AFC Risk Management and Insurance 4 — Questions and Answers
Question 1: A client has a $500 deductible and 80/20 coinsurance with a $3,000 out-of-pocket maximum on their health plan. If they incur $10,000 in covered medical expenses, what is their total out-of-pocket cost?
- $2,400
- $3,000 (Correct answer)
- $2,000
- $3,500
Correct answer: $3,000
After the $500 deductible, the remaining $9,500 triggers 20% coinsurance ($1,900), totaling $2,400 — but the $3,000 OOP max caps total liability at $3,000.
Question 2: Which type of life insurance policy builds cash value and allows the policyholder to adjust premium payments and death benefit amounts?
- Whole life insurance
- Term life insurance
- Universal life insurance (Correct answer)
- Variable term insurance
Correct answer: Universal life insurance
Universal life insurance combines permanent coverage with flexibility to adjust premiums and death benefits, while accumulating cash value at a credited interest rate.
Question 3: An AFC client asks about 'subrogation' in insurance. Which best describes this concept?
- The insurer's right to recover losses paid from a liable third party (Correct answer)
- The insured's right to cancel a policy within 30 days
- The process of filing a claim after a loss
- The insurer's right to cancel a policy for non-payment
Correct answer: The insurer's right to recover losses paid from a liable third party
Subrogation allows the insurer to step into the insured's shoes and pursue recovery from the responsible third party after paying a claim.
Question 4: What is the primary purpose of an umbrella liability policy?
- To replace homeowners insurance in high-risk areas
- To provide excess liability coverage beyond underlying policy limits (Correct answer)
- To cover intentional acts excluded by standard policies
- To insure items not covered under a homeowners policy
Correct answer: To provide excess liability coverage beyond underlying policy limits
An umbrella policy provides additional liability protection that kicks in after the limits of underlying policies (auto, homeowners) are exhausted.
Question 5: A client is self-employed and has no employer-sponsored health insurance. Which marketplace option allows them to deduct 100% of health insurance premiums from their taxable income?
- COBRA continuation coverage
- Self-employed health insurance deduction (Correct answer)
- Flexible Spending Account (FSA)
- Health Reimbursement Arrangement (HRA)
Correct answer: Self-employed health insurance deduction
Self-employed individuals may deduct 100% of health insurance premiums for themselves and their family as an above-the-line deduction on their federal income tax return.
Question 6: Which disability insurance definition of disability is most favorable to the policyholder?
- Any occupation
- Modified own occupation
- Own occupation (Correct answer)
- Social Security definition
Correct answer: Own occupation
The 'own occupation' definition pays benefits if you cannot perform the duties of your specific occupation, making it most beneficial compared to broader 'any occupation' standards.
Question 7: A client's homeowners policy has replacement cost coverage for personal property. Their five-year-old laptop worth $400 today is destroyed. Under replacement cost, the insurer pays:
- $400 minus depreciation
- $400, the current market value
- The cost of a comparable new laptop today (Correct answer)
- Nothing, as electronics are excluded
Correct answer: The cost of a comparable new laptop today
Replacement cost coverage pays the cost to replace the item with a new, comparable item at today's prices, without deducting for depreciation.
AFC Risk Management and Insurance 4
A client has a $500 deductible and 80/20 coinsurance with a $3,000 out-of-pocket maximum on their health plan.
If they incur $10,000 in covered medical expenses, what is their total out-of-pocket cost?