Life and health insurance exam study guide, by section

A reinsurance arrangement in which each large risk is offered to the reinsurer individually, and the reinsurer may accept or reject it, is:

1. Facultative reinsurance

   Under facultative reinsurance each risk is submitted and judged on its own, so the reinsurer is free to accept or decline it.
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2. Treaty reinsurance

   A treaty is an automatic agreement covering every risk in a defined class; the reinsurer does not review risks one by one.
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3. Risk retention

   Retention is the share of a risk the ceding insurer keeps for itself, which is the opposite of offering that risk to a reinsurer.
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4. Retrocession

   Retrocession is a reinsurer passing part of its own assumed risk to another reinsurer, a later step than the case-by-case offer described.
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Select an answer to record it. The card then marks the key and opens the reasoning under every choice.

In insurance terms, the unintentional decline or disappearance of value caused by a peril is a:

1. Loss

   A loss is the unintended reduction or disappearance of value that results when a peril strikes.
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2. Risk

   Risk is the uncertainty about whether a loss will happen, which is why it cannot describe value already gone.
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3. Hazard

   A hazard is a condition that makes a loss more likely or more severe; it comes before the loss rather than being the loss itself.
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4. Exposure

   Exposure is a unit used to measure loss potential, such as the number of lives covered, not the decline in value.
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In a needs analysis for a young family, the amount set aside so the children can attend college if the insured dies is the:

1. Emergency fund

   An emergency fund is a cushion for unexpected costs after death; it is not set aside for a planned goal like college.
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2. Education fund

   Money earmarked so the children can still pay for college after the insured's death is the education fund in a needs analysis.
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3. Cleanup fund

   The cleanup fund covers final expenses, such as funeral costs, medical bills and debts at death, not future tuition.
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4. Mortgage redemption fund

   This fund pays off the home loan so the family keeps the house, a separate need from schooling.
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Ellen has a 15-year mortgage and wants coverage that will pay off the remaining balance if she dies before it is paid. The most appropriate policy is:

1. 15-year decreasing term

   Decreasing term shrinks roughly in step with a mortgage balance, so coverage matches the debt for its 15-year term at the lowest cost.
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2. 15-year level term

   Level term keeps the full face while the loan balance falls, so Ellen would pay for more coverage than the debt needs.
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3. 15-pay whole life

   Limited-pay whole life builds cash value and lasts for life, which is far more expensive than a need that ends with the loan.
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4. Survivorship life

   Survivorship coverage pays at the second of two deaths and suits estate costs, not a single borrower's mortgage.
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Ruth will leave her family business, worth $2 million, to the son who runs it. She wants her daughter, who is not involved in the business, to receive a fair share. A common use of life insurance here is to:

1. Name the business as the policy's beneficiary

   Paying the business would add to the son's share and leave the daughter's position unchanged.
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2. Equalize the estate between the two children

   Estate equalization uses a policy payable to the daughter so she receives value comparable to the business going to her brother.
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3. Create a cross-purchase buy-sell agreement

   A cross-purchase plan is used when co-owners buy each other's shares; here the business passes by inheritance, not by sale.
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4. Fund a key person policy for the business

   Key person coverage protects the business from losing a vital employee; it does not balance what each child inherits.
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Beth's policy is delivered May 1 with a 10-day free look, and the premium is paid. She dies in a car crash on May 5, before deciding whether to keep it. The insurer will:

1. Pay the death benefit, since coverage is in force

   Coverage is effective during the free look; the window only lets the owner return the policy, so the insurer owes the claim.
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2. Pay only if Beth had signed a waiver of the free look

   No waiver is needed to activate coverage; the free look is a right to cancel, not a condition on the benefit.
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3. Deny the claim until the 10 days have passed

   The free look does not suspend coverage, and a claim cannot wait on a decision the deceased owner can no longer make.
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4. Refund the premium, since the free look had not ended

   A refund applies when the owner returns the policy within the window; Beth never did, so the contract was still in force.
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Rita, who is terminally ill, sells her life insurance policy to a third party for more than its cash surrender value but less than its face amount. This is a:

1. Accelerated death benefit

   An accelerated benefit is paid by the insurer itself under a rider, and the owner keeps the policy; no third-party sale occurs.
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2. Collateral assignment

   A collateral assignment pledges the policy as security for a loan while the owner keeps it, so there is no sale.
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3. Surrender of the policy

   Surrendering returns the policy to the insurer for its cash value only, which is less than Rita received.
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4. Viatical settlement

   A terminally ill insured selling the policy to a third party for more than its surrender value but less than its face is a viatical settlement.
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Under the Standard Nonforfeiture Law, an ordinary whole life policy must provide a guaranteed cash value no later than after premiums have been paid for:

1. 5 full years

   Five years is the threshold for industrial policies, not for ordinary whole life.
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2. 1 full year

   Many policies show some value early, but one year is sooner than the law requires for ordinary life.
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3. 10 full years

   Ten years would leave owners without guaranteed values for far too long; the law demands values much earlier.
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4. 3 full years

   The Standard Nonforfeiture Law requires an ordinary whole life policy to carry a guaranteed cash value once premiums have been paid for three full years.
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Val paid the premium with her health application and got a conditional receipt. The insurer offers her a rated policy instead. Coverage begins:

1. On the date she signed the application

   Backdating to the application date applies only if the applicant is insurable as applied for; a rating means she was not.
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2. On the date of her medical exam

   The medical exam date can serve as the start only when the risk qualifies as applied for, which a rated policy rules out.
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3. When the underwriter decides to rate it

   The underwriter's decision creates an offer; the contract needs Val's acceptance before coverage exists.
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4. When Val accepts the new terms

   A rated policy is a counteroffer, so the conditional receipt no longer controls and coverage starts only when Val accepts it at delivery.
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Ed, a healthy applicant for disability income insurance, races motorcycles on weekends. The insurer is most likely to:

1. Issue the policy standard with no changes at all

   Ignoring a known extra injury risk would price Ed the same as applicants without it, which underwriting does not do.
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2. Add an exclusion rider or an extra rating

   A hazardous avocation is usually handled with an exclusion rider for that activity or an extra rating, while the healthy applicant is otherwise accepted.
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3. Decline him or require a yearly medical exam

   Declining is a last resort, and repeated medical exams say nothing about racing injuries; a single hazardous hobby can be excluded or rated instead.
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4. Issue it with a longer probationary period

   A probationary period delays coverage for sickness; it does nothing about the injury risk that racing creates.
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Ella gives a whole life policy on her life to a qualified charity, which becomes owner and beneficiary. The premiums Ella continues to pay generally:

1. Are taxable income to the charity

   A qualified charity is tax-exempt, and gifts it receives are not income to it.
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2. Are not deductible, like any other life insurance premium

   Personal premiums are normally not deductible, but that rule assumes Ella still owns the policy; here she has given it away.
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3. Must be paid by the charity instead

   Nothing stops the donor from continuing to pay; doing so is exactly what makes each payment a further gift.
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4. Are deductible as a charitable contribution

   Once the charity owns the policy and is its beneficiary, premiums Ella keeps paying are gifts to the charity and can be deducted, subject to the usual limits.
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An employer provides $75,000 of employer-paid group term life to Lou, age 52. The IRS Table I monthly cost for ages 50-54 is $0.23 per $1,000. Lou's annual imputed income is:

1. $5.75

   This is the monthly figure for the excess $25,000 (25 × $0.23); the question asks for the annual amount.
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2. $207.00

   This charges the cost on the whole $75,000 (75 × $0.23 × 12) and forgets the $50,000 exclusion.
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3. $69.00

   The first $50,000 is excluded, so the cost applies to $25,000: 25 × $0.23 × 12 months = $69.00.
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4. $138.00

   This applies the rate to the excluded $50,000 (50 × $0.23 × 12) instead of the amount above it.
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Holding everything else equal, which choice lowers the premium for an individual disability income policy?

1. An own-occupation definition

   Own-occupation is the most generous definition of disability and therefore costs more.
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2. A longer elimination period

   A longer waiting period before benefits start means the insurer pays fewer short disabilities, so the premium drops.
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3. A shorter elimination period

   Benefits starting sooner make more claims payable, which raises the premium.
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4. A longer maximum benefit period

   Paying benefits for more years increases the insurer's exposure and the cost.
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A basic surgical plan assigns each procedure a number of points and multiplies them by a dollar conversion factor to find the benefit. This method is a:

1. Usual, customary and reasonable charge

   UCR pays based on what providers in the area typically charge for the service, not on a point formula.
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2. Relative value scale

   A relative value scale gives each procedure a point value and multiplies it by a dollar conversion factor to set the benefit.
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3. Flat dollar fee schedule

   A flat schedule lists a fixed dollar amount for each procedure directly, with no points and no conversion factor.
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4. Capitation arrangement

   Capitation pays a provider a fixed amount per member per period regardless of procedures performed.
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Under basic hospital coverage, charges for lab tests, X-rays, and drugs during a stay are paid under the:

1. Room and board benefit

   Room and board pays the daily charge for the bed, meals and general nursing, not tests and medication.
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2. Nonsurgical physician visit benefit

   This pays for doctor visits in the hospital, not for the supplies and services the hospital itself bills.
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3. Surgical schedule benefit

   The surgical benefit pays the surgeon's fee for an operation, not the hospital's other charges.
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4. Miscellaneous expense benefit

   Hospital extras such as lab work, X-rays and drugs given during the stay fall under the miscellaneous (ancillary) expense benefit.
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Ned's new health policy has a 30-day probationary period. He is injured in a car accident on day 10. His injury is:

1. Covered, but only if it leads to a hospital stay

   No hospitalization condition is attached to accident coverage; the injury is covered whether or not he is admitted.
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2. Not covered until the 30 days have passed

   Making the injury wait out the 30 days applies the sickness rule to an accident, the usual mix-up between the two coverages.
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3. Covered, since the period applies only to sickness

   A probationary period delays coverage for illness only; accidental injuries are covered from the effective date.
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4. Covered only after a separate 30-day elimination period ends

   An elimination period is a deductible in time for disability benefits, not a second waiting period added to accident coverage.
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Leo dies in an accident, and his beneficiary files a claim under his accidental death and dismemberment policy. Under the Physical Examinations and Autopsy provision, the insurer may:

1. Have an autopsy done at its own expense, where the law permits

   The uniform provision lets the insurer, paying the cost itself, examine a claimant or perform an autopsy in a death case unless the law forbids it.
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2. Request an autopsy, but only within 20 days of notice

   Twenty days is the notice-of-claim deadline; the autopsy right lasts while the claim is pending, not for a fixed window.
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3. Order an autopsy even where state law forbids one

   The provision expressly yields to the law; where an autopsy is prohibited, the insurer cannot demand one.
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4. Require the beneficiary to pay for any autopsy that the insurer orders

   The insurer bears the cost of exams and autopsies it requests; shifting it to the claimant is not allowed.
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Hank's doctor certifies that he needs help bathing and dressing, but he has never been hospitalized. When can his LTC insurer deny benefits for lack of a prior hospital stay?

1. Only during the first two policy years

   There is no two-year window; the ban on prior-hospitalization conditions applies for the life of the policy.
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2. At no time, since that condition is barred

   Under the NAIC model, a long-term care policy may not make a prior hospital stay a condition for benefits.
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3. Always, because a 3-day stay is required first

   A 3-day stay is a Medicare rule for skilled nursing facility care, wrongly carried over to private LTC coverage.
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4. Only when his care is in a nursing home

   The prohibition covers institutional care too, so the setting does not revive the requirement.
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Carlos, 52, has permanent kidney failure requiring regular dialysis and has enough work credits. Is he eligible for Medicare?

