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TRUE FALSE QUESTIONS

CHAPTER 1

1.

The term "risk" is generally agreed to have the same meaning in the fields of economics,
statistics, decision theory and insurance.

2.

Dynamic risks are those exposures to loss that result from changes in the economy.

3.

A hazard is anything that is likely to cause a loss, such as a fire, a windstorm, or an


earthquake.

4.

The existence of risk in the economy tends to retard accumulation of capital.

5.

Fundamental risks are usually considered to be an individual's own responsibility and are
most appropriately dealt with through loss prevention measures.

6.

The most common method of dealing with those risks facing an individual is probably risk
retention.

7.

Speculative risks are usually accepted voluntarily because of their two-dimensional nature.

8.

Although virtually all speculative risks can be avoided, it is impossible to avoid all pure
risks.

9.

The term "pure risk" describes a situation in which there is no chance of gain, but the
possibility of loss or no loss only.

10. One of the best examples of dealing with risk through sharing is the process of hedging.
11. The term "pure risk" refers to those situations in which loss is certain, such as, for example,
depreciation.
12. A particular risk is one that is not calculable, because it is unique or involves an isolated
event.
13. Insurers can partially eliminate morale hazard through the use of deductibles and other
policy provisions that require the insured to bear a part of a loss.
14. Insurers can partially eliminate moral hazard through the use of deductibles and other policy
provisions that require the insured to bear a part of a loss.
15. From the perspective of society, the most attractive approach to dealing with risks is risk
avoidance.
16. While speculative risks are voluntarily assumed, pure risk exists whether or not the
individual wishes it.
17. The existence of pure risk can have detrimental effects both on the individual and on
economic activity.
18. Depreciation of machinery and equipment is a good example of the existence of risk in a
business firm.
19. The notions of indeterminacy and adversity are inherent in most definitions of risk.
20. The concept of "expected value" relates the magnitude of a risk to both the probability and
potential severity of the loss that might occur.

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TRUE FALSE QUESTIONS

CHAPTER 2

1.

Risk management and insurance management are synonymous terms.

2.

In general, the risk manager of an organization should be someone outside the firm.

3.

In the last analysis, there are only two approaches to dealing with risk: retention and
transfer.

4.

Risk management is a scientific approach to the problem of dealing with the risks faced by
individuals and businesses.

5.

Risk management was an inevitable evolution of the profession of corporate insurance


buying.

6.

The introduction of operations research and management science into the curriculum of
business colleges was a major factor in the development of risk management.

7.

Risk management derives its rules (laws) from the general knowledge of experience,
through deduction, and from precepts drawn from other disciplines, particularly decision
theory.

8.

The first objective of risk management is survival; to guarantee the continuing existence of
the organization as an operating entity.

9.

Risk managements primary contribution to the organization is in reducing the effects of


losses and the uncertainty connected with risks. .

10. Enterprise risk management combines the management of pure risks and speculative risks,
while traditional risk management focuses on pure risks only.
11. Risk retention deserves serious consideration when the maximum loss potential is small.
12. Risk management is concerned primarily with the risk management function of giant
corporations and has little relevance for smaller organizations.
13. The earliest insurance managers were employed by banks and other financial institutions,
which began to employ insurance managers shortly after World War II.
14. As it exists today, risk management represents the merging of three specialties; decision
theory, risk financing, and risk control.
15. Enterprise risk management incorporates aspects of traditional risk management and
financial risk management..
16. The first step in the risk management process is identification of the risks facing the
organization.
17. The final step in the risk management process is implementing the decision to deal with the
risks.
18. An organizations risk management policy should be approved by the highest policy-making
body in the organization.
19. The best measure of performance in the area of risk management is whether the
organization has survived.

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20. Risk managements primarily contribution to the organization is in reducing expenditures for
insurance and retained losses.

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TRUE FALSE QUESTIONS

CHAPTER 3

1.

The two fundamental characteristics of the insurance mechanism are transfer or shifting of
risk and the sharing of losses on some equitable basis.

2.

From the standpoint of the individual, insurance is a device in which a small certain cost is
substituted for a large uncertain loss.

3.

In addition to the transfer of risk from individuals, the insurance mechanism also involves a
reduction in the total amount of risk.

4.

We know that the probability of cutting a spade from a well-shuffled deck is .25 because of
an a posteriori estimate.

5.

Other things being equal, the probable variation of actual from expected results varies with
the number of cases in the group.

6.

Insurance cannot be used to deal with exposures that lack one of the elements of an
insurable exposure.

7.

For the economy as a whole, insurance may increase the cost of losses.

8.

One of the most important of the elements of an insurable risk is "economically feasible
insurability."

9.

Insurance is similar to gambling in the sense that both involve the transfer of risk.

10. Insurance cannot exist without a sufficiently large number of exposures to make losses
predictable.
11. From the perspective of an insurer, adverse selection is an uncontrollable phenomenon.
12. The existence of insurance may have the effect of actually increasing the amount of losses
in the economy.
13. Through the law of large numbers and a reduction in uncertainty, insurers are able to charge
each individual a premium that is less than the expected value of his or her loss.
14. Insurance could not exist without statistical probability and the law of large numbers.
15. Self-insurance is a definitional impossibility, but the term has found widespread acceptance.
16. Social insurance programs place primary emphasis on social adequacy of benefits rather
than on equity in cost and benefits.
17. Surety bonds are not generally considered to be contracts of insurance.
18. Public guarantee insurance programs are generally provided in connection with some
aspect of regulation.
19. The major divisions of the private insurance field are life insurance, health insurance, and
property and liability insurance.
20. Two of the distinguishing features of social insurance programs are the absence of equity in
the rating structure and the compulsory nature of the coverage.

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TRUE FALSE QUESTIONS

CHAPTER 4

1.

Experience has demonstrated that utility theory is a highly effective approach to risk
management decisions, both in theory and in practice.

2.

For the average organization, risk management decisions are typical of the type that
decision theorists characterize as decision making under uncertainty.

3.

There are relatively few situations in risk management decision-making where the expected
value approach will not be appropriate.

4.

A major implication of Pascals wager in risk management decisions is the suggestion that
the magnitude of a potential loss may be a major consideration in the decision.

5.

The most important consideration in determining how to deal with a given risk is the
potential severity of the loss and one's ability to bear it.

6.

Insurance should be considered as a last resort in risk management, and should be used
only when absolutely necessary.

7.

With limited funds available for the purchase of insurance, the sophisticated insurance
buyers will spend these funds to insure exposures for which the probability of loss is
highest.

8.

Contributions to a business firm's self-insurance reserve are not deductible for federal tax
purposes, but losses paid by the firm are deductible.

9.

Ratings assigned to insurers by A. M. Best and Company are determined through a survey
of the company's existing and former policyholders.

10. In selecting an insurer, the most important consideration should be the cost of its products
and the company's attitude toward claim payment and cancellation of insureds.
11. When both the potential severity and the probability of loss are high, the most appropriate
techniques for dealing with the exposure are avoidance and reduction.
12. The rules of risk management imply that the cause of a loss is more important than its
effect.
13. The rule "Don't risk more than you can afford to lose" suggests that losses of the same
magnitude are equally important.
14. The cost of risk is generally measured in terms of opportunity cost.
15. Decisions relating to risk control measures are sometimes dictated by factors other than
cost.
16

In ranking insurance coverages, the most logical approach is to consider coverages


required by law "Essential," those required by contract "Important," and all others "Optional."

17. Premiums paid to a wholly owned captive are not generally deductible for tax purposes.
18. The exposure for which insurance is most appropriate are those with a low frequency and
high severity.
19. The Internal Revenue Code does not allow a tax deduction for self-insured losses.

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20. The powers of a risk retention group are generally more limited than those of an insurance
purchasing group.

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TRUE FALSE QUESTIONS

CHAPTER 5

1.

The monoline form of operation characterized the American insurance industry until shortly
after World War II.

2.

The Appleton Rule extended the effect of New York insurance laws to the operation of
insurers in other states.

3.

The American agency system places great emphasis on the ownership of renewals by the
agent.

4.

The powers of a life insurance agent are somewhat more limited than those of a property
and liability agent.

5.

The oldest of the modern branches of insurance is casualty insurance.

6.

Insurance agents possess only those powers that are specifically granted to them by the
company they represent.

7.

Health Maintenance Organizations usually operate on a post-loss assessment basis.

8.

The intensity of price competition in property and liability insurance is responsible for the
phenomenon known as cash flow underwriting.

9.

Brokers operate principally in the fields of life insurance and accident and health insurance.

10. In actual practice, there is little difference between a mutual insurer, which operates on an
advance premium basis and issues nonassessable policies, and a capital stock company.
11. Demutualization refers to the process by which a mutual insurance company changes its
organization structure to a proprietary or modified proprietary form.
12. Fraternals have generally limited their operation to the field of life insurance although they
sometimes sell health insurance as well.
13. Technically, most Health Maintenance Organizations operate as reciprocals or
interinsurance exchanges.
14. Independent insurance agents represent a number of companies and divide the policies
they sell among the companies according to their choice.
15. The essential difference between an insurance agent and an insurance broker is with
respect to the types of coverage sold.
16. Exclusive agent companies generally operate through the American Agency System, but
sometimes sell through brokers as well.
17. The market share of direct writing companies operating in the property and liability field has
increased substantially over the past three decades.
18. Insurance companies do not generally compete on a price basis, but instead restrict
competition to the fields of product and service.
19. During the 1990s, Lloyds of London significantl.y changed its methods of operation to allow
corporate underwriters and limited liability.
20. Demutualization is the process by which a mutual insurance company changes its form of
ownership to a capital stock insurance company.

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TRUE FALSE QUESTIONS

CHAPTER 6

1.

Public Law 15 (the McCarran-Ferguson Act) totally exempted the insurance industry from
the federal anti-trust laws.

