chapter 9

Personal Finance: Turning Money into Wealth, 7e (Keown) Chapter 9 Life and Health Insurance 9.1 The Importance of Insurance 1) When the Affordable Care Act is fully implemented, 100 percent of Americans will have health care insurance. Answer: FALSE Diff: 1 Topic: Affordable Care Act AACSB: Analytical Thinking 2) Life insurance and health insurance are designed to transfer the catastrophic risk you can't afford to keep onto the insurance companies. Answer: TRUE Diff: 3 Topic: Insurance AACSB: Diverse and Multicultural Work Environments 3) An insurance policy is a contract with an insurance company that spells out what losses are covered, what the policy costs, and who receives the payment if a loss occurs. Answer: TRUE Diff: 1 Topic: Insurance AACSB: Diverse and Multicultural Work Environments 4) Actuaries are statisticians who specialize in estimating the probability of death based on personal characteristics, such as your age and general health, as well as lifestyle specifics such as whether or not you exercise. Answer: TRUE Diff: 1 Topic: Actuaries AACSB: Information Technology 5) Currently only 10% of Americans receive some type of government health care entitlements such as Medicaid or Medicare. Answer: FALSE Diff: 1 Topic: Life Insurance AACSB: Analytical Thinking 6) The beneficiary is the individual designated by the owner of the life insurance policy to receive the insurance policy's proceeds upon the death of the insured. Answer: TRUE Diff: 1 Topic: Life Insurance AACSB: Analytical Thinking 1 Copyright © 2016 Pearson Education, Inc. 7) The Patient Protection and Affordable Care Act was signed into law in 2010; however many of its aspects do not go into effect until 2020. Answer: FALSE Diff: 1 Topic: Insurance AACSB: Diverse and Multicultural Work Environments 8) All life insurance policies should have a contingent beneficiary designated. Answer: TRUE Diff: 1 Topic: Life Insurance AACSB: Diverse and Multicultural Work Environments 9) In dealing with risk, one can either avoid it, manage it, or transfer it for a fee. Answer: TRUE Diff: 1 Topic: Insurance AACSB: Diverse and Multicultural Work Environments 10) Life insurance is not meant to benefit you, its purpose is to protect others in the event of your death. Answer: TRUE Diff: 1 Topic: Insurance AACSB: Diverse and Multicultural Work Environments 11) One of the reasons insurance is so expensive is due to the expense of developing, testing and verifying new drugs. This cost is passed on to consumers. Answer: TRUE Diff: 1 Topic: Health Insurance AACSB: Diverse and Multicultural Work Environments 12) Statisticians who specialize in estimating the probability of death based on personal characteristics are called A) morbidity analysts. B) actuaries. C) insurance analysts. D) morbidity statisticians. E) none of the above. Answer: B Diff: 1 Topic: Actuaries AACSB: Analytical Thinking 2 Copyright © 2016 Pearson Education, Inc. 13) Sharing the financial consequences associated with risk in the insurance industry is sometimes called A) risk pooling. B) risk deferring. C) risk migration. D) risk splitting. E) none of the above. Answer: A Diff: 1 Topic: Risk Pooling AACSB: Reflective Thinking 14) Wayne and Sarah are trying to manage the risk they face in life a best as they can. They are following Principle 7 which states A) the best protection is knowledge. B) protect yourself against major catastrophes. C) nothing happens without a plan. D) diversification reduces risk. E) the best insurance is prevention. Answer: B Diff: 1 Topic: Insurance AACSB: Reflective Thinking 15) Life insurance may not be necessary if A) you're single and don't have any dependents. B) you're married, a double-income couple, with no children. C) you're married but aren't employed. D) you're retired. E) all of the above. Answer: E Diff: 3 Topic: Life Insurance AACSB: Reflective Thinking 16) Andrew and Alice have health issues that may be passed on to their children. When the children are born would they be wise to obtain life insurance immediately on the infants prior to any of the medical conditions arising? A) Yes, this would be wise as the infant is not likely to have to pass a physical exam. B) No, they should wait until the child is an adult and let him or her decide if she or he wants insurance. Answer: A Diff: 3 Topic: Life Insurance AACSB: Reflective Thinking 3 Copyright © 2016 Pearson Education, Inc. 17) The individual designated by the owner of the life insurance policy to receive the policy's proceeds upon the death of the insured is called the A) policy holder. B) beneficiary. C) insured. D) actuary. Answer: B Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 18) What is the main purpose of life insurance? Answer: The main purpose of life insurance is to transfer the risk of a premature death onto the insurance company. The named insured is someone whose loss will create a financial or emotional loss to the beneficiaries of the policy. Diff: 2 Topic: Life Insurance AACSB: Reflective Thinking 19) What are some good reasons for a young, healthy, single person to purchase life insurance? Answer: The best time to purchase life insurance is when you are young and healthy since the premiums will be the lowest possible. Funerals today are very expensive so why would you want to be a financial burden on your family if you die? At least with a good insurance foundation in place, you will have some insurance in force regardless of your health. Diff: 3 Topic: Life Insurance AACSB: Reflective Thinking 20) Why is being the policy owner so important? Answer: The policy owner controls the decisions concerning the policy itself. They determine who the beneficiaries will be and they determine the settlement options. They are also the one the insurance company contacts if there are missed payments or pending cancellation. Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 21) Why is the beneficiary decision so important when buying life insurance? Answer: The beneficiary is the person or persons who will receive the death benefit of the insurance policy. The beneficiary designation supercedes your Will. It is critically important that you double check your beneficiary designation every time you have a life changing event such as marriage, divorce or the birth of children. Sadly, many ex-spouses receive the death benefit because the policy owner forgot to make appropriate changes to their beneficiary designation. Diff: 3 Topic: Beneficiary AACSB: Analytical Thinking 4 Copyright © 2016 Pearson Education, Inc. 9.2 Determining Your Life Insurance Needs 1) Using the earnings multiple approach is determining the present value of an annuity as a means to determine the face value of the insurance policy one needs to purchase. Answer: TRUE Diff: 3 Topic: Earnings Multiple Approach AACSB: Analytical Thinking 2) With the needs approach, you should take into consideration any additional insurance policies that have been taken out on your life. Answer: TRUE Diff: 3 Topic: Needs Approach AACSB: Reflective Thinking 3) The earnings multiple approach is based on the notion that you want to replace a stream of annual income that's lost due to the death of a breadwinner. Answer: TRUE Diff: 3 Topic: Needs Approach AACSB: Diverse and Multicultural Work Environments 4) Sandra is terrible at saving; therefore her insurance advisor suggested a term life insurance policy for her since it has a saving/investing aspect. Answer: FALSE Diff: 3 Topic: Term Life Insurance AACSB: Analytical Thinking 5) A disadvantage of term insurance is that the cost rises each time the policy is renewed. Answer: TRUE Diff: 2 Topic: Term Life Insurance AACSB: Analytical Thinking 6) With decreasing term life insurance, the face amount of the policy remains constant, but the premiums decrease. Answer: FALSE Diff: 3 Topic: Term Life Insurance AACSB: Analytical Thinking 5 Copyright © 2016 Pearson Education, Inc. 7) Convertible term life insurance can be converted into cash-value life insurance, depending on the insured's medical condition pending a medical exam. Answer: FALSE Diff: 2 Topic: Whole Life Insurance AACSB: Analytical Thinking 8) Roxanne has been stricken with a muscular degeneration disease that may potentially shorten her life span. However, she chose a renewable term insurance policy because she is able to be continually renew the policy for an agreed-upon period, regardless of her deteriorating condition. Answer: TRUE Diff: 2 Topic: Term Life Insurance AACSB: Analytical Thinking 9) With term life insurance, the beneficiary receives a fixed death benefit. Answer: TRUE Diff: 2 Topic: Term Life Insurance AACSB: Analytical Thinking 10) One of the best features of term insurance is that you are able to borrow against the face value. Answer: FALSE Diff: 2 Topic: Term Life Insurance AACSB: Analytical Thinking 11) The nonforfeiture right gives the policyholder the cash value of the policy in exchange for the policyholder giving up his or her right to a death benefit. Answer: TRUE Diff: 3 Topic: Cash Value AACSB: Analytical Thinking 12) The policy owner must pay the premium during the grace period or they forfeit the policy. Answer: TRUE Diff: 3 Topic: Grace Period AACSB: Diverse and Multicultural Work Environments 13) The suicide clause will pay double the face value to the beneficiary if the named insured commits suicide. Answer: FALSE Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 6 Copyright © 2016 Pearson Education, Inc. 14) Most life insurance settlements are based on the named insured dying from an accidental death. Answer: FALSE Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 15) A guaranteed insurability rider allows you to increase your face value even if your health fails. Answer: TRUE Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 16) Term life insurance provides protection for a specified amount of time; typically 1-30 years. Answer: TRUE Diff: 3 Topic: Term Life Insurance AACSB: Analytical Thinking 17) According to the Keown book, two recommended online insurance quote services are accuquote.com and insure.com. Answer: TRUE Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 18) According to the Keown book, 50 percent of U.S. households have no life insurance coverage. Answer: FALSE Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 19) Suppose that you have decided to buy some life insurance. Which method of determining your life insurance needs calculates the annual loss of income stream? A) Needs approach B) Earnings multiple approach C) Limited term approach D) Whole life approach Answer: B Diff: 2 Topic: Earnings Multiple Approach AACSB: Analytical Thinking 7 Copyright © 2016 Pearson Education, Inc. 20) For which of these situations is life insurance a good idea? A) Married with children B) Married, single-income couple with no children C) Single with no dependents D) Only A and B E) All of the above Answer: D Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 21) According to the Keown book, ________of U.S. households have no life insurance coverage. A) 15 percent B) 30 percent C) 50 percent D) 65 percent Answer: B Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 22) You know you desperately need life insurance but don't have much money available for premiums. What is the best thing you can do to find affordable insurance? A) Buy directly from the insurance company. B) Buy term insurance. C) Use the Internet to shop around for the best quotes. D) All of the above Answer: D Diff: 2 Topic: Life Insurance AACSB: Reflective Thinking 23) Your agent has told you to think about immediate needs at the time of death, debt elimination funds, immediate transitional funds, dependency expenses, spousal life income, educational expenses for the children, and retirement income. What has he described? A) The multiple earnings need approach B) The needs approach C) The standard approach D) The combination approach E) The long-term approach Answer: B Diff: 2 Topic: Needs Approach AACSB: Reflective Thinking 8 Copyright © 2016 Pearson Education, Inc. 24) John purchases a life insurance policy on his wife Betty where he pays the premium and he will receive the life insurance money when she dies. John is both the ________ and the ________ who will receive the ________ upon the death of Betty, the ________. A) insured; beneficiary; money; policyholder B) policy owner; beneficiary; face amount; insured C) policy owner; insured; face amount; beneficiary D) beneficiary; premium payer; face amount; policy holder E) none of the above Answer: B Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 25) Life insurance buying is a new experience for many people. Which of the following is not a basic consideration when determining life insurance needs? A) Whether or not you need life insurance at this time B) The amount of coverage you need now and in the future C) The settlement options D) The type of life insurance that fits your needs E) Shopping around for the best agent and price Answer: C Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 26) Sally brings home $50,000 a year to help provide financial support to her family, comprised of her husband and two children. She is considering purchasing life insurance. Using the earnings multiple approach, how much coverage should she purchase using a discount rate of 5% to replace 10 years of earnings. A) $500,000 B) $386,000 C) $340,005 D) $301,148 Answer: B Diff: 3 Topic: Earnings Multiple Approach AACSB: Analytical Thinking 9 Copyright © 2016 Pearson Education, Inc. 27) Using the needs approach to determine the amount of coverage looks from the perspective of the A) policy owner. B) named insured. C) beneficiary. D) salesman. Answer: C Diff: 3 Topic: Needs Approach AACSB: Reflective Thinking 28) Riley knows her ex-husband would not think about taking out a life insurance policy on himself to protect their two children in the event of his untimely death. As a result, Riley is taking out a policy on him and paying for it herself. That makes Riley the ________ and her children are the ________. A) insured, policy holders B) policy owner, beneficiaries C) beneficiary, policy holders D) insured, policy owners E) none of the above Answer: B Diff: 2 Topic: Life Insurance AACSB: Reflective Thinking 29) With decreasing term insurance A) the premiums remain constant, but the face amount of the policy declines. B) the premiums decline, and the face amount of the policy declines. C) the premiums remain constant, and the face amount of the policy remains constant. D) the premiums decline, and the face amount of the policy increases. Answer: A Diff: 2 Topic: Term Life Insurance AACSB: Analytical Thinking 30) ________ is insurance that provides permanent insurance coverage as whole life does; however the policyholder, not the insurance company, takes on the investment risk. A) Variable life insurance B) Universal life insurance C) Convertible life insurance D) None of the above Answer: A Diff: 2 Topic: Credit Life Insurance AACSB: Analytical Thinking 10 Copyright © 2016 Pearson Education, Inc. 31) What are the advantages of term life insurance? A) It allows you to increase your insurance coverage for specific reasons and specific time periods. B) With decreasing term coverage, your premiums get smaller as you get older. C) It has no investment feature so it costs less than other forms of insurance. D) All of the above are correct. E) Only A and C are correct. Answer: E Diff: 2 Topic: Term Life Insurance AACSB: Analytical Thinking 32) Statisticians who specialize in estimating the probability of death based on personal characteristics are known as A) insurance adjusters. B) vultures. C) actuaries. D) beneficiaries. Answer: C Diff: 3 Topic: Insurance AACSB: Analytical Thinking 33) The settlement option that provides for ongoing payments for a period of time is called A) an annuity. B) a reverse premium. C) a premium payout. D) an annual premium. Answer: A Diff: 2 Topic: Settlement Clause AACSB: Analytical Thinking 34) The needs approach to determining life insurance amounts considers which of the following? A) Immediate financial needs B) Debt elimination funds C) Dependency expenses D) All of the above Answer: D Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 11 Copyright © 2016 Pearson Education, Inc. 35) Cash value policies include a ________ clause that allows you to borrow against the cash value of the policy. A) reinstatement B) liquidity C) loan D) grace period Answer: C Diff: 3 Topic: Cash Value AACSB: Analytical Thinking 36) What are the risks associated with term insurance policies? A) You may need to have insurance coverage past the term expiration date. B) The cash value does not earn a decent return. C) The renewal premium may be cost prohibitive. D) Both A and C are correct. Answer: D Diff: 3 Topic: Term Life Insurance AACSB: Reflective Thinking 37) What are the disadvantages of group term insurance? A) The premiums are usually subsidized by the employer. B) The cost to covert from group coverage to individual coverage if you leave the company may be cost prohibitive. C) Relying on group insurance may hinder your decision to leave the company. D) Both B and C are correct. Answer: D Diff: 3 Topic: Group Insurance AACSB: Analytical Thinking 38) What are the main features of whole life insurance? A) The premiums stay constant for your entire life. B) The nonforfeiture right allows you access to the cash value account if needed. C) It provides your with permanent insurance regardless of age and health issues. D) All of the above are correct. E) All but B are correct. Answer: D Diff: 2 Topic: Whole Life Insurance AACSB: Reflective Thinking 12 Copyright © 2016 Pearson Education, Inc. 39) What is the purpose of companies such as A.M. Best, Moody's and Standard & Poor's? A) They sell life insurance directly to consumers without agents. B) They evaluate and rate the financial stability of the insurance industry. C) They provide reinsurance coverage to the insurance industry. D) They sell low cost term insurance via the Internet. Answer: B Diff: 2 Topic: Insurance AACSB: Analytical Thinking 40) Most likely, when you apply for life insurance, you will have to fill out a detailed medical history and take a physical exam. Why is this true? A) The insurance company wants to see if you have any pre-existing conditions. B) It prevents sick people from purchasing insurance. C) It determines how you will be rated and what premiums you will pay. D) All of the above E) All but B are correct. Answer: E Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 41) Typically, who should buy life insurance? Answer: Couples or single parents with children need life insurance. Couples with no children that have a single income also need coverage. When you own your own business or have an extremely large estate you need life insurance. Diff: 1 Topic: Life Insurance AACSB: Analytical Thinking 42) List five questions you should ask in an attempt to determine life insurance needs. Answer: -How long after your death do you want to ensure your surviving spouse's financial stability? -Will your surviving spouse be earning any income? -Is a drop in your surviving spouse or children's lifestyle acceptable? -Do you want to provide funding for your children's college education? -Do you want to immediately pay for the home mortgage and other debts? -Do you want life insurance to pay for any estate taxes that might be due? Diff: 1 Topic: Life Insurance AACSB: Reflective Thinking 13 Copyright © 2016 Pearson Education, Inc. 43) The needs approach attempts to determine the amount of funds necessary to meet the needs of a family after the death of the primary breadwinner. Name the seven common family needs. Answer: 1. cleanup funds 2. debt elimination 3. immediate transition 4. dependency expenses 5. spousal life income 6. educational expenses for children 7. retirement income Diff: 1 Topic: Needs Approach AACSB: Reflective Thinking 44) What factors should be considered when selecting a