Deck 6: Insurance Companies

Question 1

Which of the below is TRUE of whole life insurance?

A) The actuarial cost of pure insurance increases with age, but the premium charged on whole life insurance decreases.
B) Whole life insurance builds up a cash value that can be withdrawn and can also be borrowed against by the owner of the policy.
C) A major disadvantage of whole life insurance is that the inside buildup is subject to taxation.
D) The death benefit of the whole life insurance policy is always subject to estate tax.

Answer 1

B

Question 2

Insurance companies are really a composite of three companies. Which of the below is NOT one of these three components?

A) There is the component referred to as "home office" or actual insurance company that designs the insurance contract and provides the backing for the financial guarantees on the contract.
B) There is the investment component that invests the premiums collected in the investment portfolio.
C) There is the distribution component or the sales force.
D) There is the bank assurance component that assures that banks are paid off.

Answer 2

D

Question 3

The general account of an insurance company refers to ________.

A) the investment portfolio of the overall company.
B) the liability of the overall company.
C) the fixed annuities of the policy holders.
D) the investment portfolio of the policy holders.

Answer 3

A

Question 4

Which of the following statements about monoline insurance companies is TRUE?

A) Monoline insurers do not guarantee the timely repayment of the bond principal and interest when a bond insurer defaults on these payments.
B) Monoline insurance companies often require a lengthy claims and submission and adjustment process.
C) Monoline insurance was first devised in 2000.
D) Monoline insurers have been rated AAA and must have this high rating to be effective since they transfer their rating to the bond issue being insured.

Question 5

Until the past decade, the major type of health insurance available was ________ insurance.

A) medical
B) indemnity
C) reimbursement
D) well-being

Question 6

The risk insured by ________ is insurance against financial loss caused by damage, destruction, or loss to property as the result of an identifiable event that is sudden, unexpected, or unusual.

A) long-term health care companies
B) disability insurance companies
C) umbrella insurance companies
D) property and casualty insurance companies

Question 7

For ________, the risk insured against is the death of the "insured."

A) life insurance
B) health insurance
C) property insurance
D) automobile insurance

Question 8

Among the major types of products distributed to groups are ________.

A) term and whole life insurance, medical insurance, disability insurance, and investment products.
B) automobile insurance, medical insurance, disability insurance, and homeowners insurance.
C) term life insurance, medical insurance, business property insurance, and liability insurance.
D) whole life insurance, property insurance, medical insurance, and investment products insurance.

Question 9

Which of the below is TRUE of a mutual insurance company?

A) Mutual insurance companies have stock and external owners.
B) While stock insurance companies have two constituencies, their stockholders and their policyholders, mutual insurance companies only have one, since their policyholders and their owners are the same.
C) The owners, and not the policyholders, care primarily or even solely about the performance on their insurance policies, notably the company's ability to pay on the policy.
D) Traditionally the smallest insurers have been mutual, but recently there have been many demutualizations, that is, conversions by mutual companies to stock companies.

Question 10

Traditional cash value life insurance, usually called ________ insurance, has a guaranteed buildup of cash value based on the general account portfolio of the insurance company.

A) term life
B) cash value life
C) whole life
D) guaranteed life

Question 11

Which of the below statements is FALSE?

A) Structured settlements are fixed, guaranteed periodic payments over a long period of time, typically resulting from a settlement on a disability policy or other type of insurance policy.
B) The first major investment-oriented product developed by life insurance companies was the guaranteed investment contract (GIC).
C) The "insurance wrapper" on the mutual fund that makes it an annuity can be of various forms with the most common "wrapper"being the guarantee by the insurance company that the annuity policyholder will get back no less that the amount invested in the annuity.
D) Insurance companies sell investment products such as GICs (which are "mutual funds in an insurance wrapper") and annuities (which are essentially zero coupon bonds).

Question 12

Insurance companies are monitored by ________.

A) their accountants and auditors
B) their rating agencies
C) their government regulators
D) All of these

Question 13

Which of the below is TRUE of term life insurance?

A) Term insurance is pure life insurance.
B) If the insured retires at the age of 62 while the policy is intact, the beneficiary of the policy receives the benefit.
C) If the insured does not die within the period, the policy is valid and still has a cash value.
D) The policyholder can borrow against the policy.

Question 14

A ________ is similar in structure to any corporation or public company.