2.

Life insurance rates are more rigidly regulated than are property and liability insurance
rates.

3.

In the case of Paul versus Virginia, the U.S. Supreme Court ruled that insurance was not
interstate commerce.

4.

A "zone examination" is concerned primarily with the operations of an insurer in one


particular area in which it operates, rather than with its overall operations.

5.

The South Eastern Underwriters Association Case ruled that insurance is interstate
commerce and as such is subject to federal regulation.

6.

In regulating property and liability rates, states follow a variety of approaches.

7.

Virtually all segments of the insurance industry oppose the idea of federal regulation.

8.

Although the National Association of Insurance Commissions has no legal authority, it is an


important force in insurance regulation.

9.

Any federal system of insurance regulation would inevitably replace rather than supplement
the state system of regulation.

10. "Twisting" refers to unfair practices in policy interpretation at the time of a loss or claim,
which acts to the detriment of the insured.
11. The Public Choice theory of regulation is essentially the same thing as the antitrust
approach.
12. Those who favor a federal approach to insurance regulation include some members of the
private insurance industry.
13. Individual state insurer insolvency guaranty funds participate in a national system of
reinsurance under the NAIC Financial Regulation Standards Accreditation Program.
14. The NAIC state Financial Regulation Standards Accreditation Program is designed to assist
states in developing an effective system of solvency regulation.
15. The insolvency guarantee funds designed to compensate persons who suffer loss as the
result of the failure of an insurer operate in essentially the same manner as the FDIC.
16. It can be argued that the fact that some types of insurance are not affordable is a positive
phenomenon from society's perspective.
17. The Insurance Regulatory Information System (IRIS) is operated by the Federal Insurance
Administrator.
18. Insurance regulation today generally follows the antitrust approach, but at a state rather than
a federal level.
19. Both life insurers and property and liability insurers are regulated with respect to their
investments.

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20. The fundamental issue in the debate over state versus federal regulation is whether an antitrust approach or agency-regulation approach should be used in regulating insurance.

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TRUE FALSE QUESTIONS

CHAPTER 7

1.

Advisory organizations operate primarily in the life and health insurance field.

2.

Public adjusters represent insurance companies in those areas where the insurer does not
maintain a staff of adjusters.

3.

The primary purpose of underwriting is to avoid adverse selection.

4.

Legal restrictions on post selection underwriting tend to increase insurer selectivity.

5.

Retrospective rating is a type of cost-plus arrangement in which the insureds losses during
the policy period determine the final premium for the coverage.

6.

Class rating is used when the loss producing characteristics of the exposure units to be
insured vary widely.

7.

The agent's role in underwriting is generally greater in the property and liability field than in
the field of life insurance.

8.

The "gross premium" is derived by adding the net premium to the pure premium.

9.

The use of the term "underwriter" in reference to an agent is more common in the field of
life insurance than in the field of property and liability insurance.

10. The financial status of the applicant is an important underwriting factor in both property
insurance and life insurance.
11. In the field of life insurance, most rates are made by rating bureaus that are supported by
member companies.
12. The underwriting policy of an insurance company is usually formulated by the desk
underwriters of the company.
13. Legislative restraints on post-selection underwriting have reduced the difficulty for people
who previously had difficulty in obtaining insurance.
14. Public adjusters represent the policyholder in the loss adjustment process.
15. Most states have banned the use of credit scoring in insurance underwriting.
16. The credibility factor used in insurance rating reflects the anticipated public reaction to the
level of proposed rates.
17. In life insurance, policies issued to preferred risks are often called "rated policies."
18. Class rating is the most common approach used in the insurance industry today and is used
in both the life insurance industry and in the property and liability field.
19. Judgment rating is used primarily in the life insurance and health insurance fields.
20. A retrospectively rated insurance program includes elements of both risk retention and risk
transfer.

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TRUE FALSE QUESTIONS

CHAPTER 8

1.

Insurance companies are taxed on their underwriting profit, but not on their investment
income.

2.

Premium taxes are levied by each state on the premiums written by the insurer in that state.

3.

Policyholder's surplus is usually paid out annually in the form of policy dividends.

4.

A quota share reinsurance treaty reduces the surplus drain of the direct writing company to
a greater extent than does an excess of loss reinsurance treaty.

5.

The unearned premium reserve is usually the largest asset on a property and liability
insurer's balance sheet.

6.

A decline in the loss reserves on an insurer's balance sheet usually indicates that paid
losses were higher than incurred losses.

7.

Other things being equal, the statutory profit of an insurer whose premium volume is
increasing rapidly understates the actual profit.

8.

Under statutory accounting, bonds owned by insurers are normally carried on the balance
sheet at their market value.

9.

The policy reserves carried on the balance sheet of a life insurer are similar in nature to the
property and liability insurer's unearned premium reserve.

10. Under statutory accounting, common stocks owned by an insurer are carried on the insurer's
balance sheet at their original cost.
11. Catastrophe bonds or act of God bonds are likely to replace traditional forms of reinsurance.
12. Insurance company accounting differs from Generally Accepted Accounting Principles
(GAAP) with respect to the valuation of assets and in matching revenues and expenses.
13. Changes in the market value of common stocks owned by insurers have a direct effect on
balance sheet net worth.
14. Policyholders surplus represents premiums paid to insurers by policyholders for which
protection has not yet been received.
15. The combined ratio is a measure of an insurers underwriting performance.
16. The catastrophe futures option offered by the Chicago Board of Trade in the 1990s were
discontinued because of low interest, but other exchanges began offering catastrophe
options again in 2007.
17. Although there is a redundancy in the unearned premium reserve of a property and liability
insurer, there is no such redundancy in a life insurer's policy reserves.
18. "Increases in Reserves on Policies in Force" appears as a deduction from income in a life
insurer's income statement.
19. Under a facultative reinsurance treaty, the direct writing company agrees to cede and the
reinsurer agrees to accept a part of every risk to which the treaty applies.
20. Mutual life insurers are taxed on both underwriting gain and investment income.

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TRUE FALSE QUESTIONS

CHAPTER 9

1.

The common law principles regarding concealment and misrepresentation are often
modified by statute in a manner beneficial to the insured.

2.

In the case of life insurance, an insurable interest must exist at the inception of the policy.

3.

When there is a difference of opinion regarding the meaning of a term in an insurance


policy, the courts usually favor the insured.

4.

The principle of indemnity is enforced to a greater extent in the property and liability field
than in the health insurance field.

5.

In most insurance transactions, the insurance agent representing the insurer makes the
offer, and acceptance takes place when the insured agrees to purchase the insurance.

6.

The replacement cost coverage available under certain modern forms of property insurance
violates the principle of indemnity.

7.

Because the outcome of an insurance contract is affected by chance and because the
values given up by the parties are unequal, insurance contracts are said to be "aleatory."

8.

In most fields of insurance, any misrepresentation by the insured, intentional or otherwise,


will normally be sufficient to void the policy.

9.

The term "actual cash value" is generally interpreted to mean the actual dollar loss incurred
by the insured, measured by his or her original cost for the property destroyed.

10. Insurance contracts are said to be conditional because they may be declared void if they
lack one of the essential elements of a contract.
11. Most states require that insurance contracts be in writing to be enforceable.
12. Technically speaking, the terms "void" and "voidable" are interchangeable.
13. Murder of the insured by a beneficiary usually relieves the insurer of the obligation to pay
the policy proceeds.
14. The courts have generally ruled that the term "actual cash value" varies from situation to
situation and therefore cannot be defined.
15. Policies that make payment of a specified amount without reference to the financial loss of
the insured are illegal in most states.
16. The doctrine of utmost good faith is applied more rigidly in the field of ocean marine
insurance than in other fields of insurance.
17. The doctrine of "reasonable expectation" encourages an interpretation of insurance
contracts that is usually favorable to the insured.
18. In the field of life insurance, there is no requirement that an insurance policy be supported
by an insurable interest.
19. It is possible for an individual who does not own a piece of property to have an insurable
interest in that property.
20. The doctrine of insurable interest was developed to prevent the use of insurance contracts
as a means of wagering, and to protect against moral hazard.

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TRUE FALSE QUESTIONS

CHAPTER 10

1.

Huebner's human life value concept is considered to be the preferred approach in


determining the amount of life insurance to be purchased, since it follows the rules of risk
management.

2.

S. S. Huebner's life value concept defines a persons insurable value as that person's
current income projected to his or her life expectancy and discounted at an appropriate rate
of interest.

3.

The human life value approach and the needs approach will generally indicate the same
amount of life insurance to be purchased.

4.

The "human life value" concept defines the insurable value of a person as the total future
wages he or she is expected to earn.

5.

The needs approach to determining the amount of life insurance to be purchased will
usually indicate a greater amount of life insurance than does the Huebner "life value"
approach.

6.

Because social security benefits may be changed at any time, most authorities recommend
that they be disregarded in planning a life insurance program.

7.

The "fund for last expenses" and the "readjustment fund" usually represent the greatest life
insurance need for most people.

8.

In purchasing health insurance, hospitalization and surgical expense coverage rank first in
priority, followed by major medical insurance and disability income coverage.

9.

The need for life insurance is a function of the needs of dependents and the availability of
resources to meet those needs.

10. The amount of disability income protection needed by an individual may exceed the amount
of life insurance benefits that would be needed by his or her survivors.
11. The standard approach in programming disability income benefits is to provide benefits for
both sickness and accident for the entire lifetime of the individual.
12. Most authorities recommend that employer-provided group life insurance be ignored in
programming income coverages.
13. The risk of premature death and superannuation are competing and diametric needs.
14. One legitimate reason that a young single person might choose to purchase life insurance is
to guarantee his or her insurability.
15. The largest need in most life insurance programs is for income during the dependency
period.
16. Life insurance in which the insured has no incidents of ownership is excluded from the
federal estate tax.
17. The capital liquidation strategy focuses on a single goal, while there are two goals in the
capital conservation strategy.
18. Because death is inevitable, the risk of financial loss associated with death is universal.
19. The major consideration in buying medical expense insurance should be on protection
against catastrophe loss.

