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NM Life & Health practice questions

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Question 1General Insurance Principles and Concepts

Which type of risk involves only the chance of loss or no loss, with no possibility of gain?

  1. Pure risk Correct answer.
  2. Speculative risk
  3. Business risk
  4. Investment risk

Explanation

Pure risk presents only two outcomes: loss or no loss. Speculative risk involves the possibility of gain as well as loss and is generally not insurable.

Question 2General Insurance Principles and Concepts

In life insurance, insurable interest must exist at which point?

  1. Continuously throughout the policy term
  2. At the time of the insured's death
  3. At the time the policy is delivered
  4. At the time of application Correct answer.

Explanation

For life insurance, insurable interest is required at policy inception, meaning the time of application. It need not continue until the insured dies, because the policy is not a contract of indemnity.

Question 3General Insurance Principles and Concepts

Which combination of elements is necessary for a contract to be legally enforceable?

  1. Approval by a licensed insurance producer
  2. Agreement, consideration, legal purpose, and competent parties Correct answer.
  3. Filing of the contract with a state regulator
  4. A written document and a notary's seal

Explanation

A valid contract requires an offer and acceptance, consideration, a lawful purpose, and parties with legal capacity. A written form and regulatory filing are not universal requirements for validity.

Question 4General Insurance Principles and Concepts

The principle of indemnity is designed to accomplish which of the following?

  1. Restore the insured to the pre-loss financial position Correct answer.
  2. Reward insureds who avoid filing claims
  3. Punish the party whose negligence produced the loss in the first place
  4. Pay more than the value of the loss

Explanation

Indemnity means the insured is put back in approximately the same financial position held before the loss, no better and no worse. It prevents recovery that exceeds the actual loss.

Question 5General Insurance Principles and Concepts

The law of large numbers allows an insurer to do which of the following?

  1. Transfer all of the insurer's risk to policyholders
  2. Guarantee that actual losses will equal expected losses in any single year
  3. Set rates without reference to past loss experience
  4. Predict loss experience more accurately as exposures increase Correct answer.

Explanation

As the number of similar independent exposure units grows, actual results tend to converge on expected results. This convergence is what makes credible rate making possible.

Question 6General Insurance Principles and Concepts

A loose stair railing that could cause a fall is best described as which of the following?

  1. A peril
  2. A physical hazard Correct answer.
  3. A morale hazard
  4. A moral hazard

Explanation

A physical hazard is a tangible condition that increases the chance or severity of a loss. A peril, by contrast, is the actual cause of the loss, such as a fall itself.

Question 7General Insurance Principles and Concepts

Adverse selection is best described as which of the following?

  1. A deliberate attempt by an applicant to deceive the insurer
  2. An insurer's practice of declining every substandard applicant
  3. The tendency of low-risk applicants to buy large amounts of coverage
  4. The tendency of those most likely to suffer a loss to seek insurance Correct answer.

Explanation

Adverse selection occurs when applicants who expect to need coverage are more likely to buy it, leaving the insurer with a pool worse than average. Underwriting and exclusions exist largely to control it.

Question 8General Insurance Principles and Concepts

An insurance policy is considered an aleatory contract because:

  1. Only the insured is bound to perform under the contract
  2. The parties exchange equal value at the moment of formation
  3. The insurer must always pay the full face amount
  4. The amounts exchanged depend on an uncertain event Correct answer.

Explanation

In an aleatory contract the dollar amounts exchanged by the parties are unequal and depend on whether a chance event occurs. A small premium may produce a large claim payment, or no payment at all.

Question 9General Insurance Principles and Concepts

Why is an insurance policy described as a unilateral contract?

  1. Both parties are bound to perform from the outset
  2. Only the insurer makes a legally enforceable promise Correct answer.
  3. The insured may cancel at any time without penalty
  4. The insurer may change policy terms at will

Explanation

The insurer promises to pay covered claims, and only that promise is legally enforceable. The insured's payment of premium is a condition of coverage rather than a promise the insurer can sue to enforce.

Question 10General Insurance Principles and Concepts

After paying a covered claim, an insurer's right to pursue the party that caused the loss is called:

  1. Salvage
  2. Subrogation Correct answer.
  3. Contribution
  4. Indemnification

Explanation

Subrogation lets the insurer step into the insured's shoes and recover from the responsible third party after paying the claim. It supports the principle of indemnity by preventing double recovery.