A) stock insurance company
B) mutual insurance company
C) partnership insurance company
D) All of these

Question 15

There are two very important differences between calculating profitability of bread manufacturers and insurance companies. Which of the below is ONE of these?

A) One difference is that the timing and magnitude of the payments are much more certain for an insurance company.
B) One difference is that there is a short lag between the receipts and payments for an insurance company.
C) One difference is that the timing and magnitude of the payments are much less certain for a bread company.
D) One difference is that there is a long lag between the receipts and payments for an insurance company, which introduces the importance of the investment portfolio.

Question 16

________ policies allow the policy owners to allocate their premium payments to and among separate investment accounts maintained by the insurance company, within limits, and also to be able to shift the policy cash value among the separate accounts.

A) Guaranteed life insurance
B) Universal life insurance
C) Flexible premium insurance
D) Variable life insurance insurance

Question 17

Which of the below statements is FALSE?

A) Companies that provide insurance in both life and long-term care insurance products are called multiline insurance companies.
B) Health insurance has predominately, but not completely, separated from life insurance and become a separate industry.
C) Life insurance companies have also increasingly offered investment-oriented products, both annuities, variable and fixed, and mutual funds.
D) Disability insurance is now sold primarily by pure disability companies but is also offered by some life insurance companies.

Question 18

A new form of insurance company, which is a hybrid between a pure mutual and a pure stock company, has been approved by some states and implemented by some insurance companies in these states since their introduction in 1996. This form is called a ________.

A) stock insurance company (SIC)
B) mutual insurance company (MIC)
C) mutual molding company (MMC)
D) mutual holding company (MHC)

Question 19

Mutual insurance companies can adopt a longer time frame in their investments, which will most likely make possible a higher long-term return.

A) Stock insurance companies can adopt a longer time frame in their investments, which will most likely make possible a higher long-term return.
B) Mutual insurance companies can adopt a shorter time frame in their investments, which will most likely make possible a higher long-term return.
C) Mutual insurance companies can adopt a longer time frame in their investments, which will most likely make possible a lower long-term return.
D) None of these

Question 20

Insurance companies provide insurance policies for which the policyholder pays insurance ________. Insurance companies promise to pay specified sums contingent on the occurrence of future events and thus are ________. The major part of the insurance company ________ is deciding which applications for insurance they should accept and which ones they should reject. Insurance companies have two sources of income: the initial underwriting income and the ________.

A) underwriting process; premiums; risk bearers; investment income
B) investment income; premiums; risk bearers; underwriting process
C) premiums; risk bearers; underwriting process; investment income
D) payments; risk bearers; investment process; insurance income

Question 21

The passage of the Financial Modernization Act of 1999 accelerated the convergence of ________.

A) insurance, investment, and pension products.
B) insurance, savings, and health care products.
C) health care, investment, and pension products.
D) insurance, health care, and pension products.

Question 22

In regards to the Gramm-Leach-Bliley Act (GLB), which of the below statements is FALSE?

A) The GLB removed the 50-year-old "anti-affiliation restrictions" among commercial banks, investment banks, and insurance companies.
B) The GLB is asserted to be a reason for the accelerated demutualization of insurance companies.
C) The GLB prevented a single organization from having complete control over the sources of corporate funding.
D) The GLB has facilitated and accelerated affiliations among these three types of institutions.

Question 23

In 1933, Congress passed the Glass-Steagall Act. The act separated ________.

A) deregulation of the financial system, internationalization of the insurance industry, and demutualization.
B) commercial banking, investment banking, and insurance.
C) deregulation of the financial system, commercial banking, and demutualization.
D) commercial banking, investment banking, and deregulation of the financial system.

Question 24

There are many differences among the various types of insurance policies. Which of the below is NOT one of these differences?

A) One difference is that many types of insurance will not have a payoff.
B) One difference is the statistical or actuarial accuracy of estimates of when the event insured against will occur and the amount of the payment.
C) One difference is the tax differences among different types of insurance policies and companies.
D) One difference is the expected time at which the average payment will be made by the insurance company (technically, the "duration" of the payments).

Question 25

The complication in determining the value of liabilities arises because the insurance company has committed to make payments at some time in the future, and those payments are recorded as contingent liabilities on its financial statement.

Question 26

Few insurance companies use independent brokers or producer groups to distribute their products rather than their own agents.

Question 27

Three decades ago, there were three distinct types of products for individuals: insurance products that included ________; savings/ investment products that included ________; retirement products included ________.

