MICHIGAN LIFE INSURANCE FINAL EXAM 2026 ACTUAL
QUESTIONS AND ANSWERS RATED A+
✔✔Policy summary - ✔✔How consumers evaluate the suitability of the recommended
product?
✔✔Liquidity - ✔✔An insurer's ability to make unpredictable payoffs to policy owners
✔✔Hazard - ✔✔This is any factor, condition, or situation that creates an increased
possibility that a peril (a cause of a loss) will actually occur
✔✔Loss - ✔✔The unintentional decrease in the value of an asset due to a peril
✔✔Types of hazards include: - ✔✔Physical - poor health, overweight, blind
Moral - dishonesty, drugs, alcohol abuse
Morale - careless attitude - reckless driving, jumping off a cliff, stealing, racing
motorcycles, carefree, careless lifestyle. This attitude causes an indifference to loss.
✔✔Peril - ✔✔An immediate, specific event which causes loss, such as an earthquake or
tornado. Peril can also be referred to as the accident itself.
✔✔Risk - ✔✔The potential for loss
✔✔Speculative risk - ✔✔A risk that presents both the chance for loss or gain. Gambling
is an example. Speculative risks are not insurable.
✔✔Pure risk - ✔✔The only insurable risk and present a potential for loss only, such as
injury, illness, and death
✔✔Elements of insurable risk - ✔✔Loss must be due to chance - causeless, outside of
the insured control
Loss must be definite and measurable - time, place, amount, and when payable
Loss must be predictable - statistically able to estimate the average frequency and
severity
Loss cannot be catastrophic - must be reasonable, $1 trillion policy is not reasonable
Loss exposure to be insured must be - ideally common enough, that the insurer can pull
many homogenous, or similar, exposure units (law of large numbers)
Must be randomly selected - fair proportion of good and poor risks (adverse selection)
✔✔Law of large numbers - ✔✔The larger the amount of exposures that are combined
into a group, the more certainty there is to the amount of loss incurred in any given
Period. The law of large numbers allows prediction of individual and group losses based
on past experience. An increased degree of accuracy and predicting losses in large
groups.
,✔✔Adverse selection - ✔✔Insurer must minimize adverse selection, which is defined as
the tendency for poor than average risks to seek out insurance
✔✔Risk management - ✔✔The process of analyzing exposures that create risk and
designing programs to handle them
✔✔Physical hazards - ✔✔Physical hazards are physical, or tangible conditions of exist
in a manner which makes a loss more likely to occur. Physical hazards can be seen,
touched, tasted, smelled, or tripped over, thereby causing loss. Poor health and ice on
roads are examples of physical hazards. (Being an idiot, leaving gasoline near the
furnace)
✔✔Moral hazards - ✔✔Moral hazards make the loss more likely to occur due to
dishonest character of the insured, who may be more than disposed to either engage in
criminal activity or cause a loss because of negative habits. The chance of loss
increases because of who the insured is. In other words, the chance of loss is greater to
the individual character of the insured. Properly defined, a moral hazard occurs when
the insured is much more intention and conscious of participating in wrongdoing that's
more likely to lead to a loss. (More likely to lie to an insurance company)
✔✔Five ways to handle risk - ✔✔Avoidance - avoid the risk altogether. For example,
you can avoid the risk of getting injured in a car accident by never leaving the house.
Reduction - take precautions; minimizing severity of a potential loss. You can reduce
the risk of getting injured in a car accident by taking public transportation. (Smoke alarm
is another example)
Retention (self insure) accepting a risk and confronting it if it occurs. You would retain
the risk of getting injured in a car accident by driving without insurance.
Transfer (transference) - make someone else responsible for a loss. Buying auto
insurance transfers the cost associated with a car accident from the driver to the
insurance company. Best example is buying insurance.
Risk pooling-when a large group of people spread a risk for a small certain cost. It
transfers risk from an individual to a group. An example of risk sharing would be
doctors, pulling their money to cover malpractice exposures.
✔✔Principle of indemnity - ✔✔Involves making an insured hole by restoring them to the
same condition as before a loss
✔✔Human life value approach - ✔✔A method of determining the financial value of a
persons life based on computing the current value of a persons future earnings.