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20. Although there are limited options for transferring the risk of unemployment the risk can be
reduced by loss control measures.

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TRUE FALSE QUESTIONS

CHAPTER 11

1.

The Social Security system discriminates against younger workers since a worker and his or
her dependents do not become eligible for any type of benefits until the worker is fully
insured.

2.

The OASDI system is financed by a tax imposed on employers, employees, and selfemployed persons.

3.

Under some cases, a worker can become fully insured under OASDHI with less than 40
quarters of coverage, and more than 40 quarters is never required for fully insured status.

4.

There is now general agreement that the social security system's financial difficulties are
past, and there should be little difficulty in financing benefits in the future.

5.

Under the OASDHI system, each generation of workers provides a fund out of which they
will receive their benefits at the time they retire.

6.

Although the social security tax rate has been increased many times since the inception of
the program, the taxable wage base to which it is applied has remained stable since 1960.

7.

In order to be eligible for retirement benefits under OASDHI, a worker must be both fully
insured and currently insured at the time of retirement.

8.

Historically, the Social Security system has paid retirees significantly more in benefits than
those retirees have paid in taxes during their working years.

9.

The social security tax is a regressive tax, in that it falls most heavily on those in lower
income classifications.

10. The Social Security law provides for a reduction in social security benefits by the full
amount of any other income received by the social security beneficiary.
11. Under OASDHI, a quarter of coverage is granted for each three-month period in which an
individual has earned income equal to a specified level.
12. The Primary Insurance Amount under social security is the amount that would be payable to
a fictitious person who paid the maximum tax during his or her lifetime.
13. The formula used to convert a workers Average Indexed Monthly Earnings into the Primary
Insurance Amount discriminates slightly in favor of those in the lower income brackets.
14. The social security trust funds equal the accrued benefits of those workers who have
already retired, but do not meet the accrued liabilities with respect to those who are still
employed.
15. A workers must be currently insured under OASDI at retirement to be eligible to receive
social security retirement benefits.
16. The benefit payable to a mother or father with the care of a child beneficiary under OASDHI
terminates when the child reaches age 18 unless the child is still in school, in which case it
continues until age 19.
17. Persons who began their employment careers many years ago are penalized under the
social security benefit structure, since the lower taxable earnings in the early years of the
program reduce these persons' benefits at retirement.
18. Although social security benefits are now taxable, a maximum of 50 percent of benefits are
subject to taxation.
19. Although social security survivors benefits are adjusted for changes in the Consumer Price
Index, retirement benefits are not adjusted during the individuals retirement years.

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20. In planning the amount of life insurance required to meet family needs, benefits payable
under social security and workers compensation should be deleted from the total need.

193

TRUE FALSE QUESTIONS

CHAPTER 12

1.

Life insurance is not generally considered to be a contract of indemnity.

2.

Since group life insurance is written without medical examinations, the mortality costs under
group contracts are generally higher than under individual contracts.

3.

Variable universal life policies combine the universal life concept with variable life, making
most aspects of the contract flexible and variable.

4.

Under a whole life policy, the cash value increases during the early years of the policy, and
then begins to decline at about age 65.

5.

The non-forfeiture cash values in life insurance are derived from the fact that the insured
pays more than the cost of the protection during the early years of the policy.

6.

The cash surrender values listed in a life insurance policy are estimates based on projected
mortality and cannot be guaranteed.

7.

There are some situations in which death does not necessarily result in a financial loss.

8.

Most group life insurance is written on a yearly renewable term basis.

9.

There is no legal limit to the amount of insurance that a person may purchase on his or her
own life.

10. In terms of the various approaches to marketing, group life insurance represents the largest
single class of coverage.
11. Insurance on the lives of debtors that is sold in connection with the extension of credit is
known as savings bank life insurance.
12. Term insurance is basically "pure" protection, and provides payment of benefits only if the
insured dies during the policy term.
13. Under a whole life policy, protection is provided for the entire lifetime of the insured, and
premiums are always payable for the same period.
14. Cash value life insurance provides death benefits if the insured should die, and can also
permit the accumulation of funds that are available if the insured does not die.
15. A term insurance policy may be renewable or convertible, but not both.
16. Most group life insurance is written on a whole life basis.
17. Under group life insurance, the amount of insurance on all insureds must be the same.
18. Under a limited pay life insurance policy, premiums are usually paid for a number of years,
after which they are borrowed from the cash value.
19. In the field of credit life insurance, individual policies are usually issued to each insured.
20. For an individual insured, the overpayment during the early years of a cash value life
insurance policy is less than the underpayment in later years.

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TRUE FALSE QUESTIONS

CHAPTER 13

1.

By selecting one of the level premium forms of permanent insurance, the individual may
avoid the higher mortality costs that occur at ages past 65.

2.

The net single premium for a 20-pay life policy is the same as the net single premium for a
whole life policy.

3.

The net single premium is an amount sufficient, with the interest earned on it, to pay the
individual's share of all future claims of the group.

4.

To convert the net single premium into annual premiums, the net single premium is divided by
the number of years for which premiums are to be payable.

5.

The reserve on a twenty-pay life policy and a thirty-pay life policy issued at the same age
should both be the same at the end of 40 years.

6.

A whole life policy issued at age 21 would have a higher reserve at age 55 than would a whole
life policy issued at age 31.

7.

Insurers may use different mortality data and interest assumptions in setting actual premiums
than the mortality and interest assumptions required for legal reserve purposes.

8.

The reserve value that is most important from the regulatory point of view is the terminal
reserve for any given year.

9.

The policy reserve is equal to the difference between the present value of future benefits and
the present value of future premiums.

10. The three factors used in life insurance premium computation are interest, mortality, and
loading.
11. The net single premium for a life insurance policy is based on only two of the three elements
used in life insurance ratemaking.
12. The cash surrender value of a life insurance policy is the same as the policy reserve.
13. As in the case of life insurance the calculation of the premium for an annuity reflects both
expected mortality and the time value of money.
14. Other things being equal, the reserve on a 20-pay life policy will initially accumulate at a faster
rate than will the reserve on a 30-pay life policy.
15. A life insurance policy is "mature" when all premiums due have been paid.
16. The principles of risk management suggest that one should purchase life insurance protection
for one's entire lifetime.
17. Other things being equal, the reserve on a whole life policy issued at age 25 will increase
faster than the reserve on a whole life policy issued at age 35.
18. Differences in premiums among various types of life insurance policies reflect the different
periods for which protection is provided and the manner in which the premiums will be paid.
19. In computing premiums for a whole life and a limited pay life policy, the net single premium for
the whole life policy will be slightly larger than the net single premium for the limited pay
policy.

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20. The 2001 CSO mortality tables include a safety margin and overstate the death rate.

196

TRUE FALSE QUESTIONS

CHAPTER 14

1.

In life insurance, the willful misstatement of the applicant's age provides grounds for voiding
the policy.

2.

Generally, a straight life income option will provide a higher monthly benefit to a beneficiary
than will a life income option with period certain.

3.

Statements by an applicant for life insurance are included in the application that becomes a
part of the contract, thus giving such statements the status of warranties.

4.

The grace period clause must be elected by the insured at the time the policy is taken out.

5.

The reinstatement clause used in life insurance gives the insured a conditional right to
reinstate a lapsed policy.

6.

The misstatement of age clause used in life insurance provides for a return of premium
when the insured's age is overstated and a reduction in coverage when it is understated.

7.

The incontestable clause in life insurance stipulates that after the policy has been in force
for two years, the insurer may void the policy only for intentional misrepresentation of a
material fact.

8.

Actual payments to a beneficiary under the life insurance policy settlement options may
exceed the amounts specified in the policy.

9.

An irrevocable beneficiary named in a life insurance policy gains vested rights in the
contract and in a sense becomes a co-owner.

10. Statements made by the applicant for life insurance are considered to be representations
rather than warranties.
11. Under the standard grace period provision used in life insurance, any premium not paid by
the due date is borrowed from the policy's cash value.
12. The term collateral assignment refers to what is usually a permanent, irrevocable
assignment of an interest in a life insurance policy.
13. If the insured does not submit the premium with an application for life insurance, the policy
will not become effective until the first premium is paid.
14. Although the owner of a life insurance policy has the right to designate a settlement option,
the beneficiary always has the right to change the designation if he or she chooses to do so.
15. Most life insurance policies provide that if an irrevocable beneficiary dies before the
insured, the interest of the beneficiary terminates and all rights in the contract revert to the
insured.
16. The reinstatement provision used in life insurance usually requires payment of back
premiums with interest.
17. When death benefits are paid in installments, the part of the payment representing interest
is taxable.
18. When an irrevocable beneficiary is named in a life insurance policy, the owner loses the
right to name a new beneficiary, but retains the right to exercise all other options under the
policy.
19. A typical suicide clause limits the suicide exclusion to two years.

197

20. While a guaranteed rate of interest is credited on the unpaid balance under policy
settlement options, the actual rate may exceed the guaranteed rate.

198

TRUE FALSE QUESTIONS

CHAPTER 15

1.

Under the so-called "fifth dividend option," dividends are used to purchase one-year term
insurance.

2.

The disability waiver of premium provision used in life insurance usually provides that
premiums will be waived during any period of disability.

3.

A term insurance policy that is both renewable and convertible is also known as the
Guaranteed Insurability Option.

4.

The cash values listed in a whole life policy are estimates based on projected mortality and
cannot be guaranteed.

5.

The double indemnity provision usually provides for payment of twice the face amount of
the policy if the insured dies within a specified period of time as a result of an accident.