A) health insurance; stocks, bonds, and mutual funds; term life and whole life
B) health insurance; stocks, bonds, and mutual funds; Social Security and IRAs
C) term life and whole life; stocks, bonds, and mutual funds; Social Security and IRAs
D) term life and whole life; short-term government securities; Social Security and IRAs

Question 28

Traditionally, insurance companies have been stock, but they are increasingly remutualizing due to the perceived benefits of having a publicly traded stock.

Question 29

Liability insurance insures against the inability of employed persons to earn an income in either their own occupation or any occupation.

Question 30

There have been three major types of changes in the insurance industry in the past two decades. Which of the below is ONE of these?

A) internationalization of the insurance industry
B) deregulation of the accounting system
C) regulation of the accounting system
D) naturalization

Question 31

The first major investment-oriented product developed by life insurance companies was the guaranteed investment contract (GIC).

Question 32

Which of the below statements is FALSE?

A) 401(k) plans are plans provided by an employer whereby an employee may elect to contribute pretax dollars to a qualified tax-deferred retirement plan.
B) While a 401(k) is an employer-sponsored retirement program, the most common types of IRAs are personal tax-deferred retirement plans set up at the initiative of the employee/investor.
C) Traditional and Roth IRAs are vehicles for individuals to set up their own retirement plans outside their employment.
D) Rollover IRAs may be used when an individual is staying with an employer and wants to continue this retirement plan.

Question 33

In terms of ownership, there are two main forms of insurance companies: stock and mutual. A hybrid form, the mutual holding company, has been approved in some states.

Question 34

The performance of separate account products depends on the performance of the ________ portfolio chosen and is not affected by the performance of the overall insurance company's ________ portfolio.

A) separate account; general account
B) general account; separate account
C) separate account; liability account
D) mutual account; general account

Question 35

The performance of the insurance product depends almost solely on the performance of the portfolio selected without adjusting for the fees or expenses of the insuring company.

Question 36

The credit rating of an insurance company is important to a purchaser of insurance, especially for the types of insurance that may be paid well into the future, such as health insurance.

Question 37

Insurance companies often have different distribution systems for individual and group products because individual product distributors deal with individuals and small company owners; and group product distributors deal with human resource departments of corporations and other organizations.

Question 38

Cash value insurance products may be "guaranteed" or "variable"; with fixed or flexible premiums; and, with or without a survivorship feature.

Question 39

Flexible premium life insurance combines the features of variable life and universal life policies, that is, the choice of separate account investment products and flexible premiums.

Question 40

Long-term care insurance is a fairly new line of business and is offered by different types of companies, but mainly life insurance companies.

Question 41

Roth IRAs are qualified employer-sponsored IRAs wherein the contributions by the business are tax deductible to the business.

Question 42

Describe the investing framework for a mutual company and its potential return. Comment on the profitability of this framework and return as compared to a stock company.

Question 43

Explain survivorship insurance or second-to-die insurance.

Question 44

Explain how insurance companies are regulated and rated?

Question 45

The key distinction between life insurance and property and casualty insurance companies lies in the difficulty of projecting whether or not a policyholder will be paid off and how much the payment will be.

Question 46

Name some major differences in (a) the portfolios of life companies and P&C companies, and (b) investment strategy between public (or stock) and mutual insurance companies of the same type.

Question 47

Explain the concept of a multiline company.

Question 48

Insurance products can be sold to individuals or groups. Describe the groups for which insurance products are typically sold to and the products sold to these groups.

Question 49

What does the overall investment portfolio of an insurance company support? What do separate account products depend on?

Question 50

Name and briefly describe four major types of insurance.

Question 51

Whereas a life insurance company provides the guarantee of a minimum dividend on its term life policies, the policies' actual dividend may increase if the investment portfolio performs well.

Question 52

Describe and contrast the various types of IRAs.

Question 53

Under what condition can a participating policy pay a higher dividend than the guaranteed minimum?

Question 54

In 1933, Congress passed the Glass-Steagall Act. Trace the history of this act through the 20th century.

Question 55

Globalization has occurred in many industries, but not in the insurance industry.

Question 56

The third element of an insurance company is the distribution component or the sales force. There are different types of distribution forces. Describe two of these forces.

Question 57

Contrast the fundamental difference between an insurance company and a bread manufacturer.