life insurance policy? Answer: Select an agent who will work for you; that is, meet your needs, not his or hers. Choose a company that is highly rated by one of the independent rating firms such as A.M. Best. Be sure to compare costs and choose a policy with a low cost index. Carefully select the amount of life insurance needed, the type of policy, and the method of premium payments. Make sure the beneficiary designation is correct. Choose between using an advisor (agent) or buying direct from a company. Diff: 2 Topic: Life Insurance AACSB: Reflective Thinking 45) Define policy rider and describe the purpose of the five basic ones. Answer: A rider is a special provision that may be added to your policy, which either provides extra benefits or limits the company's liability under certain conditions. A waiver of premium for disability rider allows your insurance protection to stay in place by paying your premiums if you become disabled before you reach a certain age, usually 65. An accidental death benefit rider or multiple indemnity rider doubles or triples the death benefit when the insured dies from an accident rather than from natural causes. The guaranteed insurability rider gives the right to increase your life insurance protection in the future without a medical examination. A cost-of-living adjustment rider increases the death benefit at the same rate as inflation without forcing you to pass a medical exam. Some cashvalue policies allow for living benefits; that is, this rider allows for early payout of a percentage of the anticipated death benefits for the terminally ill, enabling them to pay medical bills, etc. Diff: 2 Topic: Rider AACSB: Reflective Thinking 14 Copyright © 2016 Pearson Education, Inc. 46) Briefly explain the four common settlement options. Answer: 1. The lump-sum settlement gives a beneficiary the entire death benefit in one large check. 2. An interest-only settlement provides payment of interest while the company holds the principal. 3. The installment-payments option pays the beneficiary both principal and interest over a fixed period or in fixed payments. 4. A life annuity option gives the beneficiary an income for life, generally in a monthly check. Diff: 1 Topic: Settlement Clause AACSB: Reflective Thinking 47) It should be everyone's goal to become self-insured when it comes to Life insurance. Explain how and why this should be? Answer: When most people are young, they have negative or low net worth because they have few assets and higher levels of debt. When they become financially responsible for someone else, then they need to cover the risk of their death by purchasing Life insurance to replace their lost financial support. As a person goes through the Financial Life Cycle, they generally acquire more assets, especially Investment assets that appreciate in value, and they tend to pay off most of their debt, developing positive net worth. At middle age their dependent children have grown up and are now independent. Their mortgage is paid off and they have substantial assets, especially in their retirement accounts. Their spouse would be able to live comfortably off these investments so the loss of the financial support of the breadwinner would not be a catastrophic loss. At later ages, Term insurance premiums become prohibitive. There is really no reason to maintain life insurance coverage for the average person at this time. Diff: 3 Topic: Life Insurance AACSB: Reflective Thinking 48) Why is it critically important to check out the financial health of a Life Insurance Company through a ratings company like A.M. Best before you purchase the insurance? Answer: When you purchase a life insurance policy, you are basically entering into a partnership with the Insurance Company that may last for 40+ years or more. You want to make certain that this company or partner will be there when your beneficiaries desperately need the death benefit of the policy. It is not unusual for Insurance companies to become insolvent and fail. It is not unusual for Insurance scams to happen, especially via the internet. Ratings companies evaluate the financial health of the Insurance company and their ratings are a good predictor of the ability of the Insurance company to remain solvent for many years into the future. There would be nothing worse than for your Insurance company to fail after you have paid premiums for many years and you have developed a pre-existing health condition during this time. Now you may have a hard time finding a new Insurance company or the premium may be cost prohibitive due to age and health. Diff: 3 Topic: Insurance AACSB: Analytical Thinking 15 Copyright © 2016 Pearson Education, Inc. 9.3 Major Types of Life Insurance 1) The primary advantage of term insurance is a flexible premium. Answer: FALSE Diff: 1 Topic: Term Life Insurance AACSB: Analytical Thinking 2) Term life insurance has a life insurance component and a savings plan. Answer: FALSE Diff: 1 Topic: Term Life Insurance AACSB: Analytical Thinking 3) Cash-value insurance is any policy that provides both a death benefit and an opportunity to accumulate cash value. Answer: TRUE Diff: 1 Topic: Life Insurance AACSB: Analytical Thinking 4) The money that the policy holder is entitled to if the policy is terminated is known as the face value. Answer: FALSE Diff: 1 Topic: Whole Life Insurance AACSB: Analytical Thinking 5) With decreasing term insurance, each time the term insurance is renewed the premium decreases. Answer: FALSE Diff: 1 Topic: Term Life Insurance AACSB: Analytical Thinking 6) A universal life insurance policy is a type of cash-value insurance combining term insurance with a tax-deferred savings feature in a package in which both the premiums and the benefits are flexible. Answer: TRUE Diff: 1 Topic: Universal Life Insurance AACSB: Analytical Thinking 16 Copyright © 2016 Pearson Education, Inc. 7) The advantage of whole life insurance is that it is generally cheaper than term life insurance per dollar of coverage. Answer: FALSE Diff: 1 Topic: Whole Life Insurance AACSB: Analytical Thinking 8) Practically all insurance contracts include a suicide clause stating that the insurance company won't pay off for suicide deaths that occur within the first five years of the contract. Answer: FALSE Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 9) The primary advantage of term insurance is A) a flexible premium. B) a savings component. C) affordability. D) convertibility. Answer: C Diff: 1 Topic: Term Life Insurance AACSB: Analytical Thinking 10) The coverage grace period gives you an extension of generally ________ in which to make your premium payment without cancelling your policy. A) 15 days B) 30 days C) 45 days D) 60 days Answer: B Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 11) The incontestability clause states that the insurance company cannot dispute the validity of the contract after a specified period of time, usually A) one year. B) two years. C) five years. D) 10 years Answer: B Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 17 Copyright © 2016 Pearson Education, Inc. 12) Which of the following is not an insurance rating service? A) Weiss B) Moody's C) Standards & Fitch D) A.M. Best Answer: C Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 13) Jenny and Joey have seven children and are expecting another. Joey is the primary income provider for his family, and the couple recognizes that the growing family is in need of life insurance. To begin the agent search process, Jenny and Joey make a list of prospects from reputable companies. Both Jenny and Joey prefer to speak to an agent with a life insurance certification. What life insurance agent designation do you recommend? A) CLU B) LICA C) AIA D) CIR Answer: A Diff: 3 Topic: Life Insurance AACSB: Application of Knowledge 14) A method of determining how much life insurance you require based on funds your family would require to maintain its lifestyle after your death is called the A) earnings multiple approach. B) needs approach. C) cash liquidity approach. D) funds analysis approach. E) none of the above. Answer: B Diff: 1 Topic: Needs Approach AACSB: Analytical Thinking 15) Your agent argues in favor of cash-value life insurance. You counteract with term to A) have a larger policy and keep things simple. B) enjoy a relatively low cost per each $1,000 of coverage. C) have a lot of insurance at affordable prices when you need it the most. D) save the difference you would pay, invest it, and come out ahead. E) all of the above. Answer: E Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 18 Copyright © 2016 Pearson Education, Inc. 16) Joleene is a single parent with two children and earns $45,000 per year. She is purchasing term life insurance for 15 years until her youngest child is self supporting. Assuming her survivors can receive a 3% after-tax, inflation return on insurance proceeds, use the earnings multiple approach to calculate the face value of Joleene's policy. A) $33,445 B) $547,851 C) $397,548 D) $556,668 E) None of the above Answer: C Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 17) Using the earnings multiple approach calculate how much life insurance Heather and Robert need to take out on Heather. She earns $80,000 and is 37 years old. They want coverage until she retires at age 67. Robert is sure he can get an annual rate of return on the policy settlement of 8%. They have no children. A) $1,004,227 B) $997,553 C) $854,214 D) $630,417 E) None of the above Answer: D Diff: 3 Topic: Term Life Insurance AACSB: Analytical Thinking 18) Billy's occupation is a potentially dangerous one — he is a skydiving instructor. His agent pointed out that the monthly premiums will be high. Billy wants a lot of value for his money. He could take advantage of ________ life insurance at this time to save money. A) universal B) variable C) term D) credit E) whole Answer: C Diff: 1 Topic: Term Life Insurance AACSB: Analytical Thinking 19 Copyright © 2016 Pearson