Deck 17: Insurance Companies and Pension Funds

Question 1

The assets of life insurance companies are not as marketable as those of casualty/property insurance companies because life companies have greater certainty of claims.

Answer 1

True

Question 2

Universal life became popular in the inflationary, high interest periods of the 1980s because interest rates on universal life policies vary with market rates.

Answer 2

True

Question 3

The sale of term life insurance was an important factor explaining the growth and large size of life insurance companies.

Answer 3

False

Question 4

Investment income tends to offset premium income, thus reducing premiums for the insured.

Question 5

Pure risk and objective risk are both assumed by life insurance companies.

Question 6

Term life policies provide maximum life insurance dollar protection for consumers for a given amount of premium.

Question 7

Objective risk is the deviation of actual from expected.

Question 8

An annuity provides both insurance against premature death and savings features.

Question 9

Property/liability insurance companies pay little federal income tax, thus explaining their large portfolio of state and municipal, tax-exempt securities.

Question 10

Health insurance includes protection against the risk of large, unexpected medical expenses and/or the loss of income from illness or disability.

Question 11

Life insurance companies are the oldest financial intermediary in the United States.

Question 12

A deductible is a form of loss-sharing.

Question 13

The nature of the assets of life insurance companies influence the type of liabilities they may issue.

Question 14

Life insurance and pension reserves are liquid asset balances held by life insurance companies to pay losses and pension benefits.

Question 15

Social Security is a fully funded pension program.

Question 16

Pension funds, which count on current contributions to make payments to retirees, are under funded.

Question 17

Though stock companies dominated the number of life insurance companies, mutuals are dominant in terms of assets and insurance in force.

Question 18

The liability of Lloyds of London members on assumed risks are unlimited.

Question 19

Insurance premiums are directly related to expected dollar losses.

Question 20

Life insurance companies provide protection against death.

Question 21

If you are terminated before you are fully vested in an employer-sponsored plan, you may not get to keep previous contributions to your pension made by your employer.

Question 22

Which statement is not true about life insurance companies?

A) they have relatively predictable inflows and outflows.
B) their liabilities are long-term in nature.
C) they invest heavily in short-term highly marketable securities.
D) they sell contracts that offer financial protection against premature death and against living too long.

Question 23

The law of large numbers practically guarantees that an insurer will be profitable if it has enough policy holders.

Question 24

"Superannuation" is an unwelcome development to the underwriter of a life annuty.

Question 25

The insured need to pay premium for insurance to protect their financial loss. Therefore, insurance industry increases cost of bearing risk in society.

Question 26

Of the following, which type of life insurance policy would probably accumulate the least amount of funds for investment in capital market securities?

A) term insurance
B) whole life insurance
C) annuity
D) universal life insurance

Question 27

Municipal bonds are a logical investment for "qualified" pension plans.

Question 28

Any risk is insurable for a high enough premium.

Question 29

Which one of the following statements best describes the insurance industry?

A) major insurance company liabilities are called reserves.
B) most life insurance companies are stock companies.
C) mutual insurance accounts for about half of all the life insurance in force.
D) all of the above are true.

Question 30

Which one of the following types of casualty insurance policy would a bank purchase if it wants to protect itself against economic loss from bank tellers who might embezzle cash?

A) liability insurance
B) fidelity bond
C) surety bond
D) marine insurance

Question 31

All insurers must deal with the problem of adverse selection.

Question 32

Property/casualty insurers have a tax incentive to hold preferred stock.

Question 33

"Fully contributory plans" are funded with employee contributions only.

Question 34

Which statement is not true about casualty insurance companies?

A) they are subject to federal income tax.
B) they invest heavily in municipal bonds.
C) they have more predictable cash flows related to claims than life insurance companies.
D) they invest in corporate stock.

Question 35

Policy reserves are the major asset of the typical life insurance companies.

Question 36

Insurance is almost entirely regulated by state, not federal law.

Question 37

Pure risk is very similar to speculative or investment risk that is related to the variability of returns. Therefore, the insured can possibly have a gain or a loss from the insurance policies.

Question 38

Business interruption is an example of an indirect loss.

Question 39

Since insurance is an application of theorem of large number, the risk to be insured must be homogeneous, similar, fortuitous, and occurring by chance.

Question 40

Liability risk is much easier to gauge than property risk.

