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RI Life & Health practice questions

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Question 1Insurance Regulation (state and federal)

Under the McCarran-Ferguson Act, which entity is primarily responsible for regulating the business of insurance in Rhode Island?

  1. The Federal Trade Commission
  2. The state insurance department Correct answer.
  3. The U.S. Department of the Treasury
  4. The Securities and Exchange Commission

Explanation

The McCarran-Ferguson Act (1945) reversed the earlier reading of the Commerce Clause and left regulation of the business of insurance to the states, allowing federal law to apply only where it specifically targets insurance. In Rhode Island that authority rests with the Insurance Division of the Department of Business Regulation, headed by the Insurance Commissioner. Federal agencies have limited roles, such as securities regulation of variable products.

Question 2Insurance Regulation (state and federal)

Which statement best describes the licensing requirement for a person who wants to sell life insurance in Rhode Island?

  1. Solicit or sell insurance only after a producer license is issued Correct answer.
  2. Sell insurance after passing the exam, before licensing
  3. Sell only term life while an application is pending
  4. Sell insurance while supervised by a licensed producer

Explanation

A person must hold a valid producer license for the line of authority being sold before soliciting, negotiating, or selling insurance. Working under supervision, passing the exam, or having an application pending does not create authority to transact insurance. Acting without a license subjects the person to penalties and bars compensation for the activity.

Question 3Insurance Regulation (state and federal)

A producer offers to give a prospect half of the commission on a new life policy to persuade her to buy. This practice is best identified as:

  1. Misrepresentation
  2. Coercion
  3. Twisting
  4. Rebating Correct answer.

Explanation

Rebating is offering any inducement not stated in the policy, such as a share of commission or a gift, to persuade someone to buy insurance. It is prohibited because it gives some buyers an unfair advantage and can destabilize pricing. Coercion, twisting, and misrepresentation are separate unfair trade practices.

Question 4Insurance Regulation (state and federal)

What right does the free-look provision give the owner of a newly delivered life insurance policy?

  1. Exchange the policy for a larger face amount
  2. Return the policy within the free-look period for a full refund Correct answer.
  3. Return the policy only if a replacement occurred
  4. Cancel the policy at any time for a full refund

Explanation

The free-look provision lets the owner return a delivered policy within a specified period, generally at least 10 days after delivery, and receive a full premium refund. It exists so buyers can review the contract and change their minds. The right is time-limited and expires once the period runs.

Question 5Insurance Regulation (state and federal)

What is the purpose of the grace period in a life insurance policy?

  1. The time allowed to change the beneficiary
  2. A period after the due date to pay without a lapse Correct answer.
  3. The period during which the insurer may contest the policy
  4. The time allowed to reinstate a lapsed policy

Explanation

The grace period gives the policyowner a set number of days after the premium due date to pay while the coverage stays in force. If the insured dies during that window, the overdue premium is typically deducted from the benefit. Reinstatement, contestability, and beneficiary changes are governed by other provisions.

Question 6Insurance Regulation (state and federal)

How must a producer treat premium money collected from an applicant on behalf of an insurer?

  1. As funds held in a fiduciary capacity in a separate account Correct answer.
  2. As the producer's personal funds once collected
  3. As earned income when the receipt is issued
  4. As property of the insured until a claim is paid

Explanation

Premiums and returned premiums received by a producer are held in a fiduciary capacity and must be accounted for and remitted promptly to the insurer. Commingling those funds with the producer's own money or using them for personal expenses is prohibited and can lead to license action. The obligation exists whether or not a commission has been paid.

Question 7Insurance Regulation (state and federal)

Before an insurer may legally transact insurance business in Rhode Island, it must first obtain:

  1. An NAIC accreditation certificate for the state
  2. A federal charter from the U.S. Treasury
  3. A certificate of authority from the Commissioner Correct answer.
  4. A surety bond filed with the Secretary of State

Explanation

An insurer must be authorized by the Commissioner, which is evidenced by a certificate of authority, before it transacts insurance in the state. Carriers holding that authority are called admitted insurers and are subject to state solvency, form, and market conduct oversight. Unauthorized insurers may be used only through limited channels such as surplus lines.