Question 11General Insurance Principles and Concepts

A producer assures an applicant that a late premium will be accepted, and the insurer later tries to deny coverage on that basis. The insurer may be prevented from denying coverage by:

  1. Adhesion
  2. Estoppel Correct answer.
  3. The parol evidence rule
  4. Rescission

Explanation

Estoppel prevents a party from asserting a right that contradicts its earlier conduct when another party has relied on that conduct. A representation by the insurer's authorized producer can therefore bind the insurer.

Question 12General Insurance Principles and Concepts

When policy language is genuinely ambiguous, courts generally resolve the ambiguity in favor of:

  1. The insured Correct answer.
  2. The insurer, because it drafted the policy
  3. The state insurance department
  4. Both parties equally

Explanation

Under the rule of contra proferentem, ambiguities in a contract of adhesion are construed against the party that drafted the language. Since the insurer drafts the policy, the reasonable expectation of the insured controls.

Question 13General Insurance Principles and Concepts

Which statement about representations in an insurance application is correct?

  1. A representation is a promise that a stated fact will remain true
  2. A representation is a statement made only by the insurer
  3. A representation is a statement believed true to the applicant's knowledge Correct answer.
  4. A representation must be literally true in every detail, or the policy is void from inception

Explanation

A representation is a statement of fact made by the applicant that is believed to be true to the best of the applicant's knowledge. Only a material misrepresentation affects the validity of the contract.

Question 14General Insurance Principles and Concepts

The primary function of a deductible in an insurance policy is to:

  1. Guarantee the insured pays nothing out of pocket
  2. Extend coverage to perils the policy excludes
  3. Increase the insurer's exposure to small losses
  4. Eliminate small claims and reduce the cost of insurance Correct answer.

Explanation

A deductible makes the insured responsible for a specified initial amount of each loss, which removes small claims from the system and lowers the premium. It does not widen the perils covered.

Question 15General Insurance Principles and Concepts

Which statement best describes reinsurance?

  1. The insurer transfers its obligations to a state guaranty association fund
  2. The reinsurer assumes direct obligations owed to the original insured
  3. The ceding insurer stays liable to its policyholders after transferring risk Correct answer.
  4. A producer transfers risk by placing business with another producer

Explanation

Reinsurance is insurance for insurers: the ceding company transfers part of its risk to a reinsurer but remains fully liable to its own policyholders. The reinsurer deals with the ceding insurer, not with the original insured.

Question 16General Insurance Principles and Concepts

An insurer and a producer sign a written agency agreement that spells out the producer's power to solicit and submit applications. This authority is best described as:

  1. Implied authority
  2. Apparent authority
  3. Express authority Correct answer.
  4. Fiduciary duty

Explanation

Authority created by an explicit written or oral grant from the principal is express authority. Apparent authority arises from the appearance of authority created by the principal's conduct, and implied authority consists of powers reasonably necessary to carry out express authority.

Question 17General Insurance Principles and Concepts

A producer collects premium payments from applicants and fails to remit them promptly to the insurer. The producer has breached:

  1. A fiduciary duty Correct answer.
  2. The principle of indemnity
  3. The law of large numbers
  4. The parol evidence rule

Explanation

Premiums collected on the insurer's behalf are held in trust, which creates a fiduciary responsibility. Commingling or failing to remit those funds is a breach that can lead to license revocation.

Question 18General Insurance Principles and Concepts

Which statement accurately distinguishes a mutual insurer from a stock insurer?

  1. A mutual insurer may not be incorporated under state law
  2. A mutual insurer is owned by its shareholders
  3. A mutual insurer is owned by its policyholders Correct answer.
  4. A mutual insurer issues only nonparticipating policies

Explanation

A mutual insurer is owned by its policyholders and typically issues participating policies that may pay dividends. A stock insurer is owned by shareholders who supply its capital.

Question 19General Insurance Principles and Concepts

A conditional receipt given with an application and initial premium provides coverage:

  1. Only after the policy is physically delivered and the first premium is paid
  2. From the date of application regardless of whether the applicant is insurable
  3. Only after the insurer issues the policy and mails it to the producer
  4. From the date of application if the applicant proves insurable under the insurer's rules Correct answer.

Explanation

A conditional receipt creates interim coverage effective as of the date of application or medical examination, but only if the applicant meets the insurer's underwriting standards. If the applicant is not insurable, no coverage ever attaches.