Education, Inc. 19) Sonny Coltraine was told by a friend that universal life is the best policy. He will find that A) it will have a tax-deferred savings feature. B) death benefits are not taxable income. C) death benefits and premiums are fixed. D) death benefits and premiums are flexible. E) A, B, and D above. Answer: E Diff: 2 Topic: Universal Life Insurance AACSB: Analytical Thinking 20) Charles is the sole beneficiary of his late uncle's life insurance policy. The face value of the policy is $785,000. Charles has decided to accept annual annuity payments of $95,000. The interest rate on the policy is 5%. How many annual payments will Charles receive from this policy? A) 7.08 years worth of payments B) 8.26 years worth of payments C) 10.92 years worth of payments D) None of the above Answer: C Diff: 3 Topic: Insurance Agents AACSB: Analytical Thinking 21) You might consider another insurance agent if your agent uses the ________ method to analyze the costs of a policy. A) TNC B) IANC C) NCO D) TLC E) none of the above Answer: A Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 22) You want to get a good buy on your life insurance contract. You find a book that compares insurance costs by incorporating the time value of money into its calculations. This method allows you to select wisely using the A) interest-adjusted net cost method. B) traditional net cost method. C) variable method. D) comparison cost index. Answer: A Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 20 Copyright © 2016 Pearson Education, Inc. 23) Barry Blair wants to select a good life insurance agent. His dad has had several negative experiences with life insurance agents in the past. What should Barry consider when selecting an agent? A) Has a professional designation B) Is a full-time agent C) Has the necessary experience and training D) Has references E) All of the above Answer: E Diff: 2 Topic: Insurance Agents AACSB: Analytical Thinking 24) Suppose that you earn $50,000 annually. You expect expenses to drop by 22% for your family in the event of your death. Currently, if you die, you want to provide for your family for at least 15 more years, and the applicable after-tax and inflation return assumed is 5%. Using the earnings multiple approach provided in your textbook, what would be the amount of life insurance that you should purchase? A) $301,080 B) $404,820 C) $485,940 D) $500,000 E) 519,000 Answer: B Diff: 3 Topic: Earnings Multiple Approach AACSB: Analytical Thinking 25) A.M. Best, Standard & Poor's, Moody's, and Weiss perform a vital service for the insurance industry. What do they do? A) They rate the quality level and performance of each company. B) They tell you the best price deals. C) They provide information on the best policies. D) They provide a listing of all agents. E) They provide a listing of all agents who have violated insurance laws. Answer: A Diff: 1 Topic: Rating AACSB: Analytical Thinking 21 Copyright © 2016 Pearson Education, Inc. 26) Alice and Tommy have 3 dependent children. Alice earns $125,000 per year. They are taking out insurance on Alice for the next 30 years. Tommy expects to get a 9.25% rate of return on the life insurance payoff. Using the earnings multiple approach calculate how much life insurance they need to take out on Alice. A) $987,440 B) $1,005,011 C) $1,105,447 D) $2,228,553 E) None of the above Answer: B Diff: 3 Topic: Guaranteed Renewability AACSB: Analytical Thinking 27) Suppose that your husband was killed in a bank robbery. Which of the following is not one of the typical settlement options that would be available? A) Installment-payments B) Interest-only C) Conversion of spousal insurance D) Lump-sum E) Life annuity Answer: C Diff: 3 Topic: Settlement Clause AACSB: Analytical Thinking 28) Let's assume you are the beneficiary of your great Aunt's life insurance policy. Sadly she passed away yesterday. You elect to receive annual payments from this policy for the next 20 years. The settlement amount is $500,000 and the interest accruing on the policy is an annual 8%. What will be your annual life insurance annuity payments? A) $10,923 B) $50,926 C) $72,551 D) $98,934 Answer: B Diff: 3 Topic: Insurance AACSB: Analytical Thinking 22 Copyright © 2016 Pearson Education, Inc. 29) Nancy and Leonard are married. They have two children who will be financially dependent for the next 20 years. They are taking out life insurance on Leonard, the bread winner and earns an annual salary of $80,000. Nancy is sure she is able to get a 9.5% rate of return on the policy settlement. Using the earnings multiple approach calculate how much life insurance they should take out on Leonard. A) $1,038,225 B) $1,704,952 C) $549,893 D) $301,471 E) None of the above Answer: C Diff: 3 Topic: Rider AACSB: Analytical Thinking 30) Luke is 30 years old and earns an annual salary of $55,000. His wife wants to take out a life insurance policy on him until he turns 67. Using the earnings multiple approach, how large should the face value of his insurance policy be—assuming his wife can earn an annual rate of return of 8.5% on his life insurance pay off? A) $223,985 B) $1,225,462 C) $430,803 D) $6,154,330 E) None of the above Answer: C Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 31) Brenda's husband Bob died last week. Her agent told her she could receive the death proceeds tax-free and a monthly check until her death. He is talking about the ________ settlement option. A) lump-sum B) life annuity C) interest-only D) installment-payments E) tax-free Answer: B Diff: 2 Topic: Settlement Clause AACSB: Analytical Thinking 23 Copyright © 2016 Pearson Education, Inc. 32) Javier Jimenez was pleasantly surprised to find out that within three to five years after expiration of a previous life insurance policy, he can A) change beneficiaries. B) void the grace period. C) reinstate the policy subject to current qualifications. D) change the incontestability clause. E) both A and D above. Answer: C Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 33) All of the following are types of life insurance annuity settlements except A) straight life annuity. B) period certain annuity. C) refund annuity. D) joint life and survivorship annuity. E) variable annuity. Answer: E Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 34) Choose the option(s) available in the nonforfeiture clause of a cash-value life policy. A) Exchange the policy for a paid-up term policy of equal face value. B) Receive the policy's cash value. C) Retain rights to a death benefit. D) Exchange the policy's cash value for a paid-up policy with a reduced face value. E) A, B, and D above Answer: E Diff: 3 Topic: Nonforfeiture Clause AACSB: Analytical Thinking 35) The ________ rider increases your death benefits at the same rate as inflation without forcing you to complete a new medical exam. A) waiver of premium for disability B) living benefits C) cost-of-living adjustment (COLA) D) guaranteed insurability E) accidental death benefit Answer: C Diff: 1 Topic: Whole Life Insurance AACSB: Analytical Thinking 24 Copyright © 2016 Pearson Education, Inc. 36) The policy feature that allows you to pay the premium late but still retain coverage is known as the A) loan clause. B) nonforfeiture clause. C) incontestability clause. D) grace period. E) policy reinstatement clause. Answer: D Diff: 1 Topic: Grace Period AACSB: Analytical Thinking 37) At what point does whole life insurance pay the death benefit? A) When the insured turns 100 years old B) When the maximum stated age is reached by the insured C) Upon due proof of death of the insured D) When the cash value equals the death benefit E) Either A, B, or C above Answer: E Diff: 2 Topic: Whole Life Insurance AACSB: Analytical Thinking 38) Special provisions that may be added to your policy which either provide extra benefits to the beneficiary or limit the company's liability under certain conditions are known as A) alternative provisions. B) secondary provisions. C) riders. D) attachments. E) none of the above. Answer: C Diff: 1 Topic: Rider AACSB: Analytical Thinking 39) Which of the following factors is connected with convertible term life insurance? A) A medical exam is not required. B) It helps make a smooth transition from term to cash-value insurance. C) There is a corresponding increase in premium cost. D) Generally, the conversion feature is only offered during the first two years. E) All of the above Answer: E Diff: 3 Topic: Term Life Insurance AACSB: Analytical Thinking 25 Copyright © 2016 Pearson Education, Inc. 40) The alternative ways that a beneficiary can choose to receive the policy benefits upon the death of the insured are called A) premium options. B) settlement options. C) terminal options. D) residual options. E) none of the above. Answer: B Diff: 1 Topic: Settlement Clause AACSB: Analytical Thinking 41) Sally Heath has the option of obtaining life insurance through her place of employment. She will not need to take a physical exam. This type of policy would be a/an ________ policy. A) universal life B) employer's life C) renewable term life D) group term life E) intermediate term life Answer: D Diff: 2 Topic: Term Life Insurance AACSB: Analytical Thinking 42) The ________ is the right of the policyholder to choose to receive the policy's cash value in exchange for the policyholder giving up his or her right to a death benefit. A) nonforfeiture right B) cash exchange right C) cash-out privilege D) residual cash right E) none of the above Answer: A Diff: 2 Topic: Nonforfeiture Clause AACSB: Analytical Thinking 43) Which of these life insurance plans holds the annual premium constant but decreases the face value of the policy each year? A) Decreasing term B) Credit life C) Mortgage life D) Universal life E) All of the above Answer: A Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 26 Copyright © 2016 Pearson Education, Inc. 44) You are considering the need for insurance. You desire a policy that provides permanent protection, has