Question 8Insurance Regulation (state and federal)

How does an insurer typically give a producer the authority to act on its behalf?

  1. Paying the producer's first commission check
  2. Listing the producer on the insurer's website
  3. Filing an appointment with the Insurance Commissioner Correct answer.
  4. Sending the producer a signed commission schedule

Explanation

Appointment is the insurer's formal authorization, filed with the Commissioner, that allows a licensed producer to transact business for that carrier. A license alone does not permit a producer to represent a particular insurer. When the relationship ends, the insurer must terminate the appointment and notify the state.

Question 9Insurance Regulation (state and federal)

Rhode Island producers must satisfy a continuing education requirement that is generally:

  1. 40 credit hours every four years, half in ethics
  2. 12 credit hours every two years, including 3 hours of ethics
  3. 24 credit hours every two years, including 3 hours of ethics Correct answer.
  4. 16 credit hours every two years, with no ethics requirement

Explanation

Rhode Island requires licensed producers to complete 24 continuing education credit hours during each two-year license term, with a portion devoted to ethics. Courses must be approved and reported to the state, and credits cannot be carried over indefinitely. Failure to complete CE can block renewal or result in license termination.

Question 10Insurance Regulation (state and federal)

A producer licensed and living in Massachusetts wants to sell life insurance in Rhode Island. What must the producer generally do?

  1. Maintain an office in Rhode Island
  2. Pass the Rhode Island licensing exam before applying
  3. Pay a higher fee than resident producers
  4. Hold a valid resident license and qualify under reciprocity Correct answer.

Explanation

Nonresident licensing is built on reciprocity: the producer must hold an active resident license in good standing in the home state, and the home state must extend the same courtesy. An examination is generally waived when the home-state requirements are met. A physical office in Rhode Island is not required.

Question 11Insurance Regulation (state and federal)

A Rhode Island producer's license is disciplined by another state for a sales practice violation. When must the producer report this to the Rhode Island Commissioner?

  1. Within 30 days of the final disposition Correct answer.
  2. Only at the next license renewal
  3. Within 5 business days of the action
  4. Only if the action involved an insurance violation

Explanation

Producers must report administrative actions taken against them by another state's insurance regulator, generally within 30 days of the final disposition. The duty covers a broad range of actions, not only those involving insurance law violations. Failing to report is itself a violation that can lead to license suspension or revocation.

Question 12Insurance Regulation (state and federal)

Which of the following is an unfair claim settlement practice?

  1. Failing to acknowledge claim-related communications promptly Correct answer.
  2. Requesting a police report before paying a theft claim
  3. Denying a claim because a stated policy exclusion applies
  4. Using an independent adjuster to inspect damage

Explanation

Unfair claim settlement practices include failing to acknowledge and act reasonably promptly on communications about a claim, and failing to conduct a reasonable investigation. Insurers may legitimately deny claims based on policy language or request supporting documentation. The violation lies in unreasonable delay or bad-faith handling, not in applying exclusions.

Question 13Insurance Regulation (state and federal)

A producer tells a client that her current whole life policy 'has no cash value and is about to be cancelled by the company' so she will surrender it and buy a new policy. This conduct is:

  1. Twisting Correct answer.
  2. Defamation
  3. Unfair discrimination
  4. Rebating

Explanation

Twisting is misrepresenting the terms of an existing policy in order to induce the policyowner to lapse, surrender, or replace it. The false statement about cash value and cancellation is the defining element. Rebating involves inducements, discrimination involves unequal treatment of similar risks, and defamation involves false statements about an insurer's financial condition.

Question 14Insurance Regulation (state and federal)

Under the Gramm-Leach-Bliley Act, what must an insurance producer generally do before sharing a customer's nonpublic personal financial information with a nonaffiliated third party?