6.

When the insured fails to pay the premium within the grace period, most life insurance
contracts automatically convert to extended term insurance.

7.

If the insured and beneficiary are killed in the same accident, the Uniform Simultaneous
Death Act stipulates that where there is no evidence to the contrary, payment under life
insurance policies shall be made as if the insured survived the beneficiary.

8.

The "spendthrift clause" is designed to prevent a beneficiary from dissipating life insurance
policy proceeds through extravagance.

9.

Increments in the cash value of a whole life insurance policy are subject to federal income
taxes in the year in which the increase takes place.

10. A term policy that is guaranteed renewable is also, by definition, convertible.


11. The term direct recognition refers to a reduction in the policy dividends that reflects lost
investment income because of a policy loan.
12. The automatic nonforfeiture option in life insurance policies is usually the reduced paid-up
option.
13. When premiums are being waived under the disability waiver of premium provision, the
cash and loan values of the policy stop increasing.
14. The survivorship clause states that the beneficiary must survive the insured by some
designated period of time in order to receive the benefits under the policy.
15. Policy loans against the cash value of a life insurance policy must usually be repaid by the
policy anniversary date following the fifth anniversary of the loan.
16. The accidental death benefit in life insurance policies is a proper application of the risk
management principle.
17. When a policy continues under the automatic premium loan provision, special features such
as accidental death or the guaranteed insurability option remain in force.
18. The "fifth dividend option" consists of a cash refund of dividends on the policy.
19. The Guaranteed Insurability Option may not be exercised if the insured is disabled and
premiums are being waived under the policy.
20. The Accidental Death Benefit is usually not available beyond a specified age, such as 65 or
70.

199

TRUE FALSE QUESTIONS

CHAPTER 16

1.

A family income policy combines decreasing term insurance with some form of permanent
insurance.

2.

Under an indeterminate premium policy, the initial premium is lower than a maximum
premium specified in the policy, and can be increased at the option of the insurer.

3.

A return of premium policy combines permanent insurance with increasing term insurance.

4.

Repeal of the federal estate tax would likely result in a decrease in sales of survivorship or
second-to-die policies.

5.

Under most package policies designed to provide insurance protection on the entire family,
the husband and wife normally have different amounts of insurance.

6.

Under a family protection policy, coverage on the children is typically written as term
insurance.

7.

A modified whole life policy is "modified" in the sense that additional term riders have been
added to the basic policy.

8.

Under a modified whole life policy, premiums are generally payable for the entire lifetime of
the insured, but are lower for the first several years.

9.

The portfolio average method of dividend allocation has generally favored older insureds at
the expense of newer insureds.

10. Interest sensitive policies are also referred to as variable life insurance policies.
11. Indeterminate premium policies allow the insurance company, subject to limits, to adjust the
premium up or down after the policy is in force.
12. The major appeal of juvenile insurance is that it guarantees some level of coverage if the
child becomes uninsurable in the future.
13. The survivorship or "second-to-die" policy is designed for a two-income family that would
suffer hardship if the spouses were to die simultaneously.
14. Single premium life insurance policies that qualify as modified endowment contracts may
receive favorable tax treatment under the Internal Revenue Code.
15. An appealing feature of the family protection policies that cover all family members is that
they provide an opportunity to obtain life insurance on uninsurable family members.
16. Because it involves a compound probability, a joint mortgage protection policy is slightly
less costly than life insurance on a single individual.
17. A modified endowment contract is one on which the premium is lower during the early years
of the contract than after this period.
18. A mortgage redemption policy provides a decreasing amount of protection designed to track
the remaining balance on a mortgage.
19. The principal use of juvenile insurance is in accumulating funds for college.
20. Withdrawals from a modified endowment contract are subject to the same tax treatment
than are withdrawals from other life insurance contracts.

200

TRUE FALSE QUESTIONS

CHAPTER 17

1.

The inverse relationship between protection and savings available for a given premium
outlay often forces a compromise between savings and protection in buying life insurance.

2.

An individual with limited funds to spend on life insurance and a substantial insurance need
should spend the funds to purchase as much permanent insurance as possible.

3.

The greatest disadvantage of term insurance is that it is temporary protection and is likely to
expire when the insured most needs it.

4.

One of the most attractive features of life insurance as an investment is the fact that the
investment earnings escape taxation.

5.

In comparing the differences in cost between two life insurance companies, one can usually
assume that "you get what you pay for."

6.

The primary consideration in selecting a life insurer should be financial strength.

7.

The first and most important decision to be made in purchasing life insurance is the type of
policy to be purchased.

8.

Although the process is complex, it is possible to compare differences in cost among


universal life policies.

9.

For a given premium outlay, the amount of death protection under most life insurance
policies varies inversely with the cash value accumulation.

10. The choice between savings and protection in the purchase of life insurance is the basic risk
management decision in purchasing life insurance.
11. The investment gain on cash value life insurance is taxable only when the gain is realized.
12. Experience has demonstrated that large life insurers are virtually immune to financial
difficulty, especially when they have a favorable rating from A. M. Best and Company.
13. The principal features to consider in evaluating the cost of a universal life policy are the
minimum guaranteed interest and the guaranteed cost of death protection.
14. The interest-adjusted method of comparing life insurance policies ignores the concept of
opportunity cost.
15. The net payment cost index for a given policy will generally be higher than the net surrender
cost index.
16. Although interest adjusted indexes are not helpful in shopping for universal life, cost
comparisons between companies can be made using benchmarks that measure the charges
for mortality and loading.
17. The most important reason for purchasing life insurance at a young age is that the premium
is lower, and the lifetime cost of protection is therefore reduced.
18. Under Internal Revenue Code Section 1035, an individual may exchange a life insurance
policy for an annuity, but may not exchange an annuity for a life insurance policy.
19. Under some circumstances, premiums paid by an individual for life insurance in which a
divorced spouse is the beneficiary qualify as alimony and are tax deductible.
20. The most appealing feature of life insurance as an investment is its complementary
functions of providing protection against premature death at the same time it provides an
accumulation that may be used for retirement.

201

TRUE FALSE QUESTIONS

CHAPTER 18

1.

Under a cash refund annuity, the amount that will be paid out by the insurance company will
be at least the purchase price of the annuity.

2.

Assuming the same age and sex of the applicant at the time of issue, a life annuity with a
10 year period certain would have a higher premium per $100 of monthly benefit amount
than a straight life annuity.

3.

Generally, a variable annuity is "variable" only during the accumulation period, and is
characterized by a fixed payout during the annuity period.

4.

Under a joint life annuity, benefit payments cease upon the death of one of the annuitants.

5.

A survivorship annuity is a program computed on the basis of two annuitants and pays until
both have died, normally with a smaller benefit payable after the death of one of the parties.

6.

The survivorship or reversionary annuity provides income to two annuitants until both have
died.

7.

A principal defect of the two-tier annuity is that it denies the purchaser to take advantage of
more attractive alternatives that appear.

8.

Individual variable annuities are also sometimes called market-value adjusted annuities,
because the accumulation is determined by the performance of the stock market.

9.

Annuities with cash or installment refund features are generally less expensive than straight
or pure-life annuities.

10. Survivor benefits under a joint and survivor annuity payable to a beneficiary other than a
spouse are includable in the decedents gross estate only in the proportion that the decedent
contributed to the purchase price of the annuity.
11. There is no significant difference in the tax treatment of a Roth IRA and a traditional IRA to
which nondeductible contributions are made.
12. A pension plan utilizing variable annuities will generally be of the defined contribution
variety.
13. Permitted disparity rules address the relationship between a plans death and disability
benefits and its retirement benefits.
14. When an employee with unvested contributions leaves an organization, the employer may
claim a refund of the contributions made on behalf of that employee.
15. Most employer pension plans provide inflation protection by automatically adjusting pension
benefits after retirement for increases in the cost of living.
16. Although the law imposes a maximum on employer contributions to a defined contribution
plan, there is no limit on the amounts payable to recipients under a defined benefit plan.
17. Section 401(k) plans are an exception to the general rule concerning the tax deductibility of
employee contributions to a qualified retirement plan
18. Self-employed persons who establish a Keogh Plan are required to include certain eligible
employees in the plan.
19. Under a defined benefit pension plan, the employer bears the investment risk.
20. While most pension plans provide an option for a joint and survivor benefit arrangement
after retirement, the law does not permit a death benefit under a qualified plan prior to
retirement.

202

TRUE FALSE QUESTIONS

CHAPTER 19

1.

The two financial risks associated with retirement are that insufficient assets will be
accumulated and that the individual may outlive the assets that have been accumulated.

2.

One way to avoid the financial risks associated with retirement is the simple expedient of
not retiring, but continuing to work beyond the traditional retirement age.

3.

The three broad sources of funding for the retirement need are social security, qualified
retirement plans, and private savings.

4.

Judging from past measures that have been adopted to address the problems of the Social
Security System, it is likely that future changes in the system will reduce the level of
benefits for some retirees.

5.

Persons who find it necessary to work to maintain a desired standard of living after the
normal retirement age may suffer a reduction in social security benefits, which, combined
with required taxes, will significantly diminish the benefit of the employment.

6.

Under a minimum distribution option, the distribution from a qualified retirement plan is an
amount sufficient to avoid a tax penalty for insufficient distribution of the accumulation.

7.

Depending on whether the individual is covered by a corporate pension plan, anywhere from
30% to 70% of the retirement income must come from savings generated during the income
earning years.

8.

Social Security benefits may be expected to provide about two-thirds of the retirement
needs of most people.

9.

Pensions, profit-sharing plans, and annuities have traditionally been referred to as the three
legs of retirement.

