LOMA 280 PRINCIPLES OF INSURANCE EXAM QUESTIONS WITH COMPLETE SOLUTIONS

LOMA 280 PRINCIPLES OF INSURANCE EXAM QUESTIONS WITH COMPLETE SOLUTIONS Cost of benefits - Answer-Value of all benefits under a product Cost of benefits = potential obligations • probability benefits will be payable Block of policies - Answer-Financial design calculations are based on them - a group of policies issued to insureds who are the same age sex and risk class Tabular mortality rates - Answer-Starting point to calculate mortality rates to project cost of benefits for a block of policies Mortality experience table - Answer-Compiled from a company's records reflecting it's insureds actual mortality Investment earnings - Answer-Money insurer receives from investing the funds it receives from customers Interest - Answer-Payment for the use of money Principal - Answer-Sum of money originally invested Simple interest - Answer-Interest on original principal only Compound interest - Answer-Interest on principal and accrued interest Operating expenses - Answer-Expenses that arise in normal course of operations Lapse rate - Answer-Percentage of a specified group of policies in force at the beginning of a period that are terminated by the end for reason other than death Conservative values for life insurance product elements - Answer-Mortality rates higher than expected Investment earnings lower than expected Operating expenses higher than expected Premium rates - Answer-Charge per unit of insurance coverage (coverage unit = $1000 of coverage) Actuaries seek to make sure premium rates and other policies are... - Answer-Adequate:high enough so insurer can pay policies Equitable:premium must reflect risk Not excessive: affordable and competitive Level premium system - Answer-Allows policy owner to pay the same premium amount each year the certificate is in force Common personal needs for purchasing life insurance - Answer-Dependents support, estate planning, paying debts, and final expenses Dependents (beneficiaries) support - Answer-Beneficiaries do not have to pay income tax on death benefits Estate - Answer-Accumulated assets an individual owns at time of death (cash, bank and investment accounts, real estate, personal possessions, ownership interest in a business) Will - Answer-Legal document that directs an individual's property division Estate plan - Answer-Considers the amount of assets and debts you are likely to have at time of death and decides how best to preserve those assets (life insurance is an important component) 2 reasons a business purchases life insurance - Answer-Provide funds to ensure business continues in the event of the death of an owner To provide benefits for its employees Business continuation insurance plan - Answer-Insurance that enables a business to continue operating if a key person dies Key person - Answer-Person or employee whose continued participation is vital to the success of the business (owner, executive, manager) Key person life insurance - Answer-Individual life insurance that a business purchases on the life of a key person Buy-Sell agreements - Answer-1) 1 party agrees to purchase the financial interest that a 2nd party has following the 2nd party's death 2) the 2nd party agrees to direct his estate to sell his interest in the business to the purchasing party Term life insurance - Answer-Provides death benefit only if the insured dies during a specified period of time (known as the policy term) Policy anniversary - Answer-The anniversary of the date on which the policy became effective - term policies usually expire on the anniversary that falls closest to a specific birthday Level term life insurance - Answer-Aka level face amount term life or guaranteed level premium term insurance Decreasing term life insurance - Answer-Benefit decreases in amount over the term of coverage Mortgage life insurance - Answer-Covers mortgage loan Joint mortgage life insurance - Answer-Provides the same as mortgage but insures the lives of 2 people Credit life insurance - Answer-Pay balance due on a loan if borrower dies Family income coverage - Answer-Provides beneficiary a stated monthly income benefit amount Policy rider - Answer-Aka endorsement- amendment to an insurance policy becomes part of the insurance contract that expands or limits benefits payable under contract Family income policy - Answer-Cash value life insurance policy with a family income coverage rider Increasing term life insurance - Answer-Death benefit starts at one amount and increases by some specified amount or percentage at stated intervals over policy term Renewable term insurance policy - Answer-Gives policy owner option to continue coverage at the end of the specified term without presenting evidence of insurability Evidence of insurability - Answer-Proof that insured person continues to be an insurable risk Renewal provision - Answer-Right to continue coverage without presenting evidence of insurability Attained age - Answer-Age insured has reached on the renewal date, renewal premium rate remains level throughout new policy term Yearly renewable term (YRT) or annual renewable term (ART) - Answer-Are renewable for a stated number of years Convertible term insurance policy - Answer-Gives policy owner the right to convert the term policy to a cash value life insurance policy (conversion privilege) Attained age conversion - Answer-Premium rate for the cash value policy based on the insureds age at the time the policy is converted Original age conversion - Answer-Premium rate for the cash value policy based on the insureds age when the original policy was issued Return on premium (ROP) term insurance - Answer-Form of term life insurance that provides a death benefit if the insured dies and returns the premium if they do not Cash value life insurance - Answer-Aka permanent life insurance provides coverage throughout insureds lifetime and provides a cash value (savings element) Risk - Answer-chance of an unexpected gain or loss Speculative risk - Answer-3 possible outcomes: gain, loss, or no change Pure risk - Answer-No gain; either loss or no loss. Only type of risk than can be insured 4 methods for managing financial risk - Answer-Avoiding, controlling, transferring, accepting Personal Risk - Answer-Risk of economic loss associated with death, poor health, injury, and outliving economic resources Liability risk - Answer-Risk of economic loss resulting from a person being held legally responsible for harming others or their property 5 characteristics of insurable risks - Answer-Loss must occur by chance Loss must be definite Loss must be significant Loss rate must be predictable Loss must not be catastrophic to the insurer