  1. Report every customer's account balance to the state
  2. Obtain the Commissioner's approval of each notice
  3. Provide a privacy notice only after a claim is filed
  4. Provide a privacy notice and a chance to opt out Correct answer.

Explanation

Gramm-Leach-Bliley requires covered financial institutions, including insurers and producers, to give customers a clear privacy notice and an opportunity to opt out before disclosing nonpublic personal information to nonaffiliated third parties, subject to stated exceptions. The rule applies from the start of the customer relationship, not only at claim time. State regulators enforce these privacy requirements.

Question 15Insurance Regulation (state and federal)

An insurer declines a life application based in part on information in a consumer report. What does the Fair Credit Reporting Act require?

  1. No notice is required for life insurance underwriting
  2. Notify the Commissioner within 30 days of the report
  3. Notify the applicant and name the reporting agency Correct answer.
  4. Provide the applicant a copy of the full credit report

Explanation

The FCRA requires an adverse action notice telling the applicant that a consumer report was used and identifying the reporting agency so the applicant can contact it. The applicant also has rights to dispute inaccurate information. The insurer is not required to send the report itself or to notify the state of each declination.

Question 16Insurance Regulation (state and federal)

Under federal anti-money laundering rules, an insurer offering covered life insurance products must maintain:

  1. An annual audit performed by the state insurance department
  2. A one-time background check of each new policyholder
  3. A written program with training and independent testing Correct answer.
  4. A surety bond filed with the U.S. Treasury

Explanation

The USA PATRIOT Act and related Treasury regulations require insurers with covered products to adopt a written anti-money laundering program with a designated compliance officer, ongoing employee training, and independent testing of the program. The program must also include policies for detecting and reporting suspicious activity. A bond or a state audit does not satisfy the requirement.

Question 17Insurance Regulation (state and federal)

What is the function of the state life and health insurance guaranty association?

  1. It reviews policy forms before they are sold
  2. It sets maximum premium rates for life insurance
  3. It decides appeals of denied claims for consumers
  4. It protects policyholders of an insolvent insurer Correct answer.

Explanation

The guaranty association provides statutory protection for covered policyholders and beneficiaries when a member insurer is declared insolvent and liquidated. It is funded by assessments on member insurers and operates within statutory coverage limits. It is not a regulator and does not resolve ordinary claim disputes.

Question 18Insurance Regulation (state and federal)

An unlicensed office assistant refers a client to a producer and the producer pays the assistant a portion of the commission. This arrangement is:

  1. Permissible only for renewal commissions
  2. Permissible if the insurer agrees in writing
  3. Permissible because referral fees are not commissions
  4. Prohibited because commissions may not be shared with an unlicensed person Correct answer.

Explanation

Sharing commissions with an unlicensed person is prohibited as a form of illegal rebating and unlicensed activity, with narrow statutory exceptions such as payments to other licensed producers. A referral fee tied to the sale is treated as commission sharing. Written insurer consent cannot authorize what the statute forbids.

Question 19Insurance Regulation (state and federal)

A producer is about to submit a life application that will replace the applicant's existing coverage. What is required?

  1. Give the applicant a notice of replacement and a comparison Correct answer.
  2. Obtain written consent from the existing insurer
  3. Wait 60 days before delivering the new policy
  4. Reduce the new policy's face amount to the old amount

Explanation

Replacement regulations require the producer to ask about existing coverage and, when a replacement is involved, to give the applicant a replacement notice and a comparison of the policies so the decision is informed. The notice is also provided to the replacing insurer. The existing insurer's consent and a waiting period are not required.

Question 20Insurance Regulation (state and federal)

Which statement about controlled business is correct?