10. Criteria that should be considered in selecting investments to accumulate funds for
retirement include the rate of return, vulnerability to inflation, tax treatment, and safety of
principal.
11. Annuities and life insurance, because of their favorable tax treatment, deserve
consideration for inclusion in the retirement accumulation.
12. In purchasing a self-directed annuity for retirement, it makes sense to select an annuity that
invests in tax-exempt state and municipal bonds.
13. Although it is traditional to assume that post-retirement income needs will be less than
needs during working years, it is conceivable that for some persons the need might be
greater.
14. Because distributions from qualified retirement plans are generally nontaxable, the
retirement plan should indicate before-tax income that will be required during the retirement
years.
15. The uncertainty regarding the time of death and the period for which retirement will last can
be addressed by using the cost of a life annuity at age 65 to define the accumulation goal.
16. The amount of capital that will be required under a capital retention strategy is usually
estimated to be about 175% of the amount required under a capital liquidation strategy.
17. Federal tax law requires that the distribution from a qualified retirement plan must begin no
later than the date on which the individual begins to draw social security benefits.
18. The distribution from a qualified retirement plan may be in the form of a life annuity or in the
form of payments based on the life expectancy of the participant, or it may be in a lump
sum.

203

19. Under the graded payment method of annuity distribution, the beneficiary receives
contractually guaranteed interest plus allocated excess interest that exceeds the guaranteed
rate.
20. Although ERISA requires qualified pension plans to offer a joint and survivor life income
option, this option may be rejected by the plan participant or by his or her spouse.

204

TRUE FALSE QUESTIONS

CHAPTER 20

1.

Amounts paid by insurance companies under accident and health policies for disability
income are exempt from taxation in those instances in which the insured paid the premium.

2.

Disability income insurance is usually less important than life insurance in because the
probability of disability at most ages death is less than the probability of death.

3.

The elimination period in a disability income policy performs essentially the same function
as a deductible in property insurance policies.

4.

A disability income policy providing benefits for 52 weeks will cost approximately two times
the cost of a policy providing the same level of benefits for 26 weeks.

5.

Disability income policies covering sickness only are more common that policies covering
both accident and sickness.

6.

The definition of disability that specifies the insureds own occupation is more favorable to
the insured than that which specifies "any occupation."

7.

The misstatement of age provision sometimes included in disability income policies


operates in essentially the same manner as the misstatement of age provision used in life
insurance.

8.

Other things being equal, a health insurance policy that is noncancelable will generally cost
more than one that is guaranteed renewable.

9.

All other provisions being equal, the longer the waiting period under a disability income
policy, the lower will be the premium.

10. Individual disability income policies typically exclude disabilities that arise from preexisting
conditions.
11. Most health insurance policies define disability as "the complete inability to engage in any
activity."
12. In health insurance policies, the term "preexisting condition" refers to a condition that
existed before the policy was issued.
13. The "Relations of Earnings to Insurance" provision is one of the mandatory uniform health
insurance provisions.
14. The grace period in individual health insurance contracts varies with the premium payment
interval selected by the insured.
15. The Change of Occupation provision used in health insurance contracts is essentially
identical with a provision of the same name used in life insurance.
16. The grace provision used in both life and health insurance contracts must be for a minimum
of 30 days.
17. The absence of a cancellation provision in a health insurance policy does not necessarily
guarantee the insured the right to continue his or her coverage.
18. The insurer may not reword any of the Uniform Provisions, but must include these
provisions verbatim in all individual health insurance contracts.
19. The Uniform Health Insurance Provisions must be included in all individual and group health
insurance policies.
20. A residual disability benefit pays a benefit for partial disability that is a function of the
insureds reduction in earnings.

205

TRUE FALSE QUESTIONS

CHAPTER 21

1.

The major medical policy coincides with the risk management philosophy, since it protects
against catastrophic losses, while providing for retention of small losses by the insured.

2.

Blue Cross and Blue Shield plans are written on a group basis, but may include a provision
for continuance of the coverage if the individual leaves the group.

3.

Most uninsured individuals do not have insurance because they are uninsurable.

4.

The insurance mechanism may contribute to the problems in health care financing by
encouraging utilization and through the process of segmenting the insurance market.

5.

Surgical expense policies usually provide coverage on a blanket basis, with the limit of the
policy payable for any covered operation.

6.

Cosmetic surgery of an elective nature is usually excluded from hospitalization, surgical,


and major medical policies.

7.

To use a Health Savings Account (HAS), an insured must obtain a high deductible health
insurance plan.

8.

Comprehensive major medical plans are usually characterized by higher deductibles than
regular major medical plans.

9.

The so-called "dread disease" policy represents a proper application of the principles of risk
management in the purchase of insurance.

10. Medicaid benefits mandated by federal standards are relatively comprehensive and include
some benefits that are not covered under standard commercial group plans.
11. Most group health policies provide the same benefits for pregnancies as for other covered
expenses.
12. Preferred Provider Organizations are doctors or hospitals with whom insurers or employers
contract to provide medical services.
13. Premiums for dental expense insurance are about equally divided between individual and
group contracts.
14. Premiums for health insurance are deductible by persons who itemize expenses only to the
extent that when combined with other medical expenses they exceed 7.5% of the
individual's adjusted gross income.
15. Infant mortality is higher and life expectancy is lower in the United States than in a number
of other industrial nations.
16. Coordination of benefits provisions are intended to eliminate overinsurance when two
policies cover the same expense.
17. While some Health Maintenance Organizations employ their own physicians, others
contract with physicians for their services.
18. Government policies have favored organization and development of Health Maintenance
Organizations.
19. Under most hospitalization policies, mental and nervous disorders are treated as any other
illness.
20. The reforms introduced by the Health Insurance Portability and Accountability Act of 1996
(HIPAA) affect the large group market, the small group market, and the individual health
insurance market.

206

TRUE FALSE QUESTIONS

CHAPTER 22

1.

The 2007 Annual Report of the Medicare Trust Fund trustees stated that funding for the
Medicare program is now considered adequate for the foreseeable future.

2.

Some persons who are not eligible for Part A of Medicare have the option of purchasing
Part B, Supplemental Medical Insurance (SMI).

3.

Premiums paid by Medicare beneficiaries for Supplemental Medical Insurance (Part B)


have exceeded the cost of the program and produce a surplus that helps to subsidize
Medicare Part A.

4.

Other things being equal, the longer a Medicare-eligible person waits before enrolling in
Medicare Part B, the higher will be the monthly premium for the coverage.

5.

The lifetime reserve under Medicare Part A may be used whenever the individual is in the
hospital for more than 90 days in a benefit period.

6.

Coverage under Medicare Part A includes coverage for confinement in a nursing home
when the beneficiarys need is primarily for personal care or custodial services.

7.

Medicare Part B provides coverage for certain preventive services, such as screening
mammography, pelvic exams, pap smears, vaccines, and diabetes self-management.

8.

Under Medicare, assignment refers to the arrangement in which a physicians charges are
billed to a third-party payer under a Medical Supplement policy or an employer-sponsored
health care plan.

9.

Most states have adopted the NAIC model act for regulating the sale of Medicare
supplement policies.

10. Prior to the introduction of Medicare Part C, virtually all Medicare beneficiaries were insured
under the fee-for-service approach.
11. State laws generally define the benefits that may be included in Medicare Supplement
policies and restricts the variety of Medicare Supplement policy forms an insurer may offer.
12. Owing to the high cost of distribution, the expense ratio on Medicare Supplement policies is
exceptionally high, generally in the range of 50% to 60% of premiums.
13. Under current law, the look-back period used in determining eligibility for Medicaid benefits
is unlimited.
14. One of the goals of the Medicare Advantage initiative is to contain Medicare costs by
encouraging more beneficiaries to enroll in managed care plans.
15. Stand-alone Medicare Prescription Drug plans offer a uniform set of benefits specified in
federal regulations.
16. Persons who change from one of the Medicare Advantage managed care options back to
the traditional Medicare program are likely to encounter difficulty in obtaining Medigap
insurance.
17. According to the General Accounting Office, fraud and abuse in the Medicare system
accounts for nearly one-third of the programs costs.
18. Under a pool of money long-term care policy, an aggregate dollar policy limit is available to
pay expenses and benefits are payable for as long as the maximum lasts, regardless of the
time period.
19. A person who disposes of assets to become eligible for Medicaid benefits will inevitably
suffer a loss of some period of Medicaid eligibility.

207

20. The standards for long-term care insurance established by HIPAA require that long-term
care insurance include non-forfeiture options once the policy has been in force for five years
or longer.

208

TRUE FALSE QUESTIONS

CHAPTER 23

1.

Premiums paid for group life and health insurance are deductible as a business expense by
the employer, but are not generally taxable as income to the employee.

2.

Although there is no limit on the amount of group term life insurance an employer may
provide to employees as an employee benefit, employees are taxed on amounts in excess
of $50,000.

3.

Although a voluntary employees beneficiary association (VEBA) can be used to fund a


variety of employee benefits, it cannot be used to fund a pension plan.

4.

When an immediate participation guarantee plan is used to fund a pension plan, the insurer
makes no guarantee regarding the adequacy of the fund to meet the plans obligations.

5.

Trusteed pension plans are basically self-insured by the employer.

6.

Pension plans must be in writing and communicated to the employees, but the requirement
does not apply to deferred profit sharing plans.

7.

When group deferred annuities are used to fund a pension plan, a paid-up unit of benefit is
purchased for each employee each year.

8.

When a corporate stock redemption plan is funded by life insurance, the premiums paid by
the corporation are tax deductible.

9.

The major penalty for failure to meet the funding requirements of ERISA is the loss of the
tax deduction by the employer.