a fixed premium, and provides a fixed death benefit. What type of policy would you purchase? A) Term insurance B) Fixed premium insurance C) Whole life insurance D) Universal life insurance E) None of the above Answer: C Diff: 1 Topic: Whole Life Insurance AACSB: Analytical Thinking 45) Which of the following term plans is intended to cover an individual's outstanding debt? A) Renewable term B) Reentry term C) Credit life D) Mortgage life E) Both C and D above Answer: E Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 46) What is the name of the insurance policy that pays your beneficiary a specific amount of money if you die while covered by the policy, and this coverage is for a set number of years and must be renewed when it expires? A) Term insurance B) Fixed premium insurance C) Cash-value insurance D) Universal life insurance E) None of the above Answer: A Diff: 1 Topic: Term Life Insurance AACSB: Analytical Thinking 27 Copyright © 2016 Pearson Education, Inc. 47) Upon examining her life insurance policy, Sylvia found the cash value amount to be fixed rather than dependent upon other variables. Sylvia has a ________ insurance policy. A) whole life B) term life C) decreasing term D) variable life E) universal life Answer: A Diff: 3 Topic: Whole Life Insurance AACSB: Analytical Thinking 48) Of the following life insurance policies — term, whole life, universal life, variable life — two have fixed death benefits. Which are they? A) Term and variable life B) Term and universal life C) Term and whole life D) Whole life and universal life E) Whole life and variable life Answer: C Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 49) Which of the following is not a cash-value life insurance plan? A) Whole life B) Universal life C) Term life D) Variable life Answer: C Diff: 1 Topic: Life Insurance AACSB: Analytical Thinking 50) When is convertible term life a good idea? Answer: Convertible term life allows you to enjoy a lower premium when younger to fit your budget and allows you to smoothly change to a more permanent type of coverage later in life. It is also great because it allows you to convert to an individual policy in the event you lose your job and want to continue the policy. Diff: 1 Topic: Term Life Insurance AACSB: Analytical Thinking 28 Copyright © 2016 Pearson Education, Inc. 51) Name and briefly describe the ten features found in almost all life insurance contracts. Answer: 1. The beneficiary provision allows for a primary and contingent beneficiary to receive the death proceeds (face amount) upon the insured's death. 2. A grace period is an automatic extension for premium payments, generally 30 or 31 days after the premium is due. 3. The loan clause allows for loans, generally at a guaranteed rate, against the cash value of the policy. 4. A non-forfeiture clause gives the policyholder the cash value in exchange for the policy's termination, or allows exchanging the cash value for a paid-up policy with a reduced face value, or allows exchanging the policy's face value for a paid-up term policy. 5. The policy reinstatement clause provides the conditions for restoring a lapsed policy to its full rights, force, and effect. 6. A change of policy clause stipulates the conditions and allows the policyholder to change the form of the policy. 7. The suicide clause states that the insurance will not pay the death benefit for suicide during the first two years. 8. A payment of premium clause defines the alternatives for paying the premiums and allows for a change in payment methods. 9. The incontestability clause ensures that the insurance company cannot dispute the validity of the contract after it has been in force for a specified number of years, usually 2. 10. A list of settlement options gives the beneficiary options for receiving the policy benefits. Diff: 3 Topic: Life Insurance AACSB: Analytical Thinking 52) What are some drawbacks of term life insurance? Answer: Term life insurance becomes very costly in later years and is prohibitive for most people at that time. It has no cash-value build-up. You cannot use the cash value to pay the premiums later. Diff: 1 Topic: Life Insurance AACSB: Analytical Thinking 53) How is variable life different from universal life and term insurance? Who is it best suited for? Answer: Like universal life, it has a cash value with flexible premiums and death benefits. Unlike universal life, the cash value and death benefit are tied to and vary according to the performance of a set of investments that are chosen by the policyholder. Term life in any of its forms has none of these features. Variable life is aimed at individuals who want to manage their own investments and are willing to take associated risks. Diff: 2 Topic: Variable Life Insurance AACSB: Analytical Thinking 29 Copyright © 2016 Pearson Education, Inc. 54) Tell about the pros of group term life insurance. Answer: Group term life is often less expensive than an individual policy, especially if you are older or less healthy. Uninsurable individuals are able to get relatively low-cost insurance whereas they would not otherwise. You may be able to get more coverage for the same or less money. Diff: 1 Topic: Term Life Insurance AACSB: Analytical Thinking 55) Describe the major difference between renewable term and group term versus decreasing term and credit/mortgage group life insurance. Answer: Renewable term and group term are generally level insurance amounts — the face amount of life insurance does not change over time. Decreasing term and credit mortgage group face amounts usually do decrease over time to match the amount of outstanding debt. Diff: 2 Topic: Life Insurance AACSB: Analytical Thinking 56) Explain the advantage of reentry term life insurance. Answer: Reentry term is guaranteed renewable at one of two possible premium levels. If you pass a medical exam, you qualify for the lower premium. In other words, you reenter the same policy at a cost that would not otherwise be available. Diff: 2 Topic: Term Life Insurance AACSB: Analytical Thinking 57) What is the major advantage of universal life insurance at any age? Answer: Universal life allows for flexible premium payments so that policyholders can vary the amount and timing of their payments as their financial needs change. Diff: 1 Topic: Universal Life Insurance AACSB: Analytical Thinking 58) Which of the types of cash-value policies are permanent insurance? Answer: Whole life, universal life, and variable life are permanent types of life insurance. Diff: 1 Topic: Life Insurance AACSB: Analytical Thinking 59) What are the two basic forms of variable life insurance? Answer: The two basic forms of variable life are straight variable life and variable universal life. Diff: 1 Topic: Variable Life Insurance AACSB: Analytical Thinking 30 Copyright © 2016 Pearson Education, Inc. 9.4 Health Insurance 1) One of the provisions of the Affordable Care Act is to prevent insurance companies from denying coverage to consumers with preexisting conditions. Answer: TRUE Diff: 1 Topic: Affordable Care Act AACSB: Analytical Thinking 2) Health insurance not only pays for your medical bills but also provides you with replacement income while you are unable to work. Answer: FALSE Diff: 1 Topic: Health Insurance AACSB: Analytical Thinking 3) If you can afford health insurance but don't have it, you may have to pay a fee or penalty. Answer: TRUE Diff: 1 Topic: Health Insurance AACSB: Analytical Thinking 4) Compared to those of normal weight, the 34 percent of Americans who are considered obese incur $1,429 per year in additional medical costs, and the average hospital bill for a heart attack is $54,400. Answer: TRUE Diff: 3 Topic: Health Insurance AACSB: Analytical Thinking 5) Most major health care policies cover hospital, surgical, and physician coverages. Answer: TRUE Diff: 1 Topic: Major Medical Expense Insurance AACSB: Analytical Thinking 6) Sally's employer's insurance company does not offer eye insurance. She has always had 20/20 vision and as a healthy 24 year old assumes her eyes will not change drastically. Should she purchase a vision policy since her employer does not offer such a plan? A) Yes B) No Answer: B Diff: 2 Topic: Health Insurance AACSB: Analytical Thinking 31 Copyright © 2016 Pearson Education, Inc. 7) Traditional, fee-for-service plans are becoming rarer due to rising health care costs. Answer: TRUE Diff: 1 Topic: Health Insurance AACSB: Analytical Thinking 8) Under a managed health care or prepaid plan you have a good deal of freedom to choose your doctors and hospitals. Answer: FALSE Diff: 1 Topic: Health Maintenance Organization AACSB: Analytical Thinking 9) Under a traditional indemnity plan, most of your expenses are already covered and don't need to be reimbursed, but you're limited to receiving health care from a specified group of participating providers. Answer: FALSE Diff: 2 Topic: Health Insurance AACSB: Analytical Thinking 10) With a PPO, it is much more expensive to go to out of network healthcare providers. Answer: TRUE Diff: 2 Topic: Preferred Provider Organization AACSB: Analytical Thinking 11) Group insurance premiums are generally more expensive than individual policies with the same coverage. Answer: FALSE Diff: 2 Topic: Group Insurance AACSB: Analytical Thinking 12) Your insurance's copayment and deductible are the expenses that the insured must pay before the insurance company will pay any benefits. Answer: TRUE Diff: 3 Topic: Health Insurance AACSB: Analytical Thinking 13) If your employer doesn't provide them, then it might not be a financially wise decision to purchase dental and eye insurance. Answer: TRUE Diff: 2 Topic: Health Insurance AACSB: Analytical Thinking 32 Copyright © 2016 Pearson Education, Inc. 14) An HSA is a good form of health care coverage for young, healthy people who rarely get sick. Answer: TRUE Diff: 3 Topic: Health Savings Accounts AACSB: Analytical Thinking 15) There are some health care providers who do not accept flexible spending account payments. Answer: FALSE Diff: 3 Topic: Flexible Spending Account AACSB: Analytical Thinking 16) A flexible spending account saves you money on qualifying healthcare and childcare expenses. Answer: TRUE Diff: 2 Topic: Flexible Spending Account AACSB: Analytical Thinking 17) The main disadvantage of a flexible spending plan is that you may lose any money remaining in the account at the end of the fiscal year. Answer: TRUE Diff: 2 Topic: Flexible Spending Account AACSB: Analytical Thinking 18) With COBRA coverage, the employer pays the premiums. Answer: FALSE Diff: 3 Topic: COBRA AACSB: Analytical Thinking 19) According to the Affordable Care Act, children are allowed to stay on their parents insurance policy until they turn A) 21. B) 22. C) 24. D) 26. Answer: D Diff: 2 Topic: Affordable Care Act AACSB: Analytical Thinking 33 Copyright © 2016 Pearson Education, Inc. 20) According to the Keown book, which statement(s) reflect(s) the purpose of the Affordable Care Act? I. Improve quality and lower costs of health insurance II. Provide new consumer protections III. Minimize discrepancies in pre-existing condition costs IV. Increase access to affordable health care V. Hold insurance companies accountable A) I Only B) I, II, and V C) I, III, and IV D) I, II, IV, and V E) I, II, III, IV, and V Answer: D Diff: 3 Topic: Affordable Care Act AACSB: Analytical Thinking 21) The Health Insurance Marketplace is a new way for people to buy health insurance. To make plans easier to compare, the website presents plans in five categories with varying levels of costsharing. Which of the following plans is not offered? A) Silver: Your plan pays 70 percent, you pay 30 percent. B) Gold: Your plan pays 80 percent, you pay 20 percent. C) Platinum: Your plan pays 90 percent, you pay 10 percent. D) Titanium: Your plan pays 100 percent, you pay nothing. E) Catastrophic: A coverage option if you are under 30 or have very low income. Answer: D Diff: 3 Topic: Affordable Care Act AACSB: Application of Knowledge 22) The best strategy for health insurance coverage is to purchase a comprehensive policy. Of the following, which additional coverage should you not buy if it is not provided at work or in your individual policy? A) Accident B) Terminal disease C) Dental D) Eyewear E) You should not buy any of the above if your employer does not provide them. Answer: E Diff: 2 Topic: Health Insurance AACSB: Analytical Thinking 34 Copyright © 2016 Pearson Education, Inc. 23) Surgical insurance covers the cost of surgery. A surgical policy generally lists which of the following? A) The specific operations it will cover B) The maximum dollar amount that will be paid for each operation C) The dollar amount that will be paid to the surgeon for the operation D) All of the above Answer: D Diff: 3 Topic: Health Insurance AACSB: Analytical Thinking 24) Hospital insurance is generally part of every insurance plan. It covers the costs associated with a hospital stay including A) room charges. B) nursing costs. C) drugs supplied by the hospital. D) All of the above are correct. E) Only A and B are correct. Answer: D Diff: 3 Topic: Health Insurance AACSB: Analytical Thinking 25) Insurance that covers medical costs beyond those covered by basic health insurance is A) major medical insurance. B) catastrophic insurance. C) premium insurance. D) none of the above. Answer: A Diff: 2 Topic: Health Insurance AACSB: Analytical Thinking 26) Genevieve's husband died from lung cancer. As a result, she purchased additional ________ insurance. A) accident B) dread disease C) dental D) eyewear E) all of the above Answer: B Diff: 2 Topic: Health Insurance AACSB: Analytical Thinking 35 Copyright © 2016 Pearson Education, Inc. 27) Your entire family was injured in an automobile accident, some more seriously than others. If any member of your family became disabled to a greater extent, where might you look for disability benefits? A) Worker's Compensation B) Social Security C) Medicare D) Medicaid E) Both B and D above Answer: E Diff: 3 Topic: Medicare AACSB: Analytical Thinking 28) James is employed by the university. Yesterday he fell outside of his office due to water on the floor. He broke his leg in two places. What type of health care plan will cover James' expenses? A) Worker's Compensation. B) Medicaid. C) Medicare. D) Medigap. E) None of the above Answer: A Diff: 2 Topic: Worker's Compensation AACSB: Analytical Thinking 29) A ________ is a savings plan offered by some employers that allows each employee to have pretax earnings deposited into a specially designated account for paying qualified medical and dependant care bills. A) medical distribution account B) planned provider account C) group practice plan D) flexible spending account E) planned reimbursement account Answer: D Diff: 2 Topic: Flexible Spending Account AACSB: Analytical Thinking 36 Copyright © 2016 Pearson Education, Inc. 30) Veronica was recently diagnosed with a heart condition. Her doctor's bill was $4,200 for the diagnostics. Her policy has a $250 deductible and a 80/20 coinsurance provision up to $10,000 and then the insurance pays 100% thereafter. In total, how much will Veronica pay for her diagnosis? A) $250 B) $4,200 C) $1,040 D) $10,000 Answer: C Diff: 1 Topic: Deductible AACSB: Analytical Thinking 31) Sylvester and JoAnn have both been laid off work during the last year and are now very poor. They found out that needy families can receive medical benefits through Medicaid. In addition, JoAnn found out that Medicaid can be used A) by the aged. B) by the blind. C) by disabled persons. D) for Medicare premiums, deductibles, and co-payments. E) all of the above. Answer: E Diff: 2 Topic: Medicaid AACSB: Analytical Thinking 32) Medicare part ________ pays for doctor's fees/medical services/supplies, while part ________ pays for hospital insurance benefits. A) B; A B) A; B C) A; C D) B; C E) none of the above Answer: A Diff: 2 Topic: Medicare AACSB: Analytical Thinking 37 Copyright © 2016 Pearson Education, Inc. 33) Suppose that you wanted to purchase insurance that is sold by a private insurance company that will help bridge the gap in your Medicare coverage. You would purchase what type of insurance? A) Medicare Additional insurance B) Medigap insurance C) Medicare Plus insurance D) Medicare Bridge insurance E) None of the above Answer: B Diff: 1 Topic: Medigap Insurance AACSB: Analytical Thinking 34) Which of the following is a government-sponsored health care plan? A) Medicare B) Medicaid C) Worker's Compensation D) A and B only E) A, B, and C Answer: E Diff: 3 Topic: Worker's Compensation AACSB: Analytical Thinking 35) Which of the following statements is true about individual health care policies versus group healthcare policies? A) You may be required to take a physical exam. B) They tend to be less costly than group plans. C) You may need one as a supplement to your group policy. D) They are tailor-made for you. E) All but B are correct. Answer: E Diff: 3 Topic: Group Insurance AACSB: Analytical Thinking 36) Individual practice association, group practice, and point-of-service plans are the three basic types of A) Blue Cross Blue Shield plans. B) traditional indemnity plans. C) major medical expense plans. D) health maintenance organizations. E) fee-for-service policies. Answer: D Diff: 2 Topic: Health Maintenance Organization AACSB: Analytical Thinking 38 Copyright © 2016 Pearson Education, Inc. 37) Managed health care/prepaid care plans differ from fee-for-service or traditional indemnity plans in that they A) automatically file the claims for you. B) require you to see only a specified group of doctors, hospitals, and clinics. C) are more expensive to operate and cost you more money. D) are less efficient. E) both A and B above. Answer: E Diff: 3 Topic: Managed Health Care AACSB: Analytical Thinking 38) The difference between an individual practice association plan (IPA) and a group practice plan is that A) an IPA is made up of a group of independent doctors who work out of their own offices; while a group practice plan confines doctors to the same central, shared facility. B) a group practice plan is made up of a group of independent doctors who work out of their own offices; while an IPA confines doctors to the same central, shared facility. Answer: A Diff: 3 Topic: Health Insurance AACSB: Analytical Thinking 39) Your health care coverage is with a PPO. For approved, in-network providers your deductible is $500 and your coinsurance provision is 80%. For out-of-network providers, your deductible is $1,000 and your coinsurance provision is 70%. Assume there is no co-pay provision and you have no other claims this calendar year. You have decided to go to a specialist that is not in the network and the bill is $1,400. How much will you have to pay out-of-pocket? A) $1,400 B) $1,120 C) $420 D) $1,320 Answer: B Diff: 3 Topic: Preferred Provider Organization AACSB: Analytical Thinking 40) Your grandmother has just turned 65 years old and is now eligible for Medicare. She asks you whether or not she should also purchase Medigap insurance. What would you tell her to do? A) No, Medicare is a very comprehensive coverage so you won't need any additional coverage. B) Yes, Medicare is very complicated and there are areas not covered so it would be a good idea to purchase additional coverage. Answer: B Diff: 2 Topic: Medigap Insurance AACSB: Analytical Thinking 39 Copyright © 2016 Pearson Education, Inc. 41) Group health insurance A) refers to the way the health insurance is sold rather than to the characteristics of the policy. B) tends to be more expensive. C) reflects the age and health of the policyholder. D) all of the above. Answer: A Diff: 3 Topic: Group Insurance AACSB: Analytical Thinking 42) When firms allow employees to "opt out" regarding health care, employees A) are offered a cash incentive for electing not to cover their families under the company health plan. B) are not eligible to participate if their spouse has