  1. A license cannot be used mainly to insure the licensee's own interests Correct answer.
  2. Controlled business is permitted if the insurer approves it in writing
  3. Controlled business may exceed 50 percent of annual commissions
  4. Controlled business rules apply only to nonresident producers

Explanation

A producer license is intended for serving the public, so a license obtained or used primarily to write coverage on the licensee's own life, property, or the interests of family members or employers is restricted as controlled business. Regulators may deny or revoke a license used that way. The limits apply to all producers regardless of residency.

Question 21Insurance Regulation (state and federal)

A producer wants to place a life policy with a nonadmitted insurer through the surplus lines market. What must the producer generally establish first?

  1. The producer must place the risk with a domestic insurer first
  2. A diligent search must show admitted insurers declined the risk Correct answer.
  3. The producer must charge a rate at least 10% above the admitted market
  4. The producer must obtain the Commissioner's prior written approval

Explanation

Surplus lines placement requires a diligent search documenting that the coverage is unavailable from authorized insurers in the admitted market. Only then may the risk be placed with an eligible unauthorized insurer, and the producer must disclose the insurer's nonadmitted status to the applicant. Surplus lines rates are not required to exceed admitted rates.

Question 22Insurance Regulation (state and federal)

How are variable life insurance and variable annuity products regulated?

  1. Variable products are exempt from state insurance licensing
  2. Variable products are regulated only by the SEC as securities
  3. Variable products are regulated only by the state insurance department
  4. Variable products are regulated as both insurance and securities Correct answer.

Explanation

Variable products combine insurance features with investment risk borne by the contract owner, so they are treated as securities as well as insurance. The insurer registers the product and the producer must hold the appropriate securities registration in addition to a state insurance license. State insurance departments still regulate the insurance aspects, including form and sales practice rules.

Question 23Insurance Regulation (state and federal)

The Insurance Commissioner finds that a producer has engaged in a pattern of misrepresentation. What action may the Commissioner take?

  1. Refer all enforcement matters to the NAIC for action
  2. Issue a cease and desist order after notice and a hearing Correct answer.
  3. Revoke a federal securities registration
  4. Order an insurer to pay attorney fees without a hearing

Explanation

The Commissioner has broad administrative enforcement authority, including holding hearings, issuing cease and desist orders, suspending or revoking licenses, and imposing monetary penalties. Due process requires notice and an opportunity to be heard, and the licensee may appeal the final order to the courts. The Commissioner does not control federal securities registrations.

Question 24Insurance Regulation (state and federal)

Who bears the cost when the Insurance Commissioner conducts a market conduct examination of an authorized insurer?

  1. The insurer being examined pays the cost of the examination Correct answer.
  2. The Commissioner pays from the state's general fund
  3. The producer who sold the policies pays the cost
  4. The cost is split evenly between the state and the insurer

Explanation

The Commissioner may examine the books, records, and practices of an authorized insurer as often as reasonably necessary, and the examined insurer is responsible for the expense of the examination. This allows the state to perform ongoing solvency and market conduct oversight without taxing the general public. The cost is not allocated to individual producers or split with the state.

Question 25General Insurance Concepts

Which of the following types of risk is generally considered insurable by a private insurer?

  1. Market risk affecting the value of an investment portfolio
  2. The risk of loss from a business venture undertaken to earn a profit
  3. Speculative risk, such as buying shares of a new company
  4. Pure risk, which involves only the chance of loss or no loss Correct answer.

Explanation

Private insurance is designed for pure risk, where the only possible outcomes are loss or no loss. Speculative risks carry a chance of gain as well as loss, so they are not privately insurable.

Question 26General Insurance Concepts

Insurable interest in a life insurance policy must exist at which point in time?

  1. At the time the policy is applied for and issued Correct answer.
  2. At the moment of the insured's death
  3. At the time a claim is submitted to the insurer
  4. At any point during the policy period, provided a claim is later filed

Explanation

In life insurance, insurable interest must exist when the contract is formed, because the policy is not a contract of indemnity. Its presence at the time of death is not required.

Question 27General Insurance Concepts

Which situation best illustrates a moral hazard?