10. The amount of insurance required for a partnership buy-and-sell agreement should be the
same under either an entity plan or a cross-purchase plan.
11. Premiums paid for key-person life insurance purchased by business firms are deductible as
a business expense for tax purposes.
12. Under a cafeteria employee benefit plan, the employee is offered a choice of taxable and
nontaxable employee benefits or cash.
13. Under the retired lives reserve approach, funding for yearly renewable term for retired
employees is provided by employer contributions to a trust fund during the employees working
years.
14. Although the definition of employee benefits used by the Chamber of Commerce is broader,
the Social Security Administration limits its definition of employee benefits to those benefits
offered voluntarily by an employer.
15. Although premiums paid for life insurance on a key employee are tax deductible, premiums
paid for coverage under a split-dollar plan are not deductible.
16. ERISA requires payment of a death benefit under a qualified pension plan both before and after
retirement, equal to at least the contributions that have been made on behalf of the employee.
17. The Harris Trust decision created problems for insurers both with respect to the sale of certain
unallocated funding programs for corporate pensions and for plans of this type sold in the past.
18. The term "split funding" as used in connection with pension plans refers to the use of two or
more agencies for funding a single pension plan.
19. The Pension Benefit Guarantee Corporation protects workers against loss of benefits under
an insured pension plan, but may seek reimbursement from the employer for amounts paid.

209

20. The Pension Protection Act of 2006 strengthenedTRUE FALSE QUESTIONS CHAPTER
24
1.

The Homeowners forms are all identical with respect to the liability coverage, and differ
primarily with respect to the coverage provided on the insured's own property.

2.

Earthquake is included as an insured peril in all of the Homeowners policies except


Homeowners form HO-8.

3.

The off-premises coverage of the Homeowners forms applies on a worldwide basis.

4.

The Homeowners forms provide coverage on business personal property owned by the
insured, subject to a dollar limit.

5.

The contents coverage of the Homeowners forms applies only to that property owned by the
insured or a member of the insured's household.

6.

Only those Homeowners forms that provide coverage on the dwelling include the extension
to cover trees, shrubs, plants and lawns.

7.

The replacement cost condition of the Homeowners policy provides for payment of losses to
the dwelling without deduction for depreciation if insurance equals 80% of replacement cost.

8.

Cellular telephones and similar electronic equipment are covered under the Homeowners
while in an auto, provided they are not permanently installed.

9.

The Homeowners Special Form (HO-3) includes a valuable extension that provides
replacement cost coverage on both the building and contents.

10. The Homeowners forms provide a limited amount of coverage on furnishing in an apartment
on the premises that is rented or held for rental to others.
11. If one item from a pair or set is destroyed, the Homeowners policy provides that the actual
cash value of the entire pair or set is payable for the loss.
12. Coverage for additional living expense under the Homeowners forms applies for the period
required to restore the premises or until the expiration of the policy.
13. There is no coverage on personal property located at a residence owned, occupied, or rented to
an insured away from the premises except while an insured is actually residing at such location.
14. The Mortgage Clause of the Homeowners policy grants certain rights to the mortgagee
including the right to collect for losses even when the insured has violated a contractual
provision and is not entitled to collect.
15. Like the coverage on the dwelling, the coverage on trees, shrubs, and plants under the
Homeowners Special Form (HO-3) is on an open-peril basis.
16. The Inflation Guard Endorsement provides automatic increases in the coverage on the
dwelling and on the insured's personal property.
17. The Homeowners form designed for use by persons who do not own their own home (the
Tenant's Form HO-4) does not include coverage for Loss of Use.
18. The dollar limit on silverware under the Homeowners Policy applies only to losses by theft.
19. Although the coverage on personal property under the Homeowners forms applies on a
worldwide basis, coverage at a secondary location is limited to 10% of the amount at the
principal location.
20. The Homeowners forms provide when the insurer has paid for loss of stolen property and
the property is subsequently recovered, the insurer is entitled to dispose of the property to
recover part of its loss.

210

TRUE FALSE QUESTIONS

CHAPTER 25

1.

Theft of boats and their furnishings while away from the premises is covered under the
Homeowners Special Form (HO-3) but is excluded under all other forms.

2.

Damage caused by freezing of pipes is covered under the Homeowners policies that include
dwelling coverage, but it is not included under the Tenants Form (HO-4).

3.

The principal difference among the Homeowners Broad Form (HO-2), the Special Form
(HO-3), and the Tenants Form (HO-4), is with respect to the coverage on the dwelling.

4.

The Homeowners policy designed for condominium-unit owners provides coverage on the
unit-owner's contents and his or her proportionate share of the condominium building.

5.

The various homeowners forms all exclude loss caused by earthquake, but such coverage
is available by endorsement.

6.

The various homeowners forms all exclude loss caused by flood, but such coverage is
available by endorsement.

7.

The Homeowners Special Form (HO-3) provides open-peril coverage on the dwelling and the
same named-perils coverage on personal property as does the Homeowners Broad Form (HO2).

8.

Coverage on unit-owners additions under the Condominium-Unit Owner's form is for the
same named perils as is the coverage on personal property.

9.

Coverage for leaking or overflow from a plumbing or heating system does not apply if the
insured's negligence contributed to the loss.

10. Although damage caused by vehicles is an insured peril under HO-2, HO-3, HO-4 and HO6, all forms except form HO-3 exclude damage caused by owned vehicles.
11. Under the named-peril Homeowners forms, glass breakage is covered only if caused by one
of the specifically insured perils.
12. Theft from a secondary residence is completely excluded under all Homeowners forms
except the Homeowners Comprehensive Form (HO 00 15).
13. The "Falling Objects" peril of the named peril Homeowners forms applies only to property
within a fully enclosed building, and only if the exterior of the building is first damaged.
14. Coverage on the unit-owners additions under the Condominium-Unit Owners Homeowners
form (HO-6) is on an open-peril basis.
15. The Homeowners Modified Coverage Form 8 provides the most limited coverage available
under the homeowners program.
16. Although breakage of certain fragile articles is excluded under the Homeowners
Comprehensive form (HO 00 15), covers breakage by a specifically named peril.
17. Appurtenant structures owned by a condominium-unit owner are automatically included in
the dwelling coverage of the Condominium Unit Owners Form HO-6.
18. The Personal Property Replacement Cost Endorsement excludes certain items of property
such as antiques and paintings from its provisions.
19. Collapse of a building or structure may be covered under the Homeowners form HO-2 and
HO-3 even when it is not caused by one of the insured perils.

20. The Modified Coverage Homeowners form (HO-8) provides the broadest protection
available under the various Homeowners forms.

212

TRUE FALSE QUESTIONS

CHAPTER 26

1.

All of the modern monoline dwelling policies include a replacement cost extension similar to
that of the Homeowners forms.

2.

A major difference in the coverage on the insured's own property under Homeowners forms
and the monoline dwelling policies is the theft coverage included in the Homeowners
policies.

3.

The off-premises coverage on contents provided under the dwelling forms provides
coverage on a worldwide basis.

4.

The Mobilehome Endorsement to the Homeowners policy deletes coverage on contents of


the mobilehome, since most items of contents are built into a mobilehome.

5.

The Mobilehome Endorsement is designed for use with Homeowners forms HO-2 and HO-3
for the owner of a mobilehome, and with HO-4 for the tenant of a mobilehome.

6.

There is no provision for cancellation of the Federal Flood Policy by the insurer, except for
nonpayment of premium.

7.

Coverage on antiques and fine arts under the Homeowners Scheduled Property
Endorsement provides automatic coverage on newly acquired items.

8.

The Federal Flood Insurance policy provides the same off-premises extension on personal
property that is provided by the monoline fire dwelling policies.

9.

The Title Insurance Policy, like the Homeowners forms, may be canceled by either party
upon written notice.

10. Although the coverage of the Homeowners policy is broader than that of the dwelling forms
providing equivalent coverage, the premium is usually lower under the Homeowners policy.
11. The monoline dwelling forms have somewhat stricter eligibility requirements than do the
Homeowners forms.
12. The dwelling program forms do not contain the special limits of liability for jewelry, firearms,
and silverware that are included in the homeowners forms.
13. The Dwelling Policy Special Form provides open-peril coverage on both the dwelling and
personal property.
14. The Mobilehome endorsement to the Homeowners policy includes a special loss settlement
provision as respects appearance damage.
15. Transit coverage is automatically added to the Homeowners policy under the Mobilehome
Endorsement.
16. The Federal Flood Insurance Policy does not contain an off-premises extension for personal
property.
17. Rates under the National Flood Insurance Programs Emergency Program are the same as
rates for the Regular Program.
18. Funds are available under the terms of the Federal Flood Insurance Policy to pay for loss
avoidance measures such as sandbags and pumps.
19. Under a Stamp Collection Floater Policy, mysterious disappearance of scheduled items is
covered.
20. Coverage under the Homeowners Scheduled Personal Property Endorsement may be
written for actual cash value, replacement cost, or on a valued basis.

213

TRUE FALSE QUESTIONS

CHAPTER 27

1.

In general, a property owner has no obligation to trespassers, and cannot be held legally
liable for injuries they suffer on the premises.

2.

The doctrine of "contributory negligence" is more severe to an injured party than is the
doctrine of "comparative negligence."

3.

Under the doctrines related to vicarious liability, liability may exist even though no one has
been negligent.

4.

In most jurisdictions, minors cannot be held legally liable, although parents may be held
liable for the acts of their minor children.

5.

The doctrine of an "attractive nuisance" modifies the common law doctrines applicable to
trespassers with respect to children.

6.

The legal doctrine of respondeat superior imposes liability on a principal for the acts of his
or her agents, but does not relieve the agent of his or her personal liability.

7.

An intervening cause always breaks the chain of causation and relieves the negligent party
from liability.

8.

The collateral source rule acts to diminish the amount of damages for which a negligent
party may be held legally liable.

9.

The doctrine of governmental immunity protects government bodies and their employees
from liability arising out of the acts of the employees while in the course of their
employment.