$50,000 (Current income) x 10 years (protection) =$500,000 insurance policy
✔✔Needs based value approach - ✔✔A method of determining a persons financial
value based on the amount of money needed for current and future expenses these
expenses include final expense, spouses income, mortgage, college, education,
, retirement, charity, donations, etc. $60,000 (expenses) x 5 years (protection) =
$300,000 insurance policy
✔✔Morale hazards - ✔✔Murel hazards result from the personal or subjective thought
process of the insured. In other words, they arise from a state of mind if it's related to
the indifference of an insured to whatever loss may occur. The insured unintentionally
creates a loss situation of an unconscious level. In essence, they just don't care about
loss prevention since the property is insured. (Alex leaves his car running unattended
and the doors unlocked heated on a cold winter morning. This act makes it more likely
that the car will easily be stolen by a car thief who's looking for such vehicles)
✔✔Standard risks - ✔✔Standard risks are considered to have an average potential for
loss. Standard risks are typically insured in return for a predetermined standard
premium.
✔✔Substandard risks - ✔✔Substantive risks are judged to be a poor risk for an
insurance company and have a higher than average potential for loss. Substandard
risks may be insured for an increased premium, covered with a lower benefit, or
declined altogether.
✔✔Preferred risks - ✔✔Preferred risks are judged to be a better than average risk for
insurance company. Preferred risks have a lower potential for loss. Insurer offer
coverage to preferred risks for a lower than average premium.
✔✔Risk avoidance - ✔✔Risk of violence means that the risk can be avoided by
eliminating an activity or condition that exposes a person to a type of loss or specific
perils (not skydiving, won't die in skydiving accident)
✔✔Risk reduction - ✔✔Risk reduction is the process by which a person takes delivered
actions to reduce the likely hood of a loss, or the severity of a loss if it should occur
(installing smoke alarms, and a sprinkler system reduces the risk of death and will
reduce the amount of property loss in a building fire)
✔✔Risk retention - ✔✔Risk retention is a conscious strategy in which a person
maintains a certain amount of reserves to address unexpected expenses that are
caused by insurable losses. Some forms of risk retention are limited, such as the
deductibles in a health insurance plan or personal automobile insurance. Some large
companies that have highly predictable patterns of a loss also self ensure. (a person
with a $1000 deductible on her automobile insurance policy retains $1000 of any risk if
her car is damaged in an accident.)
✔✔STARR - ✔✔Shared, transferred, avoided, reduction, retention
QUESTIONS AND ANSWERS RATED A+
✔✔Policy summary - ✔✔How consumers evaluate the suitability of the recommended
product?
✔✔Liquidity - ✔✔An insurer's ability to make unpredictable payoffs to policy owners
✔✔Hazard - ✔✔This is any factor, condition, or situation that creates an increased
possibility that a peril (a cause of a loss) will actually occur
✔✔Loss - ✔✔The unintentional decrease in the value of an asset due to a peril
✔✔Types of hazards include: - ✔✔Physical - poor health, overweight, blind
Moral - dishonesty, drugs, alcohol abuse
Morale - careless attitude - reckless driving, jumping off a cliff, stealing, racing
motorcycles, carefree, careless lifestyle. This attitude causes an indifference to loss.
✔✔Peril - ✔✔An immediate, specific event which causes loss, such as an earthquake or
tornado. Peril can also be referred to as the accident itself.
✔✔Risk - ✔✔The potential for loss
✔✔Speculative risk - ✔✔A risk that presents both the chance for loss or gain. Gambling
is an example. Speculative risks are not insurable.
✔✔Pure risk - ✔✔The only insurable risk and present a potential for loss only, such as
injury, illness, and death
✔✔Elements of insurable risk - ✔✔Loss must be due to chance - causeless, outside of
the insured control
Loss must be definite and measurable - time, place, amount, and when payable
Loss must be predictable - statistically able to estimate the average frequency and
severity
Loss cannot be catastrophic - must be reasonable, $1 trillion policy is not reasonable
Loss exposure to be insured must be - ideally common enough, that the insurer can pull
many homogenous, or similar, exposure units (law of large numbers)
Must be randomly selected - fair proportion of good and poor risks (adverse selection)
✔✔Law of large numbers - ✔✔The larger the amount of exposures that are combined
into a group, the more certainty there is to the amount of loss incurred in any given
Period. The law of large numbers allows prediction of individual and group losses based
on past experience. An increased degree of accuracy and predicting losses in large
groups.