health insurance. C) are only eligible to participate if they are single. D) none of the above. Answer: A Diff: 3 Topic: Health Insurance AACSB: Analytical Thinking 43) An employer-sponsored medical plan that allows each employee to have pretax earnings deposited into a specially designated account for the purposes of paying specific types of expenses is called a A) flexible spending account. B) medical emergency account. C) medical contingency account. D) pre-tax contingency account. E) none of the above. Answer: A Diff: 1 Topic: Flexible Spending Account AACSB: Analytical Thinking 44) Under COBRA, if you work for a company with at least 20 employees, you will be given the opportunity to continue your health insurance coverage for ________ after you leave the company, depending on why you left. A) zero to six months B) 6-12 months C) 72-84 months D) 18-36 months E) none of the above Answer: D Diff: 1 Topic: COBRA AACSB: Analytical Thinking 40 Copyright © 2016 Pearson Education, Inc. 45) For every $100 set aside in a flexible spending account, taxable income is reduced by A) $10. B) $25. C) $50. D) $100. E) not enough information available. Answer: D Diff: 3 Topic: Flexible Spending Account AACSB: Analytical Thinking 46) All of the following are true regarding Health Savings Accounts except A) they allow individuals to pay for current health care expenses on a tax-free basis. B) they allow individuals to save for future health care expenses on a tax-free basis. C) balances in HSAs earn interest before they are spent. D) unspent HSA funds are lost as the end of the year. Answer: D Diff: 3 Topic: Health Savings Accounts AACSB: Analytical Thinking 47) Congress worked diligently in 2010 to pass a health care bill designed to make sure that almost all Americans have health insurance coverage. What is the official name of this act? A) Obamacare B) American Insurance All Act C) Patient Protection and Affordable Care Act D) None of the above Answer: C Diff: 3 Topic: Health Insurance AACSB: Analytical Thinking 48) Why are health care costs so expensive at this time? Answer: There are several reasons why health care is so expensive. For one, there seems to be a lack of incentives for providers of health care to economize. There is no incentive for patients to exercise restraint in visits and medical billing. It is very costly to develop, test, and certify new drugs. The cost of litigation from malpractice suits has skyrocketed. Diff: 2 Topic: Health Care AACSB: Analytical Thinking 41 Copyright © 2016 Pearson Education, Inc. 49) Describe the pros and cons of major medical insurance. Answer: Major medical covers medical costs beyond those covered by basic health insurance. It offsets the financial effects of a catastrophic illness or injury. It takes over where basic health insurance leaves off. Most plans cover a lifetime cap large enough for most needs. This type of plan does not provide complete coverage. There is a deductible and a co-payment provision. The lifetime cap of $250,000 limits the coverage for more costly bills. Consider an add-on policy that provides protection of up to at least $1 million. Diff: 2 Topic: Health Insurance AACSB: Reflective Thinking 50) Briefly explain the different types of health insurance. Answer: Most health insurance is basic health insurance, which includes a combination of hospital, surgical, and physician expense insurance. Hospital insurance covers the costs associated with a hospital stay, including room charges, nursing costs, operating room fees, and drugs supplied by the hospital. Surgical insurance covers the cost of surgery. Physician expense covers the physician's fees outside of surgery. Major medical covers medical costs beyond those covered by basic health insurance. Diff: 1 Topic: Health Insurance AACSB: Analytical Thinking 51) Why is health insurance so necessary today? Answer: Health insurance is necessary to pay for the bills associated with sickness and injury. No one can pay for medical expenses out of his or her income. Even the wealthy will eventually exhaust their resources when paying for a lengthy illness or accident. The health care providers and facilities could not afford to stay open without some means of being compensated for their efforts. Health care insurance seems to be the best way to do this. Without this insurance the quality of health care would go down or not be available to the extent we need it. Diff: 2 Topic: Health Insurance AACSB: Analytical Thinking 52) Explain the purpose of the government-sponsored health care plans. Answer: Worker's Compensation plans are governed by individual state laws and cover most employees. Benefits are paid for injuries and illnesses incurred on the job. Medicare covers disabled persons and persons 65 and older. Part A is mandatory, is free of charge, and provides hospital benefits. Part B is voluntary, is paid for by the individual, and covers doctors' fees and a wide range of medical services and supplies. Medicaid provides medical care for the aged, blind, and disabled as well as to needy families with dependent children. Medicaid payments go toward Medicare premiums, deductibles, and co-payments. Diff: 2 Topic: Worker's Compensation AACSB: Analytical Thinking 42 Copyright © 2016 Pearson Education, Inc. 53) Compare and contrast group and individual health insurance policies. Answer: Group insurance, which is insurance available at work or through some organization, is generally preferable to an individual policy. Most employer group plans do not require a physical exam; however, association or professional groups do require an exam. Group insurance is usually 15% to 40% less costly than an individual plan because of its bargaining power. Just the same, if you are in good health and in a safe occupation, sometimes an individual policy is less costly. An individual policy has the advantage of being tailor-made for you or your family. They tend in general to offer the same coverage as group plans. Since they are expensive, shop around. If you cannot get group coverage, get a comprehensive personal plan. The plans are also handy for acting as a supplement to a group policy. Diff: 2 Topic: Health Insurance AACSB: Analytical Thinking 54) Tell how a PPO is different from a fee-for-service or HMO plan. Answer: A preferred provider organization is a bit like a cross between a traditional fee-forservice plan and an HMO. Under a PPO, an employer or insurer negotiates with a group of doctors and hospitals to provide health care for its employees or members at reduced rates. Those doctors and hospitals that agree to the reduced pricing system become members of the PPO. Diff: 1 Topic: PPO AACSB: Analytical Thinking 55) Compare and contrast the three basic types of HMOs. Answer: An individual practice association plan is made up of independent doctors who are paid by the HMO as well as have their own private practice. Patients go to the doctors' regular offices and receive their medical treatment there. With a group practice plan, doctors are generally employed directly by the HMO and work out of a central, shared facility. The members can receive their medical treatment only from these doctors and only at these central facilities. A point-of-service plan allows its members to seek medical treatment from both HMO-affiliated doctors and non-HMO-affiliated doctors. Diff: 1 Topic: Health Maintenance Organization AACSB: Analytical Thinking 56) Compare and contrast fee-for-service and managed health care plans. Answer: Fee-for-service or traditional indemnity plans provide reimbursement for all or part of your medical expenditures. In general, they give you a good deal of freedom to choose your doctor and hospital. Managed health care or prepaid care plans entitle you to the health care of a specified group of participating doctors, hospitals, and clinics. The plans are generally offered by health maintenance organizations or variations of them. Diff: 2 Topic: Managed Health Care AACSB: Analytical Thinking 57) Provide seven tips on shopping for any health care insurance. 43 Copyright © 2016 Pearson Education, Inc. Answer: 1. Enroll in your group plan at work. 2. If there is no group plan, purchase the best individual one you can afford. 3. Don't be without health care insurance. 4. Don't cancel your present plan until the new one comes into effect. 5. Consider only a highly rated company. 6. Look for companies that provide fast, fair, and courteous claim service. 7. Get comprehensive health insurance. 