Question 41

A person who saves money for the future by buying a whole life policy

A) probably earns a rate of return on cash values greater than in an equivalent universal life policy.
B) pays the same premium for the same amount of term coverage.
C) is able to accumulate tax-free interest earnings on cash values.
D) buys more insurance for a given premium compared to term.

Question 42

Traditionally, pension funds were:

A) government-insured
B) defined contribution
C) fully contributory
D) defined benefit

Question 43

The major investment area of life insurance companies is , while casualty insurance companies hold more of their investments in .

A) corporate stock; corporate stock
B) corporate stock; government securities
C) corporate bonds; municipal bonds
D) mortgages, municipal bonds

Question 44

In the last few years, which noninsurance financial institution has been able to offer insurance services to the concern of the insurance industry?

A) finance companies
B) credit unions
C) investment banks
D) commercial banks

Question 45

Which one of the following economic conditions is best suited for the sale of whole life contracts?

A) moderate inflation (5%) and high economic growth (6%)
B) high inflation (10%) and cyclical instability
C) low inflation (3%) with stable economic growth (4%)
D) none of the above.

Question 46

A pension plan feature that provides employees with the right to future retirement income, even if the employee terminates employment, is called:

A) unvested.
B) vested.
C) under funded.
D) funded.

Question 47

Which one of the following combinations of pension terms offers the greatest protection for the future retiree?

A) under funded, vested, uninsured
B) insured, fully funded, vested
C) unfunded, private, company managed
D) trustee managed, under funded, and vested

Question 48

Pension funds whose contributions are NOT large enough to actually cover the benefits to be paid out when all employees retires are termed:

A) unvested.
B) vested.
C) under funded.
D) funded.

Question 49

Keogh plans and IRAs are

A) government sponsored retirement programs.
B) noninsured retirement plans.
C) individual retirement programs.
D) pay-as-you-go programs.

Question 50

The major areas of business for a life insurance company are

A) insuring against death and pension fund management.
B) providing life insurance and wealth accumulation for retirement such as a term policy provides.
C) providing life insurance and wealth accumulation for retirement such as a whole life or universal life policy provides.
D) reinsurance

Question 51

A life insurance company needs more liquidity when selling a high proportion of:

A) whole life policies.
B) annuities.
C) thirty-year term policies.
D) one-year renewable term policies.

Question 52

All of the following are methods used by insurance companies to reduce objective risk except:

A) safety education programs.
B) selective underwriting of insureds.
C) investment in investment grade securities only.
D) use of deductibles.

Question 53

A "stock" life insurance company is owned by

A) its policyholders.
B) its shareholders.
C) its managers.
D) both a and b above.

Question 54

Insurance companies manage all but which financial risk?

A) default risk
B) interest rate risk
C) pure risk
D) liquidity risk

Question 55

Which contract provision below is NOT likely to be associated with a term life policy?

A) loan provision
B) participating
C) convertible
D) renewable

Question 56

Life insurance companies tend to be larger than casualty insurance companies because of

A) their special income tax exclusions.
B) the characteristics of their term policies.
C) the inability to accumulate policyholders.
D) the long-term, accumulative nature of whole life policies.

Question 57

Life insurance protects the insured from

A) premature death.
B) the economic consequences of death.
C) beneficiaries.
D) pure risks faced by the insured.

Question 58

Which one of the following statements about universal life insurance is not true?

A) Cash contributions, net of term premiums, are invested at market rates.
B) The policyholder may vary the level of insurance coverage.
C) The policy does not qualify for the special federal tax exclusion of income built up inside the contract.
D) The amount of policyholder contribution each year is the difference between the contributions and the price of a one-year term policy.

Question 59

The National Association of Insurance Commissioners is an organization of _______ regulators interested in the ________ of insurance regulation.

A) state; consistency
B) state; federalization
C) federal; effectiveness
D) state and federal; efficiency

Question 60

________ risk is the chance of loss, a one-tailed risk, while _________ risk, a two-tailed risk offers returns above and below an average?

A) speculative; pure
B) objective; pure
C) default risk; pure
D) pure; speculative

Question 61

A convertibility option added to a term policy gives the insured the option of

A) converting the term insurance to common stock of the insurance company.
B) converting the term policy into cash.
C) converting the term policy to a whole life, level premium policy.
D) canceling the policy at any time.

