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web.groovymark@gmail.com
- December 18, 2024
Question 21
Which type of insurance policy covers liability losses from a negligent third party?
a) Umbrella liability insurance
b) Subrogation insurance
c) Named-perils insurance
d) Homeowner’s insurance
Answer: b) Subrogation insurance
Explanation: Subrogation rights allow an insurance company to seek reimbursement from a negligent third party after the insurer has paid for losses.
Question 22
What does the “law of large numbers” help insurance companies to do?
a) Lower premiums for high-risk customers
b) Predict individual losses accurately
c) Predict group behavior more accurately as the group size increases
d) Identify high-risk customers for premium increases
Answer: c) Predict group behavior more accurately as the group size increases
Explanation: The law of large numbers allows insurance companies to predict loss trends more accurately by using data from large groups of insured individuals.
Question 23
What is the primary benefit of umbrella liability insurance?
a) It replaces homeowner’s insurance
b) It provides extra liability coverage beyond standard policies
c) It covers damage to personal property
d) It eliminates the need for health insurance
Answer: b) It provides extra liability coverage beyond standard policies
Explanation: Umbrella liability insurance provides additional liability coverage beyond the limits of a homeowner’s or auto policy, protecting against significant claims and lawsuits.
Question 24
Which of the following is an example of speculative risk?
a) The possibility of an investment generating either a gain or loss
b) The risk of fire damaging a home
c) The chance of losing money through identity theft
d) The risk of incurring a medical expense
Answer: a) The possibility of an investment generating either a gain or loss
Explanation: Speculative risk refers to situations where there is potential for both gain and loss, such as investing in the stock market.
Question 25
What type of insurance policy would cover the loss of personal belongings in a rented dwelling?
a) Homeowner’s insurance
b) Named-perils insurance
c) Renter’s contents broad form (HO-4)
d) Liability insurance
Answer: c) Renter's contents broad form (HO-4)
Explanation: Renter’s contents broad form (HO-4) provides coverage for the personal belongings of individuals who rent their homes, protecting against losses such as theft or fire.
Question 26
What is the main purpose of a revocable living trust?
a) To avoid paying estate taxes
b) To provide income for the grantor during retirement
c) To manage assets during the grantor’s lifetime and avoid probate after death
d) To ensure the beneficiaries receive a lump sum payment
Answer: c) To manage assets during the grantor’s lifetime and avoid probate after death
Explanation: A revocable living trust allows the grantor to manage assets during their lifetime and avoid probate after death, offering flexibility and control over the estate.
Question 27
What does the “large-loss principle” encourage in risk management?
a) To insure only small, frequent risks
b) To retain risks that are financially affordable and insure risks that are not
c) To avoid purchasing insurance for any type of risk
d) To insure against speculative risks only
Answer: b) To retain risks that are financially affordable and insure risks that are not
Explanation: The large-loss principle advises insuring risks that could cause significant financial harm and retaining smaller, affordable risks.
Question 28
What is the key feature of “coinsurance” in property insurance policies?
a) The policyholder pays a percentage of the loss, with the insurer covering the rest
b) The policyholder pays a fixed amount before the insurer pays
c) The insurer covers the entire loss
d) The policyholder must pay premiums twice a year
Answer: a) The policyholder pays a percentage of the loss, with the insurer covering the rest
Explanation: Coinsurance in property insurance requires the policyholder to share a percentage of the cost of the loss, with the insurer covering the remainder.
Question 29
What is the benefit of a “testamentary trust”?
a) It avoids estate taxes
b) It becomes effective immediately upon being created
c) It takes effect upon the death of the grantor and provides asset management for heirs
d) It allows the grantor to make changes at any time
Answer: c) It takes effect upon the death of the grantor and provides asset management for heirs
Explanation: A testamentary trust is created in a will and becomes effective after the grantor’s death, ensuring that assets are managed and distributed according to their wishes.
Question 30
What is a “payable-on-death” (POD) designation in estate planning?
a) A way to avoid estate taxes
b) A legal mechanism to transfer funds to a designee upon the account owner’s death
c) A provision that allows beneficiaries to access funds before death
d) A retirement savings account designation
Answer: b) A legal mechanism to transfer funds to a designee upon the account owner's death
Explanation: A POD designation allows funds in an account to be transferred directly to a designee upon the account owner’s death, avoiding probate.
Question 31
Which of the following defines “market risk” in investing?
a) The risk of losing money due to individual investment decisions
b) The possibility of investment losses due to overall market conditions
c) The risk associated with a company’s internal operations
d) The possibility of gaining or losing based on currency fluctuations
Answer: b) The possibility of investment losses due to overall market conditions
Explanation: Market risk refers to the risk that an entire market or a segment of the market will decline, affecting the value of investments.
Question 32
Which of the following economic indicators is considered countercyclical?
a) Unemployment rate
b) Stock market index
c) Consumer confidence index
d) Gross domestic product (GDP)
Answer: a) Unemployment rate
Explanation: The unemployment rate is a countercyclical indicator, meaning it increases when the economy is in decline and decreases when the economy improves.
Question 33
What is the Consumer Confidence Index used to gauge?
a) The level of government spending
b) Consumer satisfaction with financial services
c) The willingness of consumers to spend money in the economy
d) The overall health of the banking industry
Answer: c) The willingness of consumers to spend money in the economy
Explanation: The Consumer Confidence Index measures how optimistic or pessimistic consumers are about the economy, influencing their willingness to spend money.
Question 34
Which of the following would be classified as a “short-term liability”?
a) A 30-year mortgage
b) A loan due in 6 months
c) A student loan with a 10-year term
d) A car loan with 5 years remaining
Answer: b) A loan due in 6 months
Explanation: A short-term liability is any obligation that must be paid within one year, such as a loan due in 6 months.
Question 35
What is a “cash flow statement” used for in personal finance?
a) To list and summarize income and expense transactions over a specific period
b) To calculate the total value of an individual’s assets
c) To determine an individual’s net worth
d) To estimate future earnings
Answer: a) To list and summarize income and expense transactions over a specific period
Explanation: A cash flow statement tracks and summarizes income and expenses over a set period, showing where money comes from and how it is spent.
Question 36
What is the “prime rate”?
a) The interest rate charged by banks to their least creditworthy customers
b) The interest rate charged by banks to their most creditworthy customers
c) The interest rate set by the Federal Reserve for all loans
d) The average interