Risk Management and Insurance Planning practice questions

Answer: A) Liability is imposed for harm caused by certain dangerous activities or products even if the defendant was not at fault

Strict liability holds a defendant liable for harm from certain activities or products without the plaintiff having to prove negligence or other fault.

• ACorrect. Under strict liability, the plaintiff doesn't have to prove negligence or fault. It typically applies to abnormally dangerous activities, certain animals, and defective products.
• BIncorrect. This describes an intentional tort. Strict liability doesn't depend on the defendant's intent.
• CIncorrect. This is the negligence standard. Strict liability removes the need to prove a failure of reasonable care.
• DIncorrect. This describes comparative negligence, which allocates fault among parties. Strict liability doesn't depend on fault at all.

Answer: C) Flexible premiums

• AIncorrect. That's whole life.
• BIncorrect. It builds cash value.
• CCorrect. And adjustable death benefits.
• DIncorrect. That's term.

Answer: A) The client can be charged up to 102% of the plan's full cost, covering both the employee and employer portions

Federal COBRA lets qualified beneficiaries temporarily keep group health coverage, generally for 18 months after termination, at up to 102% of the plan's full cost. It applies to employers with 20 or more employees.

• ACorrect. COBRA premiums can't exceed 102% of the plan's cost for similarly situated active participants. That covers both the employee and employer portions plus a 2% administrative fee.
• BIncorrect. The former employer doesn't have to keep subsidizing the coverage. The qualified beneficiary can be charged the full cost, employer share included, plus a 2% fee.
• CIncorrect. The standard maximum for a covered employee after termination or reduced hours is 18 months. The 36-month period applies to certain qualifying events for spouses and dependents, such as the employee's death.
• DIncorrect. Federal COBRA generally applies to group health plans of employers with 20 or more employees in the prior year, so this 60-employee employer is covered.

Answer: C) The person whose life is used as the measuring life for the annuity payments

The annuitant is the measuring life whose age and life expectancy determine annuity payments. The owner, beneficiary, and issuing insurer are separate roles, and the owner and annuitant may be different people.

• AIncorrect. That is the contract owner. The owner exercises the ownership rights and can be a different person from the annuitant.
• BIncorrect. That is the beneficiary.
• CCorrect. The annuitant is the person whose life the annuity benefit payments are based on. The IRS expected-return calculation, for example, uses the annuitant's age and life expectancy.
• DIncorrect. That is the insurance company (the issuer), not the annuitant.

Answer: C) Part D, through a Medicare-approved plan

Medicare Part D is the outpatient prescription drug benefit, offered through Medicare-approved plans. Part A covers inpatient care, and Part B covers doctors' services and outpatient care.

• AIncorrect. Part A covers inpatient care in hospitals and skilled nursing facilities, plus hospice and some home health services. It does not cover retail prescriptions.
• BIncorrect. Part B covers doctors' services and outpatient care. Its drug coverage is limited and does not serve as a retail prescription benefit.
• CCorrect. Part D is Medicare's prescription drug coverage. It is available to everyone with Medicare through approved plans, and most enrollees pay a monthly premium.
• DIncorrect. Part A is hospital insurance and does not pay for prescriptions filled at a retail pharmacy. Drug coverage requires joining a Part D plan.

Answer: B) Raises benefits during a claim to track inflation

• AIncorrect. That isn't the rider.
• BCorrect. It adds to the premium.
• CIncorrect. That isn't the rider.
• DIncorrect. That isn't the rider.

Answer: B) Loans and withdrawals are taxed gains-first

• AIncorrect. It's generally still tax-free.
• BCorrect. The death benefit stays income-tax-free.
• CIncorrect. It stays in force.
• DIncorrect. They aren't deductible.

Answer: A) It pays covered liability losses that exceed the limits of her underlying auto and homeowners policies

A personal umbrella policy is excess liability insurance. It responds to judgments above the limits of the underlying auto and homeowners liability coverage, and it requires those underlying policies to remain in place.

• ACorrect. A personal umbrella provides excess liability coverage over and above the limits of the underlying auto, watercraft and homeowners policies.
• BIncorrect. Damage to the insured's own property is first-party property coverage. An umbrella is third-party liability coverage.
• CIncorrect. Dwelling limits are handled by the homeowners policy itself, for example through an extended replacement cost endorsement, not by an umbrella.
• DIncorrect. An umbrella sits on top of the underlying policies, and insurers generally require minimum underlying liability limits to stay in force.

Answer: B) $30,000

Under a coinsurance clause, a partial loss is paid as (coverage carried ÷ coverage required) × loss: $240,000 ÷ $320,000 × $40,000 = $30,000. Being underinsured reduces the payment proportionally; it does not void coverage.

• AIncorrect. This divides coverage carried by the full replacement cost ($240,000 ÷ $400,000). The clause measures coverage against the required amount, which is 80% of replacement cost ($320,000).
• BCorrect. Required coverage is 80% × $400,000 = $320,000. The payment is ($240,000 ÷ $320,000) × $40,000 = $30,000.
• CIncorrect. This just takes 80% of the loss. The penalty depends on the ratio of coverage carried to coverage required, not the coinsurance percentage alone.
• DIncorrect. The full partial loss is paid only when coverage is at least 80% of replacement cost. Her $240,000 is below the $320,000 required.

Answer: D) Inability to perform 2 of 6 ADLs

• AIncorrect. ADL or cognitive triggers apply.
• BIncorrect. ADL or cognitive triggers apply.
• CIncorrect. ADL or cognitive triggers apply.
• DCorrect. Or severe cognitive impairment.