapse
Answer Review
Section 1: Product Pricing & Underwriting Relationship
(Questions 1–12)
Question 1: Underwriting criteria generally used in the pricing of preferred policies
include which of the following?
A. Blood pressure
B. Cholesterol/HDL ratios
C. Family history
D. All of the above
Correct Answer: D
Rationale: Blood pressure, cholesterol/HDL ratios, and family history are all standard
underwriting criteria used in the pricing of preferred life insurance policies .
Question 2: All of the following are life insurance pricing components established by
regulation EXCEPT:
A. Reserve basis
B. Tax law
C. Nonforfeiture laws
D. Asset risk
Correct Answer: D
,Rationale: Reserve basis, tax law, and nonforfeiture laws are established by regulation.
Asset risk is a type of risk covered by allocated surplus, not a regulatory pricing
component .
Question 3: What are the four types of risk that must be covered by allocated surplus in
product development and pricing?
A. Asset risk, insurance risk, interest rate risk, business risk
B. Mortality risk, morbidity risk, lapse risk, expense risk
C. Credit risk, market risk, operational risk, liquidity risk
D. Underwriting risk, pricing risk, claims risk, reinsurance risk
Correct Answer: A
Rationale: The four types of risk covered by allocated surplus are asset risk, insurance
risk, interest rate risk, and business risk .
Question 4: What is asset risk in the context of product pricing?
A. The risk that the price for the insurance product is inadequate
B. The risk that assets supporting the product line lose some or all of their value
C. The risk that assets must be sold at a loss to meet policyholder needs
D. A catch-all category of risk management
Correct Answer: B
Rationale: Asset risk is the risk that the assets supporting the product line lose some or
all of their value .
,Question 5: What is insurance risk?
A. The risk that assets lose value
B. The risk that the price for the insurance product is inadequate due to mis-estimation
of expected mortality
C. The risk that assets must be sold at a loss
D. A catch-all category of risk management
Correct Answer: B
Rationale: Insurance risk is the risk that the price for the insurance product is
inadequate, caused by mis-estimation of expected mortality .
Question 6: What is interest rate risk?
A. The risk that assets lose value
B. The risk that the price is inadequate
C. The risk that assets must be sold at a loss to meet the cash needs of the policyholder
D. A catch-all category of risk management
Correct Answer: C
Rationale: Interest rate risk is the risk that assets must be sold at a loss in order to meet
the cash needs of the policyholder .
Question 7: What is business risk?
, A. The risk that assets lose value
B. The risk that the price is inadequate
C. The risk that assets must be sold at a loss
D. A catch-all category of risk management to cover anything not included in the first
three categories
Correct Answer: D
Rationale: Business risk is a catch-all category of risk management to cover anything
not included in asset risk, insurance risk, or interest rate risk .
Question 8: Stringent underwriting causes which two things to happen?
A. Expected mortality decreases, and fewer people qualify
B. Expected mortality increases, and more people qualify
C. Expected mortality decreases, and more people qualify
D. Expected mortality increases, and fewer people qualify
Correct Answer: A
Rationale: More stringent underwriting causes: (1) expected mortality decreases on the
block of policies that qualify, resulting in lower, more competitive prices; and (2) fewer
people will qualify under the more stringent requirements .
Question 9: What is the largest decrement on policies in force?
A. Death
B. Lapse