  1. An applicant whose family medical history suggests a higher chance of illness
  2. An insured who becomes careless about maintenance because any loss would be covered
  3. An insured who misstates the value of damaged property, hoping the insurer will pay more than the actual loss Correct answer.
  4. An insured who installs a sprinkler system to limit fire damage

Explanation

Moral hazard involves dishonesty or a deliberate intent to create or exaggerate a loss. Careless indifference to loss is morale hazard, while physical conditions are physical hazards.

Question 28General Insurance Concepts

A contract in which one party drafts all the terms and the other party must accept or reject them as written is known as which type of contract?

  1. A conditional contract
  2. A unilateral contract
  3. A contract of adhesion Correct answer.
  4. An aleatory contract

Explanation

A contract of adhesion is prepared by one party, usually the insurer, and offered on a take-it-or-leave-it basis. Because of this inequality, ambiguities in the wording are construed against the party that drafted it.

Question 29General Insurance Concepts

The principle of indemnity means that an insured who suffers a covered loss is

  1. paid only after every other available source of recovery has been exhausted
  2. permitted to profit when the loss is unusually severe
  3. restored, within policy limits, to the financial position held before the loss Correct answer.
  4. entitled to collect the full policy limit regardless of the size of the loss

Explanation

Indemnity restores the insured to approximately the same financial position occupied before the loss, without profit or penalty. It is the reason property claims are limited to actual loss and why subrogation exists.

Question 30General Insurance Concepts

Which characteristic of an insurance contract describes the fact that the amounts exchanged by the parties may be unequal?

  1. Conditional
  2. Personal
  3. Aleatory Correct answer.
  4. Unilateral

Explanation

An aleatory contract depends on chance, so the value exchanged is not necessarily equal; a small premium may produce a large claim payment. The other characteristics describe promissory structure, conditions, and the person insured.

Question 31General Insurance Concepts

An insurer that is owned by its policyholders and operated for their benefit is called a

  1. reinsurer
  2. mutual insurer Correct answer.
  3. stock insurer
  4. fraternal benefit society

Explanation

A mutual insurer has no shareholders and is owned by its policyholders, who may receive dividends from favorable results. A stock insurer, by contrast, is owned by shareholders and operated to produce a return for them.

Question 32General Insurance Concepts

An applicant for life insurance inadvertently understates his age on the application. Under general insurance law, the insurer may typically rescind the policy only if the misstatement is

  1. material to the insurer's decision to accept the risk Correct answer.
  2. recorded on the written application form
  3. repeated on a later application for insurance
  4. known to the producer who took the application

Explanation

A representation need only be substantially true; an incorrect statement gives the insurer grounds to avoid the contract only when it is material to the underwriting decision. Materiality is judged by whether the truth would have changed the insurer's decision.

Question 33General Insurance Concepts

In an insurance policy, a warranty is best described as

  1. a promise by the insurer to renew the policy
  2. a statement guaranteed to be true, a breach of which may allow the insurer to void the contract Correct answer.
  3. a statement believed true to the best of the applicant's knowledge
  4. an oral statement made after the policy has been issued

Explanation

A warranty is a statement or condition that the insured guarantees to be exactly true, and a breach may permit the insurer to avoid the contract. A representation, in contrast, need only be substantially true and material.

Question 34General Insurance Concepts

What is the primary purpose of an insurer's right of subrogation?

  1. To prevent the insured from collecting twice while shifting the cost to the party at fault Correct answer.
  2. To allow the insurer to cancel coverage after a large loss
  3. To transfer the insured's policy to another person without consent
  4. To increase the insured's total recovery by adding a second payment

Explanation

Subrogation puts the insurer in the insured's shoes to pursue the negligent third party, after the insured has been paid. This enforces indemnity by preventing double recovery and places the ultimate cost on the responsible party.

Question 35General Insurance Concepts

An applicant deliberately says nothing about a serious prior medical condition that the insurer's questions clearly would have uncovered. This intentional failure to disclose a material fact is known as

  1. subrogation
  2. estoppel
  3. concealment Correct answer.
  4. waiver

Explanation

Concealment is the intentional withholding of a material fact that the applicant has a duty to disclose. It gives the insurer grounds to rescind the policy when the undisclosed fact would have affected the underwriting decision.

Question 36General Insurance Concepts

A producer learns at application that the proposed insured has a chronic condition, and the insurer nonetheless issues the policy and collects premiums for two years. When a claim for that condition is filed, the insurer is most likely barred from denying coverage because of

  1. waiver and estoppel Correct answer.
  2. reinsurance
  3. concealment
  4. subrogation

Explanation

By issuing the policy with knowledge of the condition, the insurer waives its right to deny coverage on that ground. Estoppel then prevents the insurer from asserting that right because the insured relied on the coverage and paid premiums.

Question 37General Insurance Concepts

The parol evidence rule generally provides that

  1. the insured's verbal statements always control over the written policy language
  2. oral statements made before signing may be used to add new terms to a complete written policy
  3. a complete written contract may not be modified by earlier oral agreements Correct answer.
  4. a policyholder may testify orally to contradict the policy's stated limits

Explanation

The parol evidence rule holds that a fully integrated written agreement supersedes prior or contemporaneous oral understandings. It protects the integrity of the written policy as the final expression of the parties' agreement.

Question 38General Insurance Concepts

A building valued at $500,000 is insured under a property policy with an 80% coinsurance clause and a $300,000 limit. A covered fire loss of $100,000 occurs and no deductible applies. How much will the insurer pay?

  1. $80,000
  2. $75,000 Correct answer.
  3. $100,000
  4. $60,000

Explanation

The required amount of insurance is 80% of $500,000, or $400,000. Because $300,000 was carried, the payment is ($300,000 ÷ $400,000) × $100,000 = $75,000.

Question 39General Insurance Concepts

The principle stating that as an insurer covers more similar exposure units, actual losses will more closely match expected losses is called

  1. adverse selection
  2. the law of large numbers Correct answer.
  3. reinsurance
  4. the principle of indemnity

Explanation

The law of large numbers holds that prediction improves as the number of similar, independent exposure units increases. This is why insurers seek a large volume of homogeneous risks when setting rates.

Question 40General Insurance Concepts

The tendency of people who face the greatest likelihood of loss to be the most eager to purchase insurance is known as

  1. adverse selection Correct answer.
  2. morale hazard
  3. the law of large numbers
  4. risk retention

Explanation

Adverse selection occurs when poorer-than-average risks buy coverage in disproportionate numbers, which can distort rates. Insurers counter it through underwriting, exclusions, and waiting periods.

Question 41General Insurance Concepts

When an insurer transfers a portion of its risk to another insurer, the transferring insurer is called the

  1. reciprocal insurer
  2. reinsurer
  3. third-party administrator
  4. ceding insurer Correct answer.

Explanation

The insurer that transfers risk is the ceding insurer, and the insurer accepting the risk is the reinsurer. Reinsurance helps a primary insurer spread large or unusual exposures and stabilize results.

Question 42General Insurance Concepts

The main purpose of a deductible in a property insurance policy is to

  1. increase the premium charged to high-risk insureds
  2. eliminate small claims and thereby reduce the premium Correct answer.
  3. guarantee the insured a profit on small losses
  4. shift all risk of loss to the insured

Explanation

A deductible makes the insured responsible for a stated initial amount of each loss, which removes the expense of handling small claims. The resulting savings in administrative cost are passed along as a lower premium.

Question 43General Insurance Concepts

A business decides to buy a commercial property policy instead of setting aside its own funds for fire losses. This decision is an example of

  1. risk avoidance
  2. risk retention
  3. risk reduction
  4. risk transfer Correct answer.