Question 62

Life insurance companies have a portion of their assets invested in common stocks most likely because

A) there's no other way to finance whole life insurance policies.
B) the company probably offers variable-life insurance policies.
C) it reduces the risk of the corporate bond portfolio.
D) common stockholders desire a small amount of their return in life insurance.

Question 63

Social security is a _________ pension plan.

A) fully funded
B) private
C) pay-as-you go
D) noncontributory

Question 64

All but one of the following was an important result of the ERISA Act of 1974:

A) strengthen the fiduciary responsibilities of pension fund trustees.
B) increased the number of pension funds at small businesses
C) established reporting and disclosure requirements
D) provided insurance for failed pension funds.

Question 65

All but one of the following are important areas of insurance regulation:

A) licensing of insurance companies and agents.
B) review of the financial condition of insurance companies.
C) annual safety inspection of insurance offices in each state.
D) the orderly liquidation of insolvent insurers.

Question 66

While life insurance provides economic protection in case of premature death, pensions provide coverage against

A) superannuation
B) working too long.
C) disability.
D) unemployment.

Question 67

Discuss a way in which contractual financial institutions contribute to society.

Question 68

What is a "Lloyd's association"?

Question 69

The difference between an insured versus a noninsured pension plan is

A) the insured plan is insured under the Pension Benefit Guaranty Corporation, while the noninsured is not.
B) the insured plan is a government pension fund; the noninsured is in the private sector.
C) the insured plan obligations are issued by a life insurance company with promises to pay specific amounts in the future, while the noninsured are managed by a trustee with no guarantee of amounts distributed in the future.
D) the employer of the insured guarantees payments, but not so in the case of the uninsured.

Question 70

Insurance regulation is concerned with all but one of the following:

A) capital adequacy of insurance companies
B) making sure that the perils covered under insurance do not occur too frequently
C) protecting and informing consumers
D) keeping insurance available and affordable

Question 71

John will retire seven years later and would like to have a 10-payment annual annuity that will have its first payment at the moment when he retires. If the payment amount is $50,000 a year and the interest rate is 12%, what is the fair value should be paid today for this annuity?

A) $282,511
B) $143,129
C) $141,667
D) $316,412
E) $160,304
ESSAY QUESTIONS

Question 72

A noninsured pension plan will

A) not be covered under the Pension Benefit Guaranty Corporation.
B) always be underfunded.
C) be managed by an appointed trustee to invest funds contributed for the benefit of future pensioners.
D) will be covered by term insurance, not whole life.

Question 73

Private pension plans are

A) available only to people who work.
B) illegal.
C) pensions provided by and to non-governmental, private sector businesses, organizations, and their workers.
D) a personal financial plan provided for a fee by a financial planner.

Question 74

Insurance companies have to deal with the concept of adverse selection, which is

A) the practice of low-risk insured seeking low premiums.
B) high-risk persons are more likely to purchase insurance.
C) insureds are likely to increase their risky behavior.
D) Insurance salespersons try to sell their most profitable policies.

Question 75

To protect against moral hazard, disability income policies

A) do not cover disabilities from moral problems.
B) do not provide a high percentage of pre-disability income and require a waiting period.
C) usually pay more than 100 per cent of an insured's income.
D) usually require a five-year waiting period before benefits begin.

Question 76

Social security, formally called OASDHI, stands for

A) Office of Aging Survivors, Disabled and Health Insurance
B) Office of Active Standards for the Disabled, Healthy and Infirmed
C) Old Age, Survivors, Disability, and Health Insurance System
D) Old Age Standards for Disability Health Insurance

Question 77

Purchasing insurance may alter the behavior of the insured and is known as

A) default risk and adverse selection.
B) pure risk and speculative risk
C) moral hazard and adverse selection.
D) moral hazard and speculative risk

Question 78

While life insurance protects the insured against the economic consequences of premature death, annuities protects against

A) the economic consequences of living too long.
B) varying interest rates.
C) aggressive beneficiaries.
D) default by life insurance companies.

Question 79

A level-premium, whole life policy is a combination of

A) an annuity and a pension.
B) universal life and an annuity.
C) decreasing term insurance and building a future sum of savings.
D) life and casualty insurance on the insured life and property.

Question 80

The largest amount of pension assets are associated with

A) trusteed, private pension funds.
B) social security.
C) government-administered pension funds.
D) insured pension plans with life insurance companies.