WFG Certification Exam - Questions and Answers (Complete Solutions) An insurer enters into a contract with a third party to insure itself against losses from insurance policies it issues. What is this agreement called?
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WFG Certification Exam - Questions and Answers (Complete Solutions) An insurer enters into a contract with a third party to insure itself against losses from insurance policies it issues. What is this agreement called? Reinsurance An insurer owned by its policyholders is called a Mutual insurer AAA insurance company has transferred a portion of its loss exposure to BBB insurance company. In this reinsurance transaction, what is AAA insurance called Primary insurers Which of the following contracts is defined as "one that restores an injured party to the condition that was present before the loss? Indemnity When handling premiums for an insured, an agent is acting in which capacity? Fiduciary The importance of a representation is demonstrated in what rule? Materiality of concealment Which principal is accurately described with the statement "Insureds are entitled to recover an amount NOT greater than the amount of their loss"? Indemnity A unilateral contract is one in which Only one party makes (the insurer) makes any kind of legally enforceable promise Which of the following is NOT required in the content of a policy? Probability of loss Which statement is correct when describing a contract of adhesion? Contract may be accepted or rejected by the insured Express power given to an agent in an agency agreement is The authority to represent the insurer What does the term indemnity refer to? Make whole Which of the following statements correctly describes a contract of indemnity? Restore to the position the party was in before the loss occurred Which of the following statements about aleatory contracts is NOT true? The insured and the insurer contribute equally to the contract If a material warranty violation on the part of the insured is found, what recourse does an insurer have? Rescind the policy Restoring an insured to the same condition as before a loss is an example of the principal of Indemnity Which of the following is NOT a requirement of a contract? Equal consideration is required between the involved parties Which course of action is the insurer entitled to when deliberate concealment is committed by the insured? Rescinding the contract Which of the following in NOT a characteristic of reinsurance? Increases the unearned premium reserve One important function of an insurance company is to identify and sell to potential customers. Which of these BEST describes this function? Marketing Which of the following is a contract that involves one party which indemnifies another when a loss arises from an unknown event? Insurance policy John owned an insurance policy that gives him the right to share in the insurer's surplus. What kind of policy is this? Participating Which of the following is an insurer established by a parent company for the purpose of insuring the parent company's loss exposure? Captive insurer Which of the following is a type of insurance where an insurer transfers loss exposure from policies written for its insureds? Reinsurance When a mutual insurer becomes a stock company, the process is called Demutualization Which of the following would not be accomplished with the purchases of an insurance policy Risk is eliminated Which of the following is considered to be any situation that has the potential for loss? Loss exposure Which of the following refers to a condition that may increase the chance of a loss? Hazard All of the following circumstances must be met for loss retention not be an effective risk management technique, EXCEPT Probability of loss is unknown Which of the following is NOT considered to be a definition of the term loss? the probability that an event will occur An insurer having a large number of similar exposure units is considered important because The greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums Moral hazard is described as the increased chance of a loss because of an insured's dishonest tendencies Which of the following is NOT considered a definition of risk? The cause of the loss Which of the following describes the increase in the probability of a loss due to an insured's dishonest tendencies? Moral hazard A hazard can be best described as a condition that may increase the likelihood of a loss occurring Which type of risk is gambling? Speculative risk Which of the following is NOT an element of an insurance risk? Loss must be catastrophic Which of the following is a situation where there is a possibility of either a loss or gain Speculative risk A situation in which there is ONLY a chance of loss or no loss is a pure risk Which of these statements correctly describes risks? Pure risk is the only insurable Which of the following statements do NOT apply to child coverage in a family policy? Only children born prior to policy's issue date may be included Which of the following is NOT a true description of non-medical life insurance? Applicants are not required to answer medical questions on the application A life insurance policy where the insured can choose where the cash value can be invested is called Variable life What is the proper order of initial life insurance premiums, from lowest to highest? Modified premium, ordinary life, single premium In a modified endowment contract, the penalty tax imposed on premature withdrawal is 10% Mark, age 45, has a Modified Endowment Contract (MEC). What is the tax penalty for taking a loan against this policy prior to age 59 1/2? 10% A life insurance policy's limit of liability would be The policy's face amount A life insurance policy that pays the face amount if the insured survives to a specified period of time is called Endowment insurance Which of the following types of life insurance is normally associated with a mortgage loan? Decreasing term Lynn owns a life policy that guarantees the right to renew the policy each year, regardless of health, but at an increased premium. What kind of policy is this? Renewable term life insurance Tom is shopping for a policy that covers two people and would pay the face amount ONLY when the first person dies. The type of life policy he is looking for is called Joint life policy Which of the following types of life insurance combines a savings element along with a flexible premium option? Universal Life Which of the following is a life insurance policy that does NOT require a physical exam? Non-medical In a renewable term life insurance policy, the contract will usually Require a higher premium payable at each renewal Which of the following is NOT true regarding a family policy that covers children? Conversion of child's coverage to permanent insurance requires evidence of insurability Scott has just purchased a new house. He is now shopping for a life insurance policy that provides a death benefit that matches the projected outstanding debt of his mortgage. Which life policy would best suit his needs? Mortgage redemption John and Mary have a handicapped child that is financially dependent upon them. The death of one of the parents would not be financially disastrous, however the death of both likely would be. Which policy would be best suited for them? Second-to-die policy An insurance policy written after 1988 that fails to pass the seven-pay test is known as Modified Endowment Contract What is a corridor in relation