10. The doctrine of res ipsa loquitur establishes a rebuttable prima facie presumption of
negligence.
11. It is possible for an act to be both a crime and a tort.
12. Negligence may be defined as the failure of a person to exercise the proper degree of care
required by the circumstances.
13. The Federal Tort Claims Act exempts the federal government and its agents or employees
from legal liability in connection with governmental functions.
14. General damages are designed to punish the offender and to deter future conduct of the
type that gave rise to the loss.
15. In most jurisdictions today, a husband is legally liable for the torts of his wife.
16. In general, charitable institutions may be held legally liable to the same extent as other
organizations.
17. The changes in the tort system that were made during the 1980s and 1990s have been at
the state level, which means that their effect is localized rather than national.
18. The doctrine of res ipsa loquitur is often used as a defense by the defendant in a tort action.
19. Special damages are intended to cover out of pocket costs and lost wages of an injured
party.

214

20. As a general rule, a property owner must warn trespassers of any dangers in the premises
that they would not recognize.

215

TRUE FALSE QUESTIONS

CHAPTER 28

1.

The cost of defending suits against the insured is payable in addition to the limit of liability
specified for Section II of the Homeowners Policy.

2.

The liability coverage under Section II of the Homeowners policy specifically excludes all
liability arising out of watercraft.

3.

One of the appealing features of the Homeowners Section II coverage is that it combines
coverage on the home with coverage on automobiles, eliminating the need for two policies.

4.

The medical payments coverage of the Homeowners policy is a useful coverage for a family
with small children, since it will pay medical expenses should one of them be injured on the
insured premises.

5.

Liability to domestic employees of the insured is covered under Homeowners Section II


except in those jurisdictions in which such employees are covered under the workers'
compensation law.

6.

Although the Homeowners policy does not provide coverage for suits alleging libel, slander,
or defamation, coverage against such losses is available by endorsement.

7.

Any damage to a rented apartment for which a tenant becomes liable under the terms of a
lease would be covered under Section II of the Homeowners Tenants Form.

8.

The liability section of the Homeowners policy includes comprehensive coverage for liability
arising out of both the personal activities and all business pursuits of the insured.

9.

The Physical Damage to Property of Others coverage of Section II of the Homeowners


Policy provides limited coverage for some intentional damage caused by certain insureds.

10. An individual who is the proprietor of a business would be well advised to add the Business
Pursuits Endorsement to his or her Homeowners policy.
11. Medical Payments coverage of the Homeowners Policy is an optional coverage that
requires payment of an additional premium.
12. The expense of defending a suit against the insured is payable under Section II of the
Homeowners policy, regardless of whether or not the liability itself is covered.
13. The definition of "Persons Insured" under Homeowners Section II includes the named
insured's employer if the employer is held vicariously liable for acts of the insured.
14. A college dormitory room in which a family member is residing may qualify as "insured
premises" under the Homeowners policy.
15. The business pursuits exclusion under the liability section of the Homeowners policy applies
only to those individuals who own or operate a business.
16. All liability assumed under contract is excluded under Homeowners Section II.
17. In most states, the Homeowners policy includes coverage for workers' compensation
benefits payable or required to be paid to domestic employees.
18. The Medical Payments coverage of the Homeowners policy applies only to injuries
sustained by persons on insured premises.
19. Personal Injury coverage is automatically included under the Supplementary Payments of
Section II of the Homeowners policy.

216

20. Unlike most other forms of liability insurance, professional liability policies usually cover
claims made during the policy period, rather than injuries that take place during the policy
period.

217

TRUE FALSE QUESTIONS

CHAPTER 29

1.

An increasing number of states have enacted guest hazard statutes during the past decade.

2.

The financial responsibility laws of most states require evidence of automobile liability
insurance or a substitute therefore by both parties involved in an accident that comes within
the provisions of the law.

3.

Most of the automobile reparation reform laws that have been enacted by the individual
states are of the "modified no-fault" variety.

4.

The majority of the states have statutes that may impose vicarious liability on persons other
than the operator of an automobile.

5.

Under a guest hazard statute, the operator of a motor vehicle becomes absolutely liable to
an injured guest in his or her auto.

6.

Uninsured motorist coverage is designed to protect the owner of an automobile when he or


she loans the automobile to a driver who does not carry liability insurance.

7.

Most of the "no-fault" laws that have been enacted by the individual states apply to bodily
injury only, and do not include property damage.

8.

The term "Automobile Insurance Plan" generally refers to one of the state no-fault statutes.

9.

The "Family Purpose Doctrine" as used in some jurisdictions is intended to reduce or


eliminate the possibility of parental vicarious liability.

10. The concept of a "threshold" in automobile reparation reform laws represents a compromise
with the no-fault principle.
11. Vicarious liability in connection with the use of automobiles may be based on either
common law or statute.
12. The insurance industry has generally opposed enactment of guest statutes.
13. A majority of the states have enacted compulsory automobile insurance laws.
14. Under most financial responsibility laws, only the party at fault in an accident is required to
show evidence of automobile liability insurance.
15. The applicant for insurance under an Automobile Insurance Plan cannot usually be assigned
to an insurer for more than three years.
16. The no-fault concept applies the principle of workers' compensation to injuries arising out of
the use of automobiles.
17. Under a pure no-fault law, the tort system would be totally abolished for bodily injuries
arising out of automobile accidents.
18. In many states, an individual whose driving privileges have been suspended for traffic
violations must file proof of financial responsibility to obtain restoration of his or her license.
19. The use of the automobile is a more significant factor in determining the premium for auto
insurance than are the age, sex or marital status of the driver.
20. Automobile insurance rates are higher for youthful male operators who own their own autos
or are principal operators than for youthful male operators who are incidental operators.

218

TRUE FALSE QUESTIONS

CHAPTER 30

1.

Liability coverage under the Personal Auto Policy applies to persons operating the covered
automobile with permission.

2.

The Personal Auto Policy is suspended if the insured intentionally violates the law while
operating the covered auto.

3.

Jones uses her automobile in her occupation. In the event of a suit against Jones and her
employer, the employer would be automatically covered under Jones' Personal Auto Policy.

4.

Medical Payments coverage of the Personal Auto Policy covers the named insured and
relatives if struck by an auto while they are pedestrians.

5.

While liability coverage of the Personal Auto Policy applies to the named insured while
operating a nonowned automobile, resident relatives do not enjoy such coverage.

6.

If you borrow a friend's car, the coverage of your Personal Auto Policy will apply as excess
insurance in the event of a loss.

7.

The insured must notify the insurer of the acquisition of a replacement auto within 14 days
or all coverage under the PAP will cease.

8.

Trailers owned by the named insured are automatically covered under the liability section of
the Personal Auto Policy, regardless of whether or not they have been listed.

9.

Smith's Personal Auto Policy will apply as excess coverage to an auto that his employer
furnishes for business use by Smith.

10. The "Out of State" coverage provision of the Personal Auto Policy automatically provides
the coverage required of nonresidents when the auto is operated in another state.
11. Although the Personal Auto Policy provides some coverage for the business use of
nonowned automobiles, special exclusions apply to automobiles used in the automobile
business.
12. Medical Payments under the Personal Auto Policy to persons other than the named insured
and family members are made only if the insured is legally liable for such expenses.
13. Newly acquired replacement automobiles are automatically covered under the Personal
Auto Policy without notice to the insurer, except for physical damage coverage on the new
auto.
14. Trailers are automatically covered under both the liability section and the physical damage
section of the Personal Auto Policy regardless of whether or not they are listed in the policy.
15. A "temporary substitute automobile" refers to an auto rented by the insured while in another
city on business.
16. When Uninsured Motorist coverage is purchased with a $300,000 limit, it is referred to as
"Underinsured Motorist" coverage.
17. Coverage on motorcycles and motorscooters may be provided under the Personal Auto
Policy, but with a special endorsement to tailor the coverage to the exposure.
18. In most states, uninsured motorists coverage applies to both bodily injury and property
damage caused by uninsured drivers.
19. When the Personal Auto Policy is written to provide coverage on a motorcycle, coverage
applies to a temporary substitute vehicle, but not to other nonowned motorcycles.
20. The Extended Liability Coverage endorsement to the Personal Auto Policy extends
coverage to autos furnished for the regular use of a named individual.

219

TRUE FALSE QUESTIONS

CHAPTER 31

1.

The coinsurance clause is designed to reduce the cost of fire insurance by requiring the
insured to bear a part of every loss.

2.

Replacement cost coverage such as that provided in the dwelling forms and the
Homeowners policy is also generally available to business firms.

3.

Business interruption policies cover the loss of income during a period of shutdown, limited
to the period of restoration or the expiration of the policy, whichever comes first.

4.

The ISO Portfolio Property form used to insure the personal property of business firms
contains a limited "off-premises" extension.

5.

The effect of the "full value reporting clause" of reporting forms used in the field of
commercial fire insurance is to require 100% coinsurance.

6.

Payment for damage to manufactured goods under the Standard Fire Policy is on the basis
of current market value or the selling price of the goods.

7.

The Equipment Breakdown Protection Coverage Form that replaced the Boiler and
Machinery Policy includes more extensive coverage on computer components of production
equipment.

8.

A loss-sustained employee dishonesty coverage form covers thefts that occur during the
term or the policy and in some cases loss that occurred under a prior policy.

9.

Contingent business interruption coverage covers loss of income resulting from interruption
of the insured's business caused by damage to property that is not owned by the insured.