8. Take as high a deductible and coinsurance payment as you can afford, so as to reduce costs. Diff: 2 Topic: Health Care AACSB: Reflective Thinking 58) Explain the advantages and disadvantages of medical reimbursement accounts. Answer: An employee is allowed to deposit pretax earnings into a specially designed account for paying health care costs. In addition to tax savings on unreimbursed health care costs, an MRA allows pretax dollars to pay for other medical expenses that many health care plans do not cover, such as eyeglasses and orthodontia expenses. The biggest drawback to this plan is that any contributions to the flexible spending account not used by the end of the year are lost. Care must be taken to set aside the amount of funds that approximate the bills that will be incurred. Diff: 2 Topic: Medical Reimbursement Account AACSB: Reflective Thinking 59) How does the concept of "opting out" work? Answer: An employer may offer employees a cash incentive to either opt out of the firm's health care plan or to elect not to cover their families. This provides a way for a company to reduce health care costs and increase profits. If your spouse has health care coverage where she or he works, opting out may be an alternative. If you opt out, will you be able to reenroll in the plan at a future date? This is a key question, for you do not want to be without health care insurance. Diff: 2 Topic: Health Insurance AACSB: Reflective Thinking 44 Copyright © 2016 Pearson Education, Inc. 60) What can each of us do in our personal lives to control health care costs? Answer: We can stay healthier by adopting and living the following practices: -Have regular health care check-ups. -Quit smoking. -Exercise regularly. -Eat healthy. -Reduce or eliminate alcohol consumption. -Reduce stress. -Get adequate rest. Diff: 2 Topic: Health Care AACSB: Reflective Thinking 61) List the required health benefits that health care plans must provide under the Affordable Care Act. Answer: -Ambulatory patient services -Emergency services -Hospitalization -Maternity and newborn care -Mental health and substance abuse disorder services -Prescription drugs -Laboratory services -Preventive and wellness services -Pediatric services -Rehabilitative and habilitative services and devices Diff: 2 Topic: Affordable Care Act AACSB: Analytical Thinking 62) List the plans and payment percentages offered in the Health Insurance Marketplace. Answer: Bronze: Your plan pays 60 percent, you pay 40 percent. Silver: Your plan pays 70 percent, you pay 30 percent. Gold: Your plan pays 80 percent, you pay 20 percent. Platinum: Your plan pays 90 percent, you pay 10 percent. Catastrophic: A coverage option if you are under 30 or have very low income. Diff: 3 Topic: Affordable Care Act AACSB: Application of Knowledge 45 Copyright © 2016 Pearson Education, Inc. 9.5 Disability Insurance 1) Only a long-term disability policy makes sense, because only it protects against financial catastrophe. Answer: TRUE Diff: 3 Topic: Disability Insurance AACSB: Analytical Thinking 2) Long-term disability will replace 100% of your income while you are unable to return to work. Answer: FALSE Diff: 2 Topic: Disability Insurance AACSB: Analytical Thinking 3) With some disability income policies, you may receive partial benefits if you are able to return to work with a part-time schedule. Answer: TRUE Diff: 2 Topic: Disability Insurance AACSB: Analytical Thinking 4) If you have a good comprehensive health care policy, paying extra for disability income coverage is not a good use of your scarce insurance budget. Answer: FALSE Diff: 2 Topic: Disability Insurance AACSB: Diverse and Multicultural Work Environments 5) With short-term disability coverage, payments will continue to age 65. Answer: FALSE Diff: 2 Topic: Disability Insurance AACSB: Analytical Thinking 6) Health insurance that provides payments to the insured in the event that the insured's income is interrupted by illness, sickness, or accident is called ________ insurance. A) accident and sickness B) disability C) income interruption D) unemployment Answer: B Diff: 1 Topic: Disability Insurance AACSB: Analytical Thinking 46 Copyright © 2016 Pearson Education, Inc. 7) Short-term disability insurance generally provides benefits on disabilities from ________ after a short wait of ________ days. A) one day to three months; zero B) 30 days to three months; 7 C) three month to six months; 8 to 10 D) six months to two years; 8 to 30 E) none of the above Answer: D Diff: 2 Topic: Disability Insurance AACSB: Analytical Thinking 8) Some disability insurance policies offer residual or partial payments when returning to work part-time. These payments are especially desirable for those who are A) under the age of 40. B) over the age of 50. C) one year away from retirement. D) self-employed. E) none of the above. Answer: D Diff: 2 Topic: Disability Insurance AACSB: Analytical Thinking 9) The waiting or elimination period on one's disability insurance refers to the period after the disability during which no benefits can occur. The waiting period is equivalent to A) the cost of one's total premium. B) one's annual salary. C) one's median income. D) 6 months of one's salary. E) the deductible for one's health care policy. Answer: E Diff: 3 Topic: Disability Insurance AACSB: Analytical Thinking 10) Policies define people as disabled if they can't perform A) the duties of their own occupation. B) the duties of any occupation for which they are reasonably suited. C) their own occupation for the first two years of their disability, and thereafter if they can't perform any occupation for which they are reasonably suited. D) All of the above could be correct, it varies with the policy. Answer: D Diff: 2 Topic: Disability Insurance AACSB: Analytical Thinking 47 Copyright © 2016 Pearson Education, Inc. 11) Who needs disability insurance? A) Anyone who relies on income from a job B) Only people who are married C) Only people who have dependents D) Only people who have no investment income Answer: A Diff: 2 Topic: Disability Insurance AACSB: Analytical Thinking 12) Which of the following does not offer some form of disability insurance? A) Employer benefit package B) Individual health policy C) Medicare D) Worker's Comp E) Social Security Answer: C Diff: 2 Topic: Disability Insurance AACSB: Analytical Thinking 13) Why are so many people without disability insurance? A) Employers don't supply it. B) People don't know about it. C) The price is prohibitive for most people. D) They cannot qualify for it. E) It may not be available in their state. Answer: C Diff: 2 Topic: Disability Insurance AACSB: Analytical Thinking 14) Describe the disability insurance features that make sense. Answer: 1. Choose a plan with a definition of disability that is to your advantage. 2. Consider partial or residual payments when returning to work part-time. 3. Given a choice between short-term and long-term benefit durations, choose long-term. 4. Choose a waiting/elimination period that is economical — generally three months. 5. It's a good idea to have a waiver of premium to pay the premium when disabled. 6. Get guaranteed renewable and noncancellable when you can afford it. 7. Obtain rehabilitation coverage to allow for retraining benefits. Diff: 2 Topic: Disability Insurance AACSB: Analytical Thinking 48 Copyright © 2016 Pearson Education, Inc. 15) Define disability insurance and give the common sources of it. Answer: Disability insurance is earning-power insurance for anyone who relies on income from a job for financial support. It is generally available to replace most of your monthly income when you become disabled due to injury or illness. Workers' Comp provides benefits when the disability is work-related. Social Security gives benefits when the disability lasts for more than five months and is expected to last for more than one year. Employer-sponsored plans can cover short-term and long-term disabilities. If a plan is not available at work, you might consider an individual plan that would offset your loss. Diff: 2 Topic: Disability Insurance AACSB: Information Technology 9.6 Long-Term Care Insurance 1) Long-term care insurance provides money to help pay for nursing home and home health care expenses. Answer: TRUE Diff: 2 Topic: Long-Term Care Insurance AACSB: Diverse and Multicultural Work Environments 2) Long-term care insurance may not be a good buy for people under the age of 40. Answer: TRUE Diff: 3 Topic: Long-Term Care Insurance AACSB: Analytical Thinking 3) You should only consider a long-term care policy that includes coverage for Alzheimer's and Parkinson's disease. It should also include which of the following provisions? A) Type of care B) Benefit and waiting period C) Inflation adjustment D) Waiver of premium E) All of the above Answer: E Diff: 3 Topic: Long-Term Care Insurance AACSB: Analytical Thinking 49 Copyright © 2016 Pearson Education, Inc. 4) Most long-term care policies require the insured to be unable to perform one or more activities of daily living (ADLs) without assistance. Which of these is included? A) Walking B) Eating C) Exercising D) Dressing E) A, B, and D are included. Answer: E Diff: 3 Topic: Long-Term Care Insurance AACSB: Analytical Thinking 5) Why is long-term care insurance needed? A) It is not covered by major medical insurance. B) It is not covered under Medicare. C) Life expectancies have increased. D) All of the above E) None of the above Answer: D Diff: 2 Topic: Long-Term Care Insurance AACSB: Analytical Thinking 6) Which statement is false regarding benefit periods on long-term health care insurance? A) Long-term health care coverage can range all the way from one year to a lifetime. B) The average stay in a nursing home is 2.44 years. C) The recommended minimum benefit period is six to nine years. D) Because women tend to spend longer periods of time in nursing care compared to men, women should consider a longer benefit period. Answer: C Diff: 3 Topic: Long-Term Care Insurance AACSB: Analytical Thinking 50 Copyright © 2016 Pearson Education, Inc. 7) Define long-term care insurance and describe its basic features. Answer: Long-term care insurance pays for nursing home expenses and home health care. These plans protect you from the high costs of hiring someone to take care of you in a nursing home or at your own home. Carefully shop around because these types of policies are laden with exceptions and conditions to meet. Most policies require you to be unable to perform one or more "activities of daily living" without assistance. Consider only policies that cover Alzheimer's and Parkinson's disease. The basic features include: 1. Investigate the type of care. Check to see if you are covered in a nursing home only or if the insurance extends to home care, adult day care, and hospital care. 2. The length of the benefit period is important, especially for women who live longer. Get a minimum of three to six years of coverage when taking out the policy. 3. The cost of the waiting period varies with the length. Take as long of a period as you can afford — at least 100 days. 4. Be sure to include an inflation adjustment provision to cover the rising future costs. 5. The waiver of premium lets your insurance company pay for the premiums while you are receiving benefits. This is optional and is too costly to be included in general. Diff: 2 Topic: Long-Term Care Insurance AACSB: Analytical Thinking 51 Copyright © 2016 Pearson Education, Inc.