PSI Insurance Exam Practice 5 — Questions and Answers
Question 1: Which of the following is NOT a required element for a valid insurance contract?
- Offer and acceptance
- Consideration
- Legal purpose
- Written form (Correct answer)
Correct answer: Written form
Insurance contracts do not have to be in writing to be legally valid; oral binders are enforceable, though written policies are standard practice.
Question 2: A 'named perils' property policy differs from an 'open perils' (all-risk) policy in that it:
- Covers any cause of loss the insured did not cause intentionally
- Only covers losses caused by perils specifically listed in the policy (Correct answer)
- Provides broader coverage at a lower cost than open perils
- Excludes all natural disasters by definition
Correct answer: Only covers losses caused by perils specifically listed in the policy
A named perils policy only responds to losses caused by one of the perils explicitly named in the policy; unlisted causes of loss are not covered.
Question 3: Under COBRA, how long may a qualified beneficiary typically continue group health coverage after losing coverage due to a voluntary termination of employment?
- 12 months
- 18 months (Correct answer)
- 29 months
- 36 months
Correct answer: 18 months
COBRA allows qualified beneficiaries who lose group health coverage due to voluntary or involuntary termination of employment (other than gross misconduct) to continue coverage for up to 18 months.
Question 4: The 'twisting' of insurance refers to which prohibited practice?
- Charging different premiums to insureds in the same risk class
- Inducing a policyholder to lapse or surrender a policy by misrepresenting facts to buy a new one (Correct answer)
- Sharing commissions with unlicensed persons
- Issuing a policy without the required state filing
Correct answer: Inducing a policyholder to lapse or surrender a policy by misrepresenting facts to buy a new one
Twisting is an unfair trade practice where an agent uses misrepresentation or incomplete comparisons to persuade a policyholder to replace an existing policy with a new one that may not be in their best interest.
Question 5: Which settlement option in a life insurance policy pays the death benefit in equal installments over a fixed period regardless of how long the beneficiary lives?
- Life income option
- Fixed amount option
- Fixed period option (Correct answer)
- Interest only option
Correct answer: Fixed period option
The fixed period (installments for a fixed period) option pays out the proceeds plus interest in equal payments over a specified number of years, stopping when the period ends.
Question 6: An insurer that uses reinsurance is attempting to accomplish which primary goal?
- Avoid paying agent commissions on large policies
- Transfer a portion of its risk to another insurer to limit potential losses (Correct answer)
- Reduce premiums for individual policyholders
- Comply with state requirements to cover uninsurable risks
Correct answer: Transfer a portion of its risk to another insurer to limit potential losses
Reinsurance is a risk management tool that allows a primary (ceding) insurer to transfer part of its exposure to a reinsurer, protecting the primary insurer's financial stability against large or catastrophic losses.
Question 7: Which type of annuity allows the contract owner to allocate premium among separate account sub-accounts and accept investment risk in exchange for potential higher returns?
- Fixed annuity
- Indexed annuity
- Variable annuity (Correct answer)
- Immediate fixed annuity
Correct answer: Variable annuity
A variable annuity's accumulation value fluctuates with the performance of chosen investment sub-accounts (similar to mutual funds), so the owner bears the investment risk and potential reward.
PSI Insurance Exam Practice 5
Which of the following is NOT a required element for a valid insurance contract?