10. General average losses are specifically excluded under the terms of the ocean marine hull
policy.
11. As its title suggests, the Theft Inside the Premises Money and Securities insuring
agreement covers only money and securities and only for loss by theft.
12. Blanket fidelity bonds cover all employees including new employees and additional
employees.
13. Accounts receivable insurance covers additional expenses and losses resulting from the
inability to collect from debtors when the insured accounting records are destroyed by an
insured peril.
14. The amount of insurance under a Leasehold Interest insurance contract decreases over
time.
15. The suspension provision of the Breakdown Protection Coverage Form requires the insurer
to give the insured 30 days written notice when coverage is suspended.
16. The face amount of the Employee Theft Form applies to all losses by a given employee,
with a cumulative limit of protection that compounds with each year the policy is in force.
17. The Computer Fraud insurance agreement of the commercial crime program covers loss of
property caused by hackers and damage or loss caused by a computer virus.
18. Floater policies are designed to cover property which is mobile in nature and which is
exposed to loss while away from the owner's premises.
19. It is not usually considered necessary to insure goods shipped by common carrier, since
common carriers are liable for damage to goods in their custody.

220

20. A Difference-in-Conditions policy provides broad open-peril coverage on property owned by


the insured, and replaces virtually all other forms of property insurance a firm might carry.

221

21. The Agreed Value Optional Coverage suspends the coinsurance clause, guaranteeing that
the insured will not suffer a coinsurance penalty.
22. The Ordinance or Law Coverage endorsement in effect converts some partial losses into
total losses.
23. When several properties are insured on a blanket basis under a Commercial Property (fire
insurance) policy, it is customary to require 90% coinsurance.
24. Fire insurance reporting forms are interpreted as if they included a 100% coinsurance
clause.
25. Under the builders risk completed value form, the premium cannot be determined until the
structure has been completed.
26. Most business interruption is written on a valued basis.
27. Insurance for the liability of a bailee is usually written under an inland marine form.
28. Difference in Conditions insurance is usually written to exclude loss caused by the perils of
fire and extended coverage.
29. Fidelity bonds written on a discovery basis cover losses that are discovered during the term
of the bond even if the loss occurred prior to the bonds inception.
30. The Businessowners Policy automatically includes many coverages that are available as
additional cost options under the Portfolio Commercial Package Policy.

222

TRUE FALSE QUESTIONS

CHAPTER 32

1.

A consumer who is injured by a faulty product generally has no right of action against the
retailer, but may bring suit against the manufacturer.

2.

Liability arising out of mobile equipment is excluded under business general liability policies
and must be insured under an automobile policy.

3.

An extended reporting period oR tail coverage is generally associated with a claims-made


form of liability insurance.

4.

Products liability coverage is an important form of protection for manufacturers because of


the provision under which the insurer agrees to pay the cost of having faulty products
recalled.

5.

The Commercial General Liability form automatically includes coverage for liability
assumed under contract.

6.

For a contractor, the most important benefit of products and completed operations liability
coverage is for loss to the work completed by the contractor.

7.

Although employers liability coverage is not provided under any of the standard forms of
liability insurance, it may be added to the workers compensation policy by endorsement.

8.

Personal injury liability coverage is automatically included in the Comprehensive General


Liability policy.

9.

The Motor Truck Cargo policy protects the interest of both the trucker and the owner of the
goods, providing payment for any loss to goods being carried by the trucker.

10. Employers liability coverage is automatically included as a part of the standard Workers
Compensation policy.
11. The liability policy in force when a product is sold covers liability arising out of that product.
12. A higher degree of care is required in the case of bailment for the benefit of the bailee than
is required in the case of bailment for the benefit of the bailor or bailment for mutual benefit.
13. When a worker usually employed in one state is injured working in another state, it may be
possible for the worker to elect coverage under the workers' compensation law of either
state.
14. Losses covered under a commercial umbrella liability policy are always subject to a
deductible.
15. The liability exposure of a common carrier for damage to goods in its custody is greater
than the liability exposure of a bailee for damage to goods in its custody.
16. The umbrella liability policy covers any and all liability imposed on the insured, and unlike
most other liability contracts, does not contain any exclusions.
17. The "Admitted Liability Coverage" available in connection with aircraft policies is generally
written only in conjunction with Passenger Bodily Injury Liability coverage.
18. Product liability coverage is designed to pay for injury or damage caused by the product,
and specifically excludes coverage for damage to the product itself.

223

19. Most commercial liability policies require the consent of the insured prior to the settlement
of any claim.
20. Although some inland marine forms are designed to provide liability coverage, the coverage
provided is limited to damage caused by specifically named perils.
21. The Standard Workers Compensation Policy covers the employer's obligation under the
workers compensation law of any state or the District of Columbia without endorsement.
22. Coverage for liability arising out of discrimination in employment and sexual harassment
would violate public policy and is not generally available.
23. Coverage under the Business Auto Policy may be provided on any automobile, or on
specifically scheduled autos only.
24. The Admitted Liability Coverage in aviation insurance is payable in addition to amounts
payable under the Bodily Injury liability coverage.
25. The principles of common law exempt common carriers from liability for damage to property
being transported.
26. Virtually all bailee forms provide payment for damage to bailed property only when the
bailee is legally liable for such damage.
27. The umbrella liability policy is an effective substitute for both the Comprehensive General
Liability Policy and the Business Auto Policy.
28. Directors and officers errors and omissions liability coverage is designed to protect against
liability arising out of errors in judgment or mismanagement by corporate officers and
directors.

224

TRUE FALSE QUESTIONS

CHAPTER 33

1.

The underwriting requirements for a bid bond are usually just as rigorous than those for a
construction contract bond.

2.

The person who purchases a surety bond does so in order to protect himself against the
failure of some other person to perform some obligation.

3.

The obligee under a completion bond is usually the individual or organization for whom a
building is being constructed.

4.

A lost instrument bond is generally written on a one-year basis, and is renewable at the
option of the insured.

5.

The surety bond that guarantees that labor and materials will be paid for has as its obligee
the subcontractors involved in the construction project.

6.

A trade credit insurance policy covers essentially the same loss exposure as the accounts
receivable policy.

7.

Some foreign trade credit insurance policies protect against political risks such as
expropriation or confiscation.

8.

In the event of default by a debtor, the insured under a credit insurance policy must usually
bring suit against the debtor before filing a claim under the insurance.

9.

Trade credit insurers maintain large databases that they use to assist their insureds with
management of credit risk.

10. When the principal under a surety bond defaults on the bonded obligation, the surety retains
a right to subrogate against the principal for any loss it suffers.
11. The principal under a labor and materials bond for a construction project will usually be the
same as the principal under the construction bond.
12. Committee bonds are written to cover the obligation of a group of individuals who are
responsible to a city or other public body.
13. Depending on the circumstances, a litigation bond may be required of either the plaintiff or
the defendant in a court action.
14. The terms of most public official bonds are prescribed by law.
15. The "extraordinary coverage" credit insurance policy is written to cover the obligation of a
single customer or limited number of customers.
16. Under proportional trade credit insurance policies, the proportion of the loss that the insured
bears is the same for all accounts.
17. All credit insurance policies include a collection service under which the insured is required
to turn past due accounts over to the insurer for collection.
18. The "specific coverage" credit insurance policy covers all debtors whose mercantile credit
ratings fall within the ratings selected by the insured.
19. Under trade credit insurance, the limit of coverage for an account may vary based on its
credit rating.

225

20. In credit enhancement or financial guaranty insurance, the insurer substitutes its financial
strength for the financial strength of the borrower.

226

TRUE FALSE QUESTIONS

CHAPTER 34

1.

Many factors indicate the likelihood of a decline in demand for insurance in the near future.

2.

Progressive indexing of Social Security benefits would index the earnings of high income
individuals by changes in prices rather than wages.

3.

Changes in the insurance market that may be anticipated in the future include a change in
the system for compensating agents and brokers.

4.

The share of world premiums written by U.S. insurers has continued to increase over the
past two decades.

5.

A good deal of consumer dissatisfaction with insurance is based on faulty ideas about
insurance and misconceptions about the way it operates.

6.

Solvency II includes regulatory capital requirements and requirements for insurers to have
risk management programs.

7.

In addition to possible repeal of the McCarran-Ferguson Act, state authority to regulate


insurance is threatened by a creeping erosion.

8.

The most significant impact of genetic testing for the insurance industry is that insurers will
be able to price their products with greater precision, which should benefit all consumers.

9.

To a large measure, employment in insurance is immune from fluctuations in the economy.

10. Although federal statutes barred the combination of banking and insurance for many years,
the restriction was significantly modified by the Gramm-Leach-Bliley Act.
11. The United States continues to dominate the world insurance market, currently accounting
for more than two-thirds of the world premium volume.
12. One factor that will promote globalization of insurance is the elimination of national trade
barriers.
13. The U.S. system of reinsurance regulation treats authorized and unauthorized reinsurers
differently.
14. The globalization of insurance will probably accelerate with changes in the financial services
industry and the elimination of restrictions on cross-border insurance sales.
15. The insurance industry and the states that have established reinsurance pools continue to
resist attempts by the federal government to create a federal disaster reinsurance program.
16. Based on an objective analysis of the facts, most of the criticism directed toward the
property and liability insurance industry by its critics seems well deserved.
17. The bancassurance system involves one organization that acts as both banker and insurer
to retail and corporate clients.
18. The international financial reporting standards developed by the International Accounting
Standards Board will have no impact on regulatory reporting requirements.
19. The Interstate Insurance Product Regulation Compact provides for multistate approval of
certain insurance products.
20. Although fraud has been a major problem for the property and liability insurance industry,
life insurers and health insurers have been relatively immune to fraud.

227

TRUE-FALSE QUESTION ANSWERS


Chapters
Q.

10

11

10

11

12

13

14

15

16

17

18

19

20

TRUE-FALSE QUESTION ANSWERS

228

Chapters
Q

12

13

14

15

16

17

18

19

20

21

22

10

11

12

13

14

15

16

17

18

19

20

TRUE-FALSE QUESTION ANSWERS

229

Chapters
Q.

23

24

25

26

27

28

29

30

31

32

33

34

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

230

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