to a Universal Life insurance policy? The gap between the total death benefit and the policy's cash value Index whole life insurance contains a securities component that acts as a(n) hedge against inflation What does the guaranteed insurability option allow an insured to do? Purchase additional coverage with no evidence of insurability required Which policy provision protects the policyowner from unintentional lapse of the contract? The grace period provision protects the policyowner from an unintentional lapse of the contract. Which of the following is NOT a common life insurance policy rider? Extended term How is a life insurance policy dividend legally defined? A return of excess premium and not taxable Which provision will pay a portion of the death benefit prior to the insured's death due to a serious illness? Accelerated death benefit After a policy has lapsed, which provision allows the insured to continue coverage? Reinstatement provision Which of these is NOT a valid policy dividend option? Monthly income payments What are collateral assignments normally associated with? bank loans An insurer can be protected from adverse selection with which policy provision? Suicide clause When a life insurance policy is surrendered, how does the cost recovery rule apply? The policy's cost basis is exempt from taxation A life insurance policy can be surrendered fir its cash value under which policy provision? Nonforfeiture options Which statement is true regarding policy dividends? A dividend option is selected by the insured at the time of policy purchase How are acts of war and aviation treated under a group life insurance policy? Policy exclusion If an insured dies because of an accident, which type of life insurance rider will provide additional coverage? Accidental death rider When does a life insurance policy's waiver of premium take effect? Insured becomes totally disable In a life insurance policy, the entire contract consists of Policy and attached application What time period allows an insured's life insurance policy to remain in force even if the premium was not paid on the due date? Grace period Bruce is involved in an accident and becomes totally and permanently disabled. His insurance policy continues in force without payment of further premiums. Which policy provision is responsible for this? Waiver of premium provision Jerry is an insured who understated his age on his life insurance application, paying $12 per $1,000 of insurance instead of $15 per $1,000. If he dies, how will the adjusted death benefit be calculated? 12/15th of the policy's face amount When an accidental death benefit is added to a whole life policy, how does this affect the policy's cash value? Policy's cash value is not affected (When an accidental death benefit is added to a whole life policy, the policy’s cash value is not affected) When calculating life insurance premium rates, which components would an agent's commission fall under? Insurer's expenses A creditor would be allowed rights to life insurance policy proceeds of which of the following beneficiaries is chosen? The insured's estate The probability of death, listed by year, is demonstrated in Mortality tables How are death benefits that are received by a beneficiary normally treated for tax purposes? Exempt from federal income taxes Premiums are best described as The amount an insured pays per unit of coverage Which of the following is NOT a component of determining policy premiums? Dividends A spendthrift clause in a life insurance policy Restricts the ability of the beneficiary to assign benefits Which of the following describes the number of deaths in a year compared to the number of people in a select group? Mortality rate Which of the following is not an insurer policy expense? Premiums When calculating life insurance premiums rates, which component is affected by a insured's age and gender? Mortality Pam is a primary beneficiary of a life insurance policy and wants to let the death benefit accumulate and receive only the monthly investment proceeds. Which settlement option should she choose? The Interest Option Which of the following is NOT a life insurance settlement option? Extended term option A policyowner can receive a percentage payment of the death benefits prior to death by using what kind of contract? Viatical settlement agreement What does a life insurance policy guarantee to the stated beneficiary upon the death of the insured? Specified amount of money If the beneficiary dies from the same accident as the insured individual, the insurer will proceed as if the insured outlived the beneficiary, allowing the proceeds to go to the contingent beneficiary When an applicant applies for insurance, the process by which the insurer determines whether to issue a policy is called Underwriting What must an applicant do in order to authorize the release of an attending physician report? Sign a consent form What are members of the Medical Information Bureau (MIB) required to report? Medical ailments discovered during the underwriting process An applicant has revealed conditions that require more information. Which of the following is needed next? Attending Physician's Statement Which of the following types of information is NOT required for a life insurance application? Ethnicity A report which is based on creditworthiness and personal characteristics that influences an insurance applicant's eligibility for life and health insurance is called a(n) Consumer report The risk selection process is primarily given to which insurance company department? Underwriting How does a conditional receipt differ from a binding receipt? Binding receipts always provide insurance which starts from the date of receipt The objective of underwriting is to Avoid selecting a disproportionate number of bad risks Which of the following is NOT an important reason for a life insurance application? The beneficiary must sign the application before the insurer will issue the policy A terminated employee that has exercised the conversion privilege is able to convert term insurance into permanent insurance Which of the following is NOT a requirement for a terminated employee that has exercised the conversion privilege? Provide proof of insurability How does underwriting differ between group life and individual life insurance? Medical questions must be answered on individual life insurance Which of the following describes a contributory group insurance plan? Part of the premium is paid by the employee Employer-provided Group term life insurance is exempt from income taxation up to $50,000 Employee participation in a non contributory group life plan must be 100% Which of the following is NOT a characteristic of the conversion privilege? Employer pays the premium for the converted policy How is the cost of employer-provided group life insurance with coverage amounts above $50,000 treated for tax purposes? Taxable income to the employee Who are the parties to the master contract in a group life insurance policy? Insurer and employer All of the following are considered characteristics of group life insurance, Except Individual Policies A savings vehicle designed to first accumulate funds and then systematically liquidates the funds is called a(n) Deferred annuity The systematic liquidation of a sum of money is provided by a(n) Annuity What is a common reason people purchase an annuity? To protect against the risk of outliving their financial resources
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