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FINA 365 (UNL – Jinsook Lee) Exam 2 complete Practice Questions &
Detailed Rationales (Verified Update!!!!! 2026–2027 Edition)
Instructions: This comprehensive practice exam covers all core
domains tested on FINA 365 Exam 2 at the University of
Nebraska–Lincoln. Each question includes four answer choices,
the correct answer, and a detailed rationale. Content is aligned
with the course's coverage of Chapters 4–7 and associated
topics: Insurance Companies, Securities Firms and Investment
Banks, Mutual Funds, Pension Funds, Financial Risk
Management, Derivatives, Commercial Bank Regulation, and
the Financial Crisis.
Domain 1: Insurance Companies (Questions)
1. Insurance policy benefits are classified on an insurance
company's balance sheet as:
A) Assets, because policy benefits are fully covered by premium
payments
B) Liabilities, because insurance companies must maintain a
capital base to cover the payments of benefits
C) Assets, because policy benefits are valuable to the company
D) Liabilities, because the insurance company may have to pay
out the benefits
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Answer: B.
Rationale: Insurance policy benefits are liabilities on the
balance sheet because the insurance company has a future
obligation to pay benefits to policyholders. The company must
maintain a capital base to cover these potential payments. They
are not assets (A, C), and they are not liabilities simply because
customers may fall behind on premiums (D).
2. The primary function of insurance companies is to:
A) Assist in the transfer of wealth into the future
B) Protect policyholders from adverse events
C) Sell a variety of consumer investment products
D) Provide contracts that encourage policyholders to save
current income
Answer: B.
Rationale: The primary function of insurance companies is to
protect policyholders from adverse events by pooling risk. While
insurance companies may assist with wealth transfer (A), sell
investment products (C), and encourage savings (D), these are
secondary functions.
3. The McCarran-Ferguson Act of 1945 represents legislation
confirming:
A) Federal primacy over state regulation of insurance
companies
B) State primacy over federal regulation of insurance companies
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C) The creation of the FDIC
D) The establishment of the Federal Reserve
Answer: B.
Rationale: The McCarran-Ferguson Act of 1945 confirmed the
primacy of state over federal regulation of insurance
companies. It did not establish federal primacy (A), create the
FDIC (C), or establish the Fed (D).
4. Factors that affect the predictability of claims loss exposure
include:
A) The concept of long-tail risk
B) The frequency and severity of loss
C) Property versus liability coverage
D) All of the options
Answer: D.
Rationale: All of these factors affect the predictability of claims
loss exposure. Long-tail risk (A), frequency and severity of loss
(B), and the type of coverage (C) all influence how predictable
claims will be.
5. Which of the following is pure life insurance with a savings
element built in?
A) Endowment life
B) Universal life
C) Variable life
D) Term life
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Answer: A.
Rationale: Endowment life insurance is pure life insurance with
a savings element built in. Term life (D) has no savings element.
Universal life (B) and variable life (C) are more complex products
with investment components.
6. An insurance policy in which fixed premium payments are
invested in mutual funds of stocks, bonds, and money market
instruments is called:
A) Whole life
B) Universal life
C) Term life
D) Variable life
Answer: D.
Rationale: Variable life insurance invests fixed premium
payments in mutual funds of stocks, bonds, and money market
instruments. Whole life (A) has fixed returns, universal life (B)
offers flexible premiums, and term life (C) has no investment
component.
7. The largest asset category on the balance sheet of U.S. life
insurance companies is:
A) Mortgages
B) Cash
C) Corporate stock
D) Corporate bonds
FINA 365 (UNL – Jinsook Lee) Exam 2 complete Practice Questions &
Detailed Rationales (Verified Update!!!!! 2026–2027 Edition)
Instructions: This comprehensive practice exam covers all core
domains tested on FINA 365 Exam 2 at the University of
Nebraska–Lincoln. Each question includes four answer choices,
the correct answer, and a detailed rationale. Content is aligned
with the course's coverage of Chapters 4–7 and associated
topics: Insurance Companies, Securities Firms and Investment
Banks, Mutual Funds, Pension Funds, Financial Risk
Management, Derivatives, Commercial Bank Regulation, and
the Financial Crisis.
Domain 1: Insurance Companies (Questions)
1. Insurance policy benefits are classified on an insurance
company's balance sheet as:
A) Assets, because policy benefits are fully covered by premium
payments
B) Liabilities, because insurance companies must maintain a
capital base to cover the payments of benefits
C) Assets, because policy benefits are valuable to the company
D) Liabilities, because the insurance company may have to pay
out the benefits
, Page |2
Answer: B.
Rationale: Insurance policy benefits are liabilities on the
balance sheet because the insurance company has a future
obligation to pay benefits to policyholders. The company must
maintain a capital base to cover these potential payments. They
are not assets (A, C), and they are not liabilities simply because
customers may fall behind on premiums (D).
2. The primary function of insurance companies is to:
A) Assist in the transfer of wealth into the future
B) Protect policyholders from adverse events
C) Sell a variety of consumer investment products
D) Provide contracts that encourage policyholders to save
current income
Answer: B.
Rationale: The primary function of insurance companies is to
protect policyholders from adverse events by pooling risk. While
insurance companies may assist with wealth transfer (A), sell
investment products (C), and encourage savings (D), these are
secondary functions.
3. The McCarran-Ferguson Act of 1945 represents legislation
confirming:
A) Federal primacy over state regulation of insurance
companies
B) State primacy over federal regulation of insurance companies
, Page |3
C) The creation of the FDIC
D) The establishment of the Federal Reserve
Answer: B.
Rationale: The McCarran-Ferguson Act of 1945 confirmed the
primacy of state over federal regulation of insurance
companies. It did not establish federal primacy (A), create the
FDIC (C), or establish the Fed (D).
4. Factors that affect the predictability of claims loss exposure
include:
A) The concept of long-tail risk
B) The frequency and severity of loss
C) Property versus liability coverage
D) All of the options
Answer: D.
Rationale: All of these factors affect the predictability of claims
loss exposure. Long-tail risk (A), frequency and severity of loss
(B), and the type of coverage (C) all influence how predictable
claims will be.
5. Which of the following is pure life insurance with a savings
element built in?
A) Endowment life
B) Universal life
C) Variable life
D) Term life
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Answer: A.
Rationale: Endowment life insurance is pure life insurance with
a savings element built in. Term life (D) has no savings element.
Universal life (B) and variable life (C) are more complex products
with investment components.
6. An insurance policy in which fixed premium payments are
invested in mutual funds of stocks, bonds, and money market
instruments is called:
A) Whole life
B) Universal life
C) Term life
D) Variable life
Answer: D.
Rationale: Variable life insurance invests fixed premium
payments in mutual funds of stocks, bonds, and money market
instruments. Whole life (A) has fixed returns, universal life (B)
offers flexible premiums, and term life (C) has no investment
component.
7. The largest asset category on the balance sheet of U.S. life
insurance companies is:
A) Mortgages
B) Cash
C) Corporate stock
D) Corporate bonds