1. Only after 24 months of disability benefits

   The 24-month wait applies to people entitled through Social Security disability, not to those qualifying through ESRD.
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2. Only if his income is below federal poverty limits

   An income test belongs to Medicaid; Medicare entitlement rests on work credits, not financial need.
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3. No, because he is younger than age 65

   Age 65 is only one route to Medicare; ESRD is a separate basis that does not depend on age.
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4. Yes, because he has end-stage renal disease

   Permanent kidney failure needing dialysis qualifies a person with enough work credits for Medicare at any age.
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A spouse who claims Social Security spousal benefits at his or her own full retirement age can receive up to:

1. 100% of the worker's PIA

   The full PIA is what a surviving spouse can receive after the worker's death, not the spousal benefit during the worker's life.
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2. 75% of the worker's PIA

   Seventy-five percent is the survivor rate for a widowed parent caring for a young child or for a surviving child, not the spousal maximum.
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3. 50% of the worker's PIA

   A spouse claiming at full retirement age can receive up to half of the worker's primary insurance amount.
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4. 33% of the worker's PIA

   About one-third is roughly what a spouse gets by claiming at 62 when full retirement age is 67, not the amount at full retirement age.
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Lynn buys an ACA-compliant individual major medical plan during open enrollment. She was treated for diabetes last year. Because of the diabetes, the insurer:

1. Can decline her application

   Guaranteed issue during open enrollment means a compliant plan cannot turn her down for a health condition.
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2. Cannot cover it until a 12-month exclusion ends

   Waiting periods for pre-existing conditions were common before the ACA but are no longer allowed.
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3. Cannot exclude it or charge her more

   ACA-compliant individual plans must accept applicants in open enrollment without pre-existing condition exclusions or rates based on health.
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4. Can charge her a higher premium

   Health status is not an allowed rating factor under the ACA, so the diabetes cannot raise her premium.
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Under state unfair trade practices laws, unfair discrimination occurs when an insurer charges different rates to:

1. Individuals of the same class and equal life expectancy

   Unfair discrimination means treating people differently when they present the same risk, such as charging different rates within one class.
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2. Applicants who choose annual rather than monthly premium payments

   Modal charges reflect real billing and interest costs and apply to everyone who picks that mode.
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3. Smokers and nonsmokers of the same age

   Tobacco use changes mortality, so smokers and nonsmokers are different classes and may pay different rates.
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4. Applicants of different ages, health histories and occupations

   Pricing different risks differently is ordinary underwriting, not discrimination under the unfair trade practices law.
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The NAIC affiliate that provides an electronic system for nonresident licensing, appointments and address changes across states is the:

1. Medical Information Bureau

   MIB is an insurer-owned exchange of underwriting information on applicants, not a licensing system.
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2. Federal Insurance Office

   The FIO is a Treasury office that monitors the industry; it does not license or appoint producers.
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3. National Insurance Producer Registry

   NIPR is the NAIC affiliate whose system handles nonresident license applications, appointments and address changes across states.
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4. Financial Industry Regulatory Authority

   FINRA regulates securities broker-dealers and their representatives, not insurance producer licensing.
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Anne's husband left his job in January, and the family elected COBRA. In October, still within the first 18 months, the couple divorced. What is Anne's maximum COBRA continuation period?

1. 36 months from the original qualifying event

   A divorce during the first 18 months is a second qualifying event, which extends the spouse's continuation to 36 months counted from the job loss.
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2. 18 months from the original qualifying event

   Eighteen months is the period for a job loss alone; it ignores that the divorce is a second qualifying event for Anne.
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3. 36 months from the date of the divorce

   The extended period is measured from the first qualifying event, so restarting the clock at the divorce overstates it.
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4. 29 months from the original qualifying event

   Twenty-nine months is the disability extension, which requires a qualified beneficiary to be disabled, not divorced.
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Under the NAIC Insurance Information and Privacy Protection Model Act, an insurer may conduct a pretext interview, in which the interviewer poses as someone else, only to:

1. Verify an applicant's income for underwriting

   Underwriting must gather facts openly with notice; posing as someone else to check income is not allowed.
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2. Confirm a beneficiary's address before paying a claim

   Checking an address is routine claim administration and does not justify posing as someone else, because no fraud or crime is suspected.
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3. Investigate a claim involving suspected fraud or criminal activity

   The NAIC privacy model limits pretext interviews to claim investigations where there is a reasonable basis to suspect fraud, crime or material misrepresentation.
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4. Obtain medical information the applicant has refused to disclose in writing

   An applicant's refusal must be respected or the application handled on that basis; deception cannot be used to get around it.
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