Explanation

Purchasing insurance transfers the financial consequences of loss to an insurer in exchange for a premium. Retention means keeping the risk, avoidance means eliminating the exposure, and reduction means lessening its severity or frequency.

Question 44General Insurance Concepts

Two property policies cover the same building on the same basis: Policy A has a $100,000 limit and Policy B has a $200,000 limit. A covered loss of $90,000 occurs and both policies pay on a pro rata basis. How much will Policy A pay?

  1. $45,000
  2. $90,000
  3. $30,000 Correct answer.
  4. $60,000

Explanation

Under pro rata liability, each policy pays the proportion of the loss that its limit bears to the total insurance. Policy A's share is $100,000 ÷ $300,000 = one-third, or $30,000.

Question 45General Insurance Concepts

Which statement correctly distinguishes waiver from estoppel?

  1. Waiver is a rule of policy interpretation, while estoppel is a form of reinsurance
  2. Waiver is the voluntary surrender of a known right, while estoppel bars a party from asserting a right once another has relied on its conduct Correct answer.
  3. Waiver applies only after a loss, while estoppel applies only before a policy is issued
  4. Waiver requires approval by the state insurance department, while estoppel is decided solely by the insurer

Explanation

Waiver is the insurer's intentional giving up of a known right, such as denying a claim on a known defense. Estoppel is the legal consequence that follows when another party relies on that conduct, preventing the insurer from later asserting the right.

Question 46General Insurance Concepts

Which statement about the right of subrogation is correct?

  1. It eliminates the insured's own right to sue the negligent party
  2. It applies with equal force to life insurance and health insurance claims
  3. It generally does not apply to life insurance, which pays a stated sum rather than reimbursing a loss Correct answer.
  4. It allows an insurer to recover a paid loss from the insured's relatives

Explanation

Subrogation is a feature of indemnity contracts, where payment reimburses an actual loss. Life insurance is a valued contract that pays a predetermined amount, so the insurer generally has no subrogation right against the party who caused the death.

Question 47General Insurance Concepts

In a major medical expense policy, the term coinsurance refers to

  1. a penalty imposed when the insured purchases too little coverage
  2. the portion of the premium returned to the insured at the end of the year
  3. the percentage of covered expenses the insured pays after the deductible is satisfied Correct answer.
  4. a requirement that the insured carry coverage equal to a percentage of the property's value

Explanation

In health insurance, coinsurance is the share of covered expenses paid by the insured, typically stated as a percentage such as 20%, once the deductible is met. In property insurance the same word describes an insurance-to-value requirement.

Question 48General Insurance Concepts

Which statement accurately describes how insurers pool risk?

  1. Pooling guarantees that no individual insured will ever suffer a loss
  2. Pooling spreads the losses of the few across the premiums paid by the many Correct answer.
  3. Pooling requires each insured to pay a premium exactly equal to that person's expected loss
  4. Pooling removes the need for underwriting and rating classifications

Explanation

Pooling combines a large number of similar exposure units so that the losses of the relatively few are shared by the premiums of the whole group. This substitution of a certain small cost, the premium, for an uncertain large loss is the core economic function of insurance.

Question 49Life Insurance Basics

For a life insurance policy to be valid, insurable interest must exist at which point?

  1. when the insured reaches age 65
  2. on each policy anniversary
  3. when a claim is submitted
  4. when the policy is applied for Correct answer.

Explanation

For life insurance, insurable interest must exist at the time the application is made (policy inception). Once the policy is in force, it stays valid even if the relationship creating the interest later ends, such as a divorce or a job change.

Question 50Life Insurance Basics

A life insurance contract is described as aleatory because

  1. the insurer can change the terms without the owner's consent
  2. the premiums paid and the benefit paid are unequal Correct answer.
  3. only the insurer makes an enforceable promise
  4. both parties exchange promises of equal dollar value

Explanation

An aleatory contract is one in which the values exchanged are unequal, so a small premium may purchase a large death benefit and no benefit may ever be paid. The parties' performances are not equal in dollar amount.