,✔✔Adverse selection - ✔✔Insurer must minimize adverse selection, which is defined as
the tendency for poor than average risks to seek out insurance
✔✔Risk management - ✔✔The process of analyzing exposures that create risk and
designing programs to handle them
✔✔Physical hazards - ✔✔Physical hazards are physical, or tangible conditions of exist
in a manner which makes a loss more likely to occur. Physical hazards can be seen,
touched, tasted, smelled, or tripped over, thereby causing loss. Poor health and ice on
roads are examples of physical hazards. (Being an idiot, leaving gasoline near the
furnace)
✔✔Moral hazards - ✔✔Moral hazards make the loss more likely to occur due to
dishonest character of the insured, who may be more than disposed to either engage in
criminal activity or cause a loss because of negative habits. The chance of loss
increases because of who the insured is. In other words, the chance of loss is greater to
the individual character of the insured. Properly defined, a moral hazard occurs when
the insured is much more intention and conscious of participating in wrongdoing that's
more likely to lead to a loss. (More likely to lie to an insurance company)
✔✔Five ways to handle risk - ✔✔Avoidance - avoid the risk altogether. For example,
you can avoid the risk of getting injured in a car accident by never leaving the house.
Reduction - take precautions; minimizing severity of a potential loss. You can reduce
the risk of getting injured in a car accident by taking public transportation. (Smoke alarm
is another example)
Retention (self insure) accepting a risk and confronting it if it occurs. You would retain
the risk of getting injured in a car accident by driving without insurance.
Transfer (transference) - make someone else responsible for a loss. Buying auto
insurance transfers the cost associated with a car accident from the driver to the
insurance company. Best example is buying insurance.
Risk pooling-when a large group of people spread a risk for a small certain cost. It
transfers risk from an individual to a group. An example of risk sharing would be
doctors, pulling their money to cover malpractice exposures.
✔✔Principle of indemnity - ✔✔Involves making an insured hole by restoring them to the
same condition as before a loss
✔✔Human life value approach - ✔✔A method of determining the financial value of a
persons life based on computing the current value of a persons future earnings.
$50,000 (Current income) x 10 years (protection) =$500,000 insurance policy
✔✔Needs based value approach - ✔✔A method of determining a persons financial
value based on the amount of money needed for current and future expenses these
expenses include final expense, spouses income, mortgage, college, education,
, retirement, charity, donations, etc. $60,000 (expenses) x 5 years (protection) =
$300,000 insurance policy
✔✔Morale hazards - ✔✔Murel hazards result from the personal or subjective thought
process of the insured. In other words, they arise from a state of mind if it's related to
the indifference of an insured to whatever loss may occur. The insured unintentionally
creates a loss situation of an unconscious level. In essence, they just don't care about
loss prevention since the property is insured. (Alex leaves his car running unattended
and the doors unlocked heated on a cold winter morning. This act makes it more likely
that the car will easily be stolen by a car thief who's looking for such vehicles)
✔✔Standard risks - ✔✔Standard risks are considered to have an average potential for
loss. Standard risks are typically insured in return for a predetermined standard
premium.
✔✔Substandard risks - ✔✔Substantive risks are judged to be a poor risk for an
insurance company and have a higher than average potential for loss. Substandard
risks may be insured for an increased premium, covered with a lower benefit, or
declined altogether.
✔✔Preferred risks - ✔✔Preferred risks are judged to be a better than average risk for
insurance company. Preferred risks have a lower potential for loss. Insurer offer
coverage to preferred risks for a lower than average premium.
✔✔Risk avoidance - ✔✔Risk of violence means that the risk can be avoided by
eliminating an activity or condition that exposes a person to a type of loss or specific
perils (not skydiving, won't die in skydiving accident)
✔✔Risk reduction - ✔✔Risk reduction is the process by which a person takes delivered
actions to reduce the likely hood of a loss, or the severity of a loss if it should occur
(installing smoke alarms, and a sprinkler system reduces the risk of death and will
reduce the amount of property loss in a building fire)
✔✔Risk retention - ✔✔Risk retention is a conscious strategy in which a person
maintains a certain amount of reserves to address unexpected expenses that are
caused by insurable losses. Some forms of risk retention are limited, such as the
deductibles in a health insurance plan or personal automobile insurance. Some large
companies that have highly predictable patterns of a loss also self ensure. (a person
with a $1000 deductible on her automobile insurance policy retains $1000 of any risk if
her car is damaged in an accident.)
✔✔STARR - ✔✔Shared, transferred, avoided, reduction, retention
