Module 4 Quiz notes

Chapter 8: Insuring Your Life

Insurance is intended to protect you and your family from the financial consequences of losing
assets or income when an accident, illness, or death occurs. See 8-1: Basic Insurance Concepts.

From your perspective, you are transferring your risk of loss to the insurance company. See 8-1:
Basic Insurance Concepts.

The needs analysis method assesses your family’s total economic needs and subtracts the
financial resources available after your death to determine the amount of additional life
insurance required to protect your family. See 8-3: How Much Life Insurance Is Right for You?

Social Security survivor’s benefits under Social Security are intended to provide basic,
minimum support to families faced with the loss of a principal wage earner. See 8-3: How
Much Life Insurance Is Right for You?

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6. Jonathan estimates that financial resources worth $2,000,000 will be necessary to protect his
family after his death. What amount of insurance, as per the needs analysis method, should
Jonathan purchase if he has current financial resources worth $1,000,000?
a. $1,000,000
b. $2,000,000
c. $2,500,000
d. $1,500,000
e. $500,000
ANSWER: A
RATIONALE: Jonathan should purchase a life insurance policy of $1,000,000.
Amount of Life Insurance Coverage Needed = Total Financial Resources
Needed – Total Financial Resources Available = $2,000,000 – $1,000,000 =
$1,000,000 See 8-3: How Much Life Insurance Is Right for You?

One of the biggest advantages of term life is that its initial premiums are lower than other types
of insurance, especially for younger people. See 8-4: What Kind of Policy Is Right for You?

A whole life insurance policy often provides lower yields than other investment vehicles. See 8-
5: Buying Life Insurance.

13. Marilyn Simms died with a $200,000 life insurance policy. Her husband, Jack, is the
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primary beneficiary, and their children, Mimi (age 24) and Ann (age 30), are the contingent
beneficiaries. All three survive Marilyn. How will the policy proceeds be distributed?
a. $200,000 to Jack
b. $100,000 each to Mimi and Ann
c. $100,000 to Jack and $50,000 each to Mimi and Ann
d. $66,666 each to Jack, Mimi, and Ann
e. $150,000 to Jack and $25,000 each to Mimi and Ann
ANSWER: A
RATIONALE: Jack is the primary beneficiary, so he will receive $200,000. The primary
beneficiary receives the entire death benefit if he or she is surviving when the
insured dies. See 8-6: Key Features of Life Insurance Policies.

Loss prevention is any activity that reduces the chance that a loss will occur (such as driving
within the speed limit to lessen the chance of being in a car accident). See 8-1: Basic Insurance
Concepts.

Loss control is any activity that lessens the severity of loss once it occurs. See 8-1: Basic
Insurance Concepts Basic Insurance Concepts

Chapter 9: Insuring Your Health

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Workers’ compensation insurance is designed to compensate workers who are injured on the
job or become ill through work-related causes. Although mandated by the federal government,
each state is responsible for workers’ compensation legislation and regulation. See 9-2: Health
Insurance Plans.

In the traditional indemnity plan, the lower your deductible, the higher your premium. See 9-2:
Health Insurance Plans.

Funds for Medicare benefits come from Social Security taxes paid by covered workers and
their employers. See 9-2: Health Insurance Plans.

Social Security offers disability income benefits, but you must be unable to do any job
whatsoever to receive benefits. Benefits are payable only if your disability is expected to last at
least 1 year. See 9-6: Disability Income Insurance.
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Michael’s estimated current monthly take-home pay is $4,500. His total existing monthly
benefit is $2,950. Michael’s estimated monthly disability benefit is:
a. $1,550.
b. $550.
c. $2,950.
d. $7,450.
e. $4,500.
ANSWER: a
RATIONALE: Michael’s Estimated Monthly Disability Benefit = Estimated Current Monthly
Take-Home Pay – Total Existing Monthly Benefit = $4,500 – $2,950 = $1,550
See 9-6: Disability Income Insurance.

Patrick’s monthly take-home pay is $5,000. His net worth is $125,000. He estimated that he
would receive Social Security benefits worth $1,000 and company disability benefits $2,000 if
he becomes disabled. The additional disability benefit that he needs to arrange for is:
a. $3,000.
b. $2,000.
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 c. $5,000.
d. $6,000.
e. $7,000.
ANSWER: B
RATIONALE: Patrick’s Estimated Monthly Disability Benefits = Estimated Current Monthly
Take-Home Pay – Total Existing Monthly Benefits = $5,000 – ($2,000 +
$1,000) = $2,000 See 9-6: Disability Income Insurance.

A coordination of benefits provision in a health care policy prohibits collecting more than 100%
of covered charges by collecting benefits from more than one policy. See 9-4: Medical Expense
Coverage and Policy Provisions.

Chapter 10: Protecting Your Property

Negligence occurs when someone fails to act in a reasonable manner. See 10-1: Basic
Principles of Property Insurance.
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The principle of indemnity states that the insured may not be compensated by the insurance
company in an amount exceeding the insured’s economic loss. Thus, it will prevent an insured
from collecting more than what he or she has lost. See 10-1: Basic Principles of Property
Insurance.

The personal property floater provides either blanket or scheduled coverage of items that are not
covered adequately in a standard homeowner’s policy. See 10-2: Homeowner’s Insurance.

Most individuals face two basic types of exposure: physical loss of property and loss through
liability. See 10-1: Basic Principles of Property Insurance.

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Most homeowner’s policies exclude earthquakes and floods, even if the property is located in
an area where the risk of an earthquake or a flood is relatively high. See 10-2: Homeowner’s
Insurance.

An increase in the amount of the deductible will decrease the amount of insurance premiums.
See 10-2: Homeowner's Insurance.

An independent agent represents multiple insurance companies. See 10-5: Buying Insurance
and Settling Claims.

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At the scene of an accident, the police are only responsible for assessing the probability of a
law violation. See 10-5: Buying Insurance and Settling Claims.

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