NEW FX LIFE AND HEALTH CHAPTER 1
PRACTICE Q&A NEW MODIFIED TESTED AND
APPROVED!!!
The reduction, decrease, or disappearance of value of the person or property insured in a
policy by a peril insured against is known as:
A. Hazard
B. Risk
C. Loss
D. Exposure -- ANSWER--C. Loss (Loss is the reduction, decrease, or disappearance of
value of the person or property insured in a policy by a peril insured against)
Which of the following insurance options would be considered a risk-sharing arrangement?
A. Reciprocal
B. Stock
C. Mutual
D. Surplus lines -- ANSWER--A. Reciprocal (When insurance is obtained through a
reciprocal insurer, the insureds are sharing the risk of loss with other subscribers)
On the participating insurance policy issued by a mutual insurance company, dividends paid
to policyholders are:
A. Guaranteed
B. Not taxable since the IRS treats them as a return of a portion of the premium paid.
C. Paid at a fixed rate every year
Page 1 of 53
,D. Taxable as ordinary income -- ANSWER--B. Not taxable since the IRS treats them as
a return of a portion of the premium paid (With participating policies, policy owners are
entitled to dividends. which, in the case of mutual companies, are nontaxable because they
are considered a return of excess premiums)
Which statement regarding insurable risks is NOT correct?
A An insurable risk must involve a loss that is definite as to cause, time, place and amount.
B. Insureds cannot be randomly selected.
C. Insurance cannot be mandatory
D. The insurable risk needs to be statistically predictable -- ANSWER--B. Insureds
cannot be randomly selected. (Granting insurance must not be mandatory, selecting insureds
randomly will help the insurer to have a fair proportion of good risk to poor risks. All other
statements are true)
An agent sells insurance over the phone. One of his applicants is heavily drunk when she
applies for and then almost instantly receives her policy. Which of the following is true?
A. The policy is legal; only mental retardation and psychiatric illness qualify as limiting
factors.
B. The policy is not legal if it can be proven that the applicant was drink during the
application process.
C. The contract is legal, since the agent, acting on behalf of the insurer, granted her the
policy.
D. The policy is legal; it would only be illegal if the agent had been drunk. -- ANSWER-
-B. The policy is not legal if it can be proven that the applicant was drink during the
application process. (When an insurer and insured enter into a contract, both parties must be
of legal age and mentally competent. Being heavily drunk impairs mental competency;
therefore, if it can be proven that the applicant was drunk during the application and
acceptance process, her policy would not be legal)
Page 2 of 53
,Insurance policies are not drawn up through negotiations, and an insured has little to say
about its provisions. What contract characteristic does this describe?
A. Conditional
B. Personal
C. Adhesion
D. Unilateral -- ANSWER--C. Adhesion (A contract of adhesion is prepared by only the
insurer; the insured's only option is to accept or reject the policy as it is written)
An insurer neglects to pay a legitimate claim that is covered under the terms of the policy.
Which of the following insurance principles has the insurer violated?
A. Adhesion
B. Consideration
C. Good Faith
D. Representation -- ANSWER--B. Consideration (The binding force is any contract is
consideration. Consideration on the part of the insured is the payment of premiums and the
health representations made in the application. Consideration on the part of the insurer is the
promise to pay in the event of loss)
Which of the following best describes an insurance company that has been formed under the
laws of this state?
A. Domestic
B. Sovereign
C. Alien
D. Foreign -- ANSWER--A. Domestic (A company is domestic when doing business
within the state in the which it is incorporated)
What documentation grants express authority to an agent?
A. Fiduciary contract
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, B. State provisions
C. Agent's contract with the principal
D. Agent's insurance licenseC. -- ANSWER--C. Agent's contract with the principal (The
principal grants authority to an agent through the agent's contract)
Peril is most easily defined as:
A. Something that increases the chance of loss
B. The cause of loss insured against
C. An unhealthy attitude about safety
D. The chance of a loss occurring -- ANSWER--B. The cause of loss insured against
(Perils are the causes of loss insured against in an insurance policy)
Which of the following is NOT a characteristic of an insurable risk?
A. The loss exposure must be large
B. The loss must be catastrophic
C. The loss must be due to chance
D. The loss must be measurable -- ANSWER--B. The loss must be catastrophic (In order
to be characterized as pure risk, the loss must be due to chance, definite, measurable, and
predictable, but not catastrophic)
Because an agent is using stationery with the logo of an insurance company, applicants for
insurance assume that the agent is authorized to transact on behalf of that insurer. What type
of agent authority does this describe?
A. Assumed
B. Apparent
C. Express
Page 4 of 53
PRACTICE Q&A NEW MODIFIED TESTED AND
APPROVED!!!
The reduction, decrease, or disappearance of value of the person or property insured in a
policy by a peril insured against is known as:
A. Hazard
B. Risk
C. Loss
D. Exposure -- ANSWER--C. Loss (Loss is the reduction, decrease, or disappearance of
value of the person or property insured in a policy by a peril insured against)
Which of the following insurance options would be considered a risk-sharing arrangement?
A. Reciprocal
B. Stock
C. Mutual
D. Surplus lines -- ANSWER--A. Reciprocal (When insurance is obtained through a
reciprocal insurer, the insureds are sharing the risk of loss with other subscribers)
On the participating insurance policy issued by a mutual insurance company, dividends paid
to policyholders are:
A. Guaranteed
B. Not taxable since the IRS treats them as a return of a portion of the premium paid.
C. Paid at a fixed rate every year
Page 1 of 53
,D. Taxable as ordinary income -- ANSWER--B. Not taxable since the IRS treats them as
a return of a portion of the premium paid (With participating policies, policy owners are
entitled to dividends. which, in the case of mutual companies, are nontaxable because they
are considered a return of excess premiums)
Which statement regarding insurable risks is NOT correct?
A An insurable risk must involve a loss that is definite as to cause, time, place and amount.
B. Insureds cannot be randomly selected.
C. Insurance cannot be mandatory
D. The insurable risk needs to be statistically predictable -- ANSWER--B. Insureds
cannot be randomly selected. (Granting insurance must not be mandatory, selecting insureds
randomly will help the insurer to have a fair proportion of good risk to poor risks. All other
statements are true)
An agent sells insurance over the phone. One of his applicants is heavily drunk when she
applies for and then almost instantly receives her policy. Which of the following is true?
A. The policy is legal; only mental retardation and psychiatric illness qualify as limiting
factors.
B. The policy is not legal if it can be proven that the applicant was drink during the
application process.
C. The contract is legal, since the agent, acting on behalf of the insurer, granted her the
policy.
D. The policy is legal; it would only be illegal if the agent had been drunk. -- ANSWER-
-B. The policy is not legal if it can be proven that the applicant was drink during the
application process. (When an insurer and insured enter into a contract, both parties must be
of legal age and mentally competent. Being heavily drunk impairs mental competency;
therefore, if it can be proven that the applicant was drunk during the application and
acceptance process, her policy would not be legal)
Page 2 of 53
,Insurance policies are not drawn up through negotiations, and an insured has little to say
about its provisions. What contract characteristic does this describe?
A. Conditional
B. Personal
C. Adhesion
D. Unilateral -- ANSWER--C. Adhesion (A contract of adhesion is prepared by only the
insurer; the insured's only option is to accept or reject the policy as it is written)
An insurer neglects to pay a legitimate claim that is covered under the terms of the policy.
Which of the following insurance principles has the insurer violated?
A. Adhesion
B. Consideration
C. Good Faith
D. Representation -- ANSWER--B. Consideration (The binding force is any contract is
consideration. Consideration on the part of the insured is the payment of premiums and the
health representations made in the application. Consideration on the part of the insurer is the
promise to pay in the event of loss)
Which of the following best describes an insurance company that has been formed under the
laws of this state?
A. Domestic
B. Sovereign
C. Alien
D. Foreign -- ANSWER--A. Domestic (A company is domestic when doing business
within the state in the which it is incorporated)
What documentation grants express authority to an agent?
A. Fiduciary contract
Page 3 of 53
, B. State provisions
C. Agent's contract with the principal
D. Agent's insurance licenseC. -- ANSWER--C. Agent's contract with the principal (The
principal grants authority to an agent through the agent's contract)
Peril is most easily defined as:
A. Something that increases the chance of loss
B. The cause of loss insured against
C. An unhealthy attitude about safety
D. The chance of a loss occurring -- ANSWER--B. The cause of loss insured against
(Perils are the causes of loss insured against in an insurance policy)
Which of the following is NOT a characteristic of an insurable risk?
A. The loss exposure must be large
B. The loss must be catastrophic
C. The loss must be due to chance
D. The loss must be measurable -- ANSWER--B. The loss must be catastrophic (In order
to be characterized as pure risk, the loss must be due to chance, definite, measurable, and
predictable, but not catastrophic)
Because an agent is using stationery with the logo of an insurance company, applicants for
insurance assume that the agent is authorized to transact on behalf of that insurer. What type
of agent authority does this describe?
A. Assumed
B. Apparent
C. Express
Page 4 of 53
