Fundamentals of Life Insurance: Chapter 1 Quiz

1. What is the Principle of Life Insurance?

Life insurance guarantees total financial security.

Life insurance increases risk for policyholders.

Life insurance reduces uncertaintyReplaces the possibility of a larger loss (income) with a smaller one (premium)Does not eliminate risk

Life insurance is a form of investment that guarantees profit.

Life insurance is designed to reduce uncertainty and provide financial protection by replacing the possibility of a larger loss with a smaller premium. However, it does not completely eliminate risk nor does it guarantee total financial security or profit.

Explanation

Life insurance is designed to reduce uncertainty and provide financial protection by replacing the possibility of a larger loss with a smaller premium. However, it does not completely eliminate risk nor does it guarantee total financial security or profit.

2. Nonparticipating policies (nonpar) are....

Insurance policies that require two or more individuals to participate in coverage.

Insurance policies that do not pay dividends to policy owners

Insurance policies that only provide coverage for non-profit organizations.

Insurance policies that do not require regular premium payments from policy owners.

Nonparticipating policies, also known as nonpar policies, do not participate in the distribution of surplus funds by paying dividends to policy owners. This is a key distinction from participating policies that do pay dividends.

Explanation

Nonparticipating policies, also known as nonpar policies, do not participate in the distribution of surplus funds by paying dividends to policy owners. This is a key distinction from participating policies that do pay dividends.

3. What is the term used to describe money accumulated in a permanent life insurance policy that the policy owner may borrow as a policy loan or receive if the policy is surrendered before maturity?

Policy dividend

Premium loan

Death benefit

Cash valueCan be referred to as Living Benefit

The correct term for money accumulated in a permanent life insurance policy is cash value, also known as Living Benefit. A policy dividend is a share of the insurance company's surplus profits distributed to policyholders. Premium loan refers to a loan taken out against the cash value of a policy. Death benefit is the amount payable to the beneficiary upon the death of the insured.

Explanation

The correct term for money accumulated in a permanent life insurance policy is cash value, also known as Living Benefit. A policy dividend is a share of the insurance company's surplus profits distributed to policyholders. Premium loan refers to a loan taken out against the cash value of a policy. Death benefit is the amount payable to the beneficiary upon the death of the insured.

4. What is the term for a measure of the actual future earnings and services of a person at risk in the event of premature death, with the objective of providing the proper amount of coverage as determined by the value of the individual to his/her dependents?

Economic Loss Analysis

Actuarial Value Method

Mortality Assessment Technique

Human Life Value Approach

The Human Life Value Approach calculates the financial worth of an individual's life by considering their future earnings and services to properly determine the amount of coverage needed for their dependents. The other options are not synonymous with this specific approach.

Explanation

The Human Life Value Approach calculates the financial worth of an individual's life by considering their future earnings and services to properly determine the amount of coverage needed for their dependents. The other options are not synonymous with this specific approach.

5. What approach determines a need for coverage upon the premature death of an individual, always assuming the death to be immediate?

Emergency Response Protocol

Risk Assessment Method

Survivorship Bias Analysis

Needs Analysis Approach

The Needs Analysis Approach is used to determine the financial needs of dependents and survivors in the event of the premature death of an individual, assuming the death to be immediate. It is a comprehensive method to assess the amount of coverage required.

Explanation

The Needs Analysis Approach is used to determine the financial needs of dependents and survivors in the event of the premature death of an individual, assuming the death to be immediate. It is a comprehensive method to assess the amount of coverage required.

6. What term describes assuming the desired income will be generated by the investment earnings only, thus retaining or conserving the principal or capital invested?

Income Maximization

Capital Retention/ Conservation

Risk Diversification

Principal Appreciation

The correct term for this scenario is 'Capital Retention/ Conservation', where the focus is on maintaining the initial investment while generating income solely from investment earnings.

Explanation

The correct term for this scenario is 'Capital Retention/ Conservation', where the focus is on maintaining the initial investment while generating income solely from investment earnings.

7. What is a nonqualified deferred compensation plan that allows employers to provide additional retirement income to key, highly compensated employees?

403(b) Plan

IRA (Individual Retirement Account)

SERPSupplemental Executive Retirement Plan

401(k) Plan

The correct answer, SERP, is specifically designed for highly compensated employees to receive additional retirement income, unlike the other options listed.

Explanation

The correct answer, SERP, is specifically designed for highly compensated employees to receive additional retirement income, unlike the other options listed.

8. What are participating policies (par)?

Policies that may pay annual dividends to policy owners

Policies that do not offer any financial benefits to policy owners.

Policies that only pay out a lump sum death benefit to policy owners.

Policies that require annual premium payments from policy owners.

Participating policies (par) are insurance policies that allow policy owners to receive a share of the company's profits in the form of annual dividends.

Explanation

Participating policies (par) are insurance policies that allow policy owners to receive a share of the company's profits in the form of annual dividends.

9. What method assumes both principal (capital) and interest are liquidated over the relevant time period to provide the required income for the dependents?

Income Distribution

Interest Liquidation

Dependent Withdrawal

Capital Liquidation

Capital liquidation is the method in which both the principal amount (capital) and the interest are used to provide income for dependents over a specific time period. This approach ensures that both the initial investment and any accrued interest are gradually depleted to meet financial needs.

Explanation

Capital liquidation is the method in which both the principal amount (capital) and the interest are used to provide income for dependents over a specific time period. This approach ensures that both the initial investment and any accrued interest are gradually depleted to meet financial needs.

10. What is the term used to describe a process where the policy loans are used to pay the premiums on cash value life insurance under a systematic plan of borrowing where loans are no greater than the amount of each premium?

Collateral Assignment Loans

Premium Financing

Minimum Deposit Plans

Cash Surrender Value Loans

Minimum Deposit Plans is the term used for the described process where policy loans are taken to pay premiums on cash value life insurance. Cash Surrender Value Loans involve borrowing against the cash value of the policy. Premium Financing involves using a lender to pay premiums. Collateral Assignment Loans involve assigning the value of the policy as collateral for a loan.

Explanation

Minimum Deposit Plans is the term used for the described process where policy loans are taken to pay premiums on cash value life insurance. Cash Surrender Value Loans involve borrowing against the cash value of the policy. Premium Financing involves using a lender to pay premiums. Collateral Assignment Loans involve assigning the value of the policy as collateral for a loan.

11. In which type of insurance plan must the policy owner be advised each year as to how much to borrow (if any) Each year's interest is paid in cash?

Minimum Deposit Plans

Whole Life Insurance

Term Life Insurance

Variable Universal Life Insurance

Minimum Deposit Plans require the policy owner to be advised each year on borrowing and cash interest payments, while the other options do not have this specific requirement.

Explanation

Minimum Deposit Plans require the policy owner to be advised each year on borrowing and cash interest payments, while the other options do not have this specific requirement.