Question 20General Insurance Principles and Concepts

An insured deliberately destroys covered property in order to collect the insurance proceeds. This is an example of:

  1. Adverse selection
  2. A morale hazard
  3. A moral hazard Correct answer.
  4. A physical hazard

Explanation

Moral hazard refers to a dishonest or intentional act, such as deliberately causing a loss to collect benefits. Morale hazard, by contrast, is indifference or carelessness that arises because insurance is in place.

Question 21General Insurance Principles and Concepts

An insurer's right to rescind coverage when an applicant conceals a material fact rests on the doctrine of:

  1. Indemnity
  2. Subrogation
  3. Adhesion
  4. Utmost good faith Correct answer.

Explanation

Insurance is a contract of utmost good faith, which obliges both parties to disclose material facts. Concealment or material misrepresentation gives the insurer grounds to rescind the policy.

Question 22General Insurance Principles and Concepts

A building valued at $400,000 is insured for $270,000 under a policy with a 90% coinsurance clause. A covered loss of $100,000 occurs. Ignoring any deductible, how much will the insurer pay?

  1. $90,000
  2. $75,000 Correct answer.
  3. $100,000
  4. $67,500

Explanation

The required amount of insurance is 90% of $400,000, or $360,000. The recovery is the loss multiplied by the ratio of carried insurance to required insurance: ($270,000 / $360,000) x $100,000 = $75,000, which is within the policy limit.

Question 23General Insurance Principles and Concepts

The entire contract provision in a life insurance policy serves to:

  1. Permit the producer to change policy terms after the policy is issued
  2. Allow the policy to be modified by oral statements made at the time of application
  3. Require the insured to report every change in health during the policy term
  4. Limit the contract to the policy document and any attached application Correct answer.

Explanation

The entire contract provision states that the policy together with the attached application constitutes the whole agreement. It prevents outside documents or oral statements from altering the insurer's obligations.

Question 24General Insurance Principles and Concepts

Investors persuade an elderly person to apply for a life policy naming the investors as beneficiaries, with the investors paying the premiums in exchange for the death benefit. This arrangement is best characterized as:

  1. A creditor beneficiary arrangement
  2. A buy-sell funding method
  3. A key-person insurance arrangement
  4. Stranger-originated life insurance with no insurable interest Correct answer.

Explanation

When investors with no insurable interest procure coverage on a stranger's life for their own financial gain, the arrangement is stranger-originated life insurance. It is generally prohibited because it resembles a wager on a human life.

Question 25General Insurance Principles and Concepts

Which statement best explains why life insurance is generally not treated as a contract of indemnity?

  1. Life insurers are barred by law from using deductibles or coinsurance
  2. Human life has no measurable cash value, so a stated face amount is paid Correct answer.
  3. A life policy pays only the medical and funeral expenses actually incurred
  4. Life insurance policies carry no insurable interest requirement

Explanation

Indemnity requires measuring the loss in money and restoring that amount, which is impossible for the loss of a life. Life insurance therefore pays the face amount stated in the contract rather than reimbursing a measured loss.

Question 26General Insurance Principles and Concepts

Which type of risk is insurable because it involves only the chance of loss and no chance of gain?

  1. Pure risk Correct answer.
  2. Investment risk
  3. Business risk
  4. Speculative risk

Explanation

Insurance is designed for pure risks, which present only the possibility of loss or no loss. Speculative risks involve the possibility of gain as well as loss and are generally not insurable.

Question 27General Insurance Principles and Concepts

The spread of risk among many insureds is the basis for which principle?

  1. The right of subrogation after payment
  2. The coinsurance requirement in property policies
  3. The reinsurance treaty between insurers
  4. Law of large numbers Correct answer.

Explanation

The law of large numbers allows insurers to predict losses more accurately as the number of similar exposure units increases. This supports the pooling and spreading of risk across a large group.

Question 28General Insurance Principles and Concepts

When must insurable interest exist for a life insurance policy to be valid?

  1. When the policy is issued Correct answer.
  2. At the time a claim is filed
  3. At the time of the insured's death
  4. At the time of each premium payment

Explanation

For life insurance, insurable interest must exist when the policy is issued, not at the time of death. This requirement prevents the use of insurance as a wagering contract.

Question 29General Insurance Principles and Concepts

For property insurance, insurable interest must exist at which point?

  1. At the time of loss Correct answer.
  2. When the policy is delivered
  3. When the first premium is paid
  4. When the application is signed

Explanation

Property insurance requires insurable interest at the time of loss because the insured must suffer actual financial loss. The principle of indemnity limits recovery to the insured's interest in the damaged property.

Question 30General Insurance Principles and Concepts

Which element is required for a valid insurance contract?

  1. A deductible
  2. A coinsurance clause
  3. A warranty
  4. Legal purpose Correct answer.

Explanation

A valid insurance contract requires offer and acceptance, consideration, competent parties, and a legal purpose. Warranties, deductibles, and coinsurance clauses are policy features, not universal validity requirements.

Question 31General Insurance Principles and Concepts

An insurance contract entered into by a person who lacks legal capacity is generally:

  1. Voidable only by the insurer
  2. Enforceable by both parties
  3. Void from its beginning
  4. Voidable by the incapacitated person Correct answer.

Explanation

Contracts made by persons lacking legal capacity are generally voidable at the option of the incapacitated person. The law protects the party who could not fully understand the agreement.

Question 32General Insurance Principles and Concepts

A fire is an example of which of the following?

  1. A hazard
  2. A risk
  3. A peril Correct answer.
  4. A loss

Explanation

A peril is the cause of a loss, such as fire, windstorm, or theft. A hazard is a condition that increases the chance or severity of a loss.

Question 33General Insurance Principles and Concepts

The principle of indemnity seeks to:

  1. Restore the pre-loss financial position Correct answer.
  2. Guarantee the insured a profit after a covered loss
  3. Deter the insured from filing any future claims
  4. Punish the insured for submitting a covered claim

Explanation

Indemnity aims to place the insured back in approximately the same financial position as before the loss, without profit. This principle underlies limits such as actual cash value and policy limits.

Question 34General Insurance Principles and Concepts

A policy pays actual cash value. Which method best represents actual cash value?

  1. Replacement cost minus depreciation Correct answer.
  2. Market value of similar new property
  3. Replacement cost plus depreciation
  4. Original purchase price with no adjustment

Explanation

Actual cash value is commonly calculated as replacement cost minus depreciation. It reflects the value of the property in its pre-loss condition rather than the cost of a new replacement.

Question 35General Insurance Principles and Concepts

An insurance binder provides:

  1. Temporary coverage until policy issue Correct answer.
  2. A discount on the initial premium
  3. A guarantee against future cancellation
  4. Permanent coverage after full underwriting

Explanation

A binder is temporary evidence of insurance that provides coverage while the insurer completes underwriting and issues the policy. It is subject to the terms and conditions of the eventual policy.

Question 36General Insurance Principles and Concepts

To recover under a negligence claim, a claimant generally must prove:

  1. Strict liability plus contractual privity
  2. A valid written contract between parties
  3. Proof of intent and personal malice
  4. Duty, breach, causation, and damages Correct answer.

Explanation

Negligence requires a duty of care owed by the defendant, a breach of that duty, causation of the harm, and actual damages. Intent is not required for negligence.

Question 37General Insurance Principles and Concepts

Under pure comparative negligence, an injured party's recovery is:

  1. Increased by the other party's fault
  2. Limited to documented medical expenses
  3. Reduced by the claimant's share of fault Correct answer.
  4. Barred by any contributory negligence

Explanation

Pure comparative negligence reduces the claimant's recovery by the claimant's percentage of fault but does not automatically bar recovery. The claimant may recover the remaining percentage from the defendant.

Question 38General Insurance Principles and Concepts

An insurer knowingly gives up a right it could enforce under the policy. This is known as:

  1. Subrogation
  2. Adhesion
  3. Contribution
  4. Waiver Correct answer.

Explanation

Waiver is the voluntary relinquishment of a known right. Estoppel may later prevent the insurer from asserting the right if the insured relied on the waiver to their detriment.

Question 39General Insurance Principles and Concepts

A statement in an insurance policy that is guaranteed to be true is called a:

  1. Representation
  2. Warranty Correct answer.
  3. Condition
  4. Exclusion

Explanation

A warranty is a policy statement that must be true as a condition of coverage. A representation is a statement made during application and need only be substantially true.

Question 40General Insurance Principles and Concepts

An insured's building is damaged when a windstorm blows down a wall, which crushes the roof. The proximate cause of the roof damage is:

  1. Negligence
  2. Windstorm Correct answer.
  3. Collapse
  4. Wear and tear

Explanation

Proximate cause is the dominant, initiating cause that sets the loss in motion without a break in the chain of events. Here, the windstorm initiated the sequence that damaged the roof.

Question 41General Insurance Principles and Concepts

After an insurer pays a total loss on covered property, the insurer's right to take possession of the damaged property is called:

  1. Contribution
  2. Appraisal
  3. Abandonment
  4. Salvage Correct answer.

Explanation

Salvage refers to the insurer's right to take possession of damaged property after paying a loss. The salvage may then be sold to reduce the insurer's net loss.

Question 42General Insurance Principles and Concepts

Two insurers cover the same loss on the same property under policies with similar terms. The principle that requires each to share the loss is:

  1. Indemnity
  2. Contribution Correct answer.
  3. Coinsurance
  4. Subrogation

Explanation

Contribution allows an insurer that paid more than its share to recover proportionate amounts from other insurers covering the same loss. It prevents the insured from collecting more than the actual loss.

Question 43General Insurance Principles and Concepts

A policy contains an other insurance clause. Its purpose is to:

  1. Increase the limit when multiple policies exist
  2. Eliminate the deductible on a covered loss
  3. Prevent double recovery from multiple policies Correct answer.
  4. Require the insured to buy all coverage from one insurer

Explanation

An other insurance clause coordinates coverage when more than one policy covers the same loss. It helps prevent the insured from recovering more than the actual loss.

Question 44General Insurance Principles and Concepts

Most property and casualty policies prohibit assignment of the policy without the insurer's consent because:

  1. Assignment automatically raises the premium
  2. The insurer wants to control its marketing
  3. The insurer evaluated that insured's risk Correct answer.
  4. Assignment is illegal in every state

Explanation

Insurance is personal in nature, and the insurer underwrote the specific insured's risk characteristics. A transfer to another party could expose the insurer to a risk it did not agree to insure.

Question 45General Insurance Principles and Concepts

Strict liability applies when a party is held responsible for harm:

  1. Only when the claimant proves intent
  2. Without fault for certain activities Correct answer.
  3. Only when the claimant proves negligence
  4. Only when a valid contract exists

Explanation

Strict liability imposes responsibility without proof of negligence or intent for certain activities, such as abnormally dangerous activities or defective products. The nature of the activity or product justifies the liability.

Question 46General Insurance Principles and Concepts

An insurer has incurred losses of $60, expenses of $30, and earned premiums of $100. Its combined ratio is:

  1. 30%
  2. 90% Correct answer.
  3. 130%
  4. 60%

Explanation

The combined ratio is the sum of the loss ratio and expense ratio. Here, incurred losses plus expenses equal $90 against $100 of earned premium, producing a combined ratio of 90%.

Question 47General Insurance Principles and Concepts

When a loss is caused by two perils, one covered and one excluded, and the loss cannot be separated, the concurrent causation doctrine may:

  1. Apply only to flood losses under NFIP
  2. Require the insured to select one peril
  3. Allow coverage when a covered peril concurs Correct answer.
  4. Deny coverage completely in every such case

Explanation

Concurrent causation addresses losses caused by a combination of covered and excluded perils. Depending on the jurisdiction and policy language, coverage may be allowed when a covered peril is a concurrent cause of the loss.

Question 48General Insurance Principles and Concepts

The reasonable expectations doctrine may allow coverage when:

  1. The premium is below the market rate
  2. A hidden exclusion defeats reasonable expectations Correct answer.
  3. The insurer earned an underwriting profit
  4. The insured neglected to read the policy

Explanation

The reasonable expectations doctrine may protect an insured when policy language or a hidden exclusion defeats the coverage the insured reasonably expected. It is often applied alongside ambiguity and adhesion-contract principles.

Question 49General Insurance Principles and Concepts

Which action by a principal creates ratification of an unauthorized act by an agent?

  1. The principal expressly denies the act
  2. The principal rejects the contract
  3. The principal ignores the act indefinitely
  4. The principal accepts benefits knowingly Correct answer.

Explanation

Ratification occurs when a principal, with knowledge of the facts, accepts the benefits of an unauthorized act. This treats the act as though it had been authorized from the beginning.

Question 50General Insurance Principles and Concepts

The primary purpose of state guaranty association laws is to:

  1. Guarantee insurer profits
  2. Set uniform national premium rates
  3. Protect policyholders of insolvent insurers Correct answer.
  4. Regulate agent licensing and appointments

Explanation

Guaranty associations provide protection to policyholders when an admitted insurer becomes insolvent. Benefits are subject to statutory limits and the terms of the guaranty association law.