ACTUAL PSI TEST QUESTIONS COMPLETE
WITH 100% VERIFIED ANSWERS AND
DETAILED EXPLANATIONS
1. In order for a contract to be valid, it must
A. be filed with the state
B. be signed and witnessed by an attorney
C. be in writing
D. contain offer and acceptance ✔
Explanation: A valid contract requires offer, acceptance, consideration,
legal purpose, and competent parties. Not all contracts must be in
writing (oral contracts can be valid except under Statute of Frauds).
Offer and acceptance are essential.
2. A producer's fiduciary duty requires that
A. premiums are maintained in a personal bank account until in an
interest bearing account
C. premiums are forwarded to the insurer on a timely basis ✔
D. premiums be commingled
Explanation: Fiduciary duty means handling client funds with care,
promptly forwarding premiums to the insurer, and never commingling
with personal funds.
,3. An individual who removes the risk of losing money in the stock
market by never purchasing stocks is said to be engaging in
A. Risk reduction
B. Risk transference
C. Risk avoidance ✔
D. Risk retention
Explanation: Risk avoidance means avoiding the activity entirely (not
buying stocks) rather than reducing, transferring, or retaining the risk.
4. A type of group that has a constitution and has been organized for
purposes other than obtaining insurance is called a(n)
A. employer group
B. employee group
C. association or labor group ✔
D. multiple coalition
Explanation: Association or labor groups are formed for non-insurance
purposes (e.g., professional or trade associations) and may later offer
insurance to members.
5. Term insurance is appropriate for someone who
A. seeks living benefits for themselves
B. seeks a policy that builds cash value
,C. seeks temporary protection and lower premiums ✔
D. seeks permanent protection and higher premiums
Explanation: Term insurance provides temporary coverage with lower
premiums and no cash value accumulation.
6. Michigan requires that a licensee complete __ hours of continuing
education on the subject of ethics every reporting period
A. 1
B. 2
C. 3 ✔
D. 4
Explanation: Michigan mandates 3 hours of ethics CE per reporting
period for insurance licensees.
7. Which of these would limit a company's liability to provide insurance
coverage?
A. Waiver
B. Exclusion ✔
C. Rider
D. Provision
Explanation: An exclusion specifically removes coverage for certain
perils, conditions, or property, limiting the insurer's liability.
8. How do insurers predict the increase of individual risks?
, A. Law of large numbers ✔
B. U.S. Census
C. Average mortality incidents
D. Experience of morbidity
Explanation: The law of large numbers allows insurers to predict future
losses by analyzing large groups of similar risks.
9. Which of the following BEST describes a conditional insurance
contract?
A. A contract that requires certain conditions or acts by the insured
individual ✔
B. A contract that has the potential for the unequal exchange of
consideration for both parties
C. A contract where one party "adheres" to the terms of the contract
D. A contract where only one party makes any kind of enforceable
contract
Explanation: A conditional contract requires the insured to meet certain
conditions (e.g., filing proof of loss) before the insurer must perform.
10. The power given to an individual producer that is not specifically
addressed in his/her contract is considered what type of authority?
A. discreet
B. apparent
C. implied ✔
D. express
WITH 100% VERIFIED ANSWERS AND
DETAILED EXPLANATIONS
1. In order for a contract to be valid, it must
A. be filed with the state
B. be signed and witnessed by an attorney
C. be in writing
D. contain offer and acceptance ✔
Explanation: A valid contract requires offer, acceptance, consideration,
legal purpose, and competent parties. Not all contracts must be in
writing (oral contracts can be valid except under Statute of Frauds).
Offer and acceptance are essential.
2. A producer's fiduciary duty requires that
A. premiums are maintained in a personal bank account until in an
interest bearing account
C. premiums are forwarded to the insurer on a timely basis ✔
D. premiums be commingled
Explanation: Fiduciary duty means handling client funds with care,
promptly forwarding premiums to the insurer, and never commingling
with personal funds.
,3. An individual who removes the risk of losing money in the stock
market by never purchasing stocks is said to be engaging in
A. Risk reduction
B. Risk transference
C. Risk avoidance ✔
D. Risk retention
Explanation: Risk avoidance means avoiding the activity entirely (not
buying stocks) rather than reducing, transferring, or retaining the risk.
4. A type of group that has a constitution and has been organized for
purposes other than obtaining insurance is called a(n)
A. employer group
B. employee group
C. association or labor group ✔
D. multiple coalition
Explanation: Association or labor groups are formed for non-insurance
purposes (e.g., professional or trade associations) and may later offer
insurance to members.
5. Term insurance is appropriate for someone who
A. seeks living benefits for themselves
B. seeks a policy that builds cash value
,C. seeks temporary protection and lower premiums ✔
D. seeks permanent protection and higher premiums
Explanation: Term insurance provides temporary coverage with lower
premiums and no cash value accumulation.
6. Michigan requires that a licensee complete __ hours of continuing
education on the subject of ethics every reporting period
A. 1
B. 2
C. 3 ✔
D. 4
Explanation: Michigan mandates 3 hours of ethics CE per reporting
period for insurance licensees.
7. Which of these would limit a company's liability to provide insurance
coverage?
A. Waiver
B. Exclusion ✔
C. Rider
D. Provision
Explanation: An exclusion specifically removes coverage for certain
perils, conditions, or property, limiting the insurer's liability.
8. How do insurers predict the increase of individual risks?
, A. Law of large numbers ✔
B. U.S. Census
C. Average mortality incidents
D. Experience of morbidity
Explanation: The law of large numbers allows insurers to predict future
losses by analyzing large groups of similar risks.
9. Which of the following BEST describes a conditional insurance
contract?
A. A contract that requires certain conditions or acts by the insured
individual ✔
B. A contract that has the potential for the unequal exchange of
consideration for both parties
C. A contract where one party "adheres" to the terms of the contract
D. A contract where only one party makes any kind of enforceable
contract
Explanation: A conditional contract requires the insured to meet certain
conditions (e.g., filing proof of loss) before the insurer must perform.
10. The power given to an individual producer that is not specifically
addressed in his/her contract is considered what type of authority?
A. discreet
B. apparent
C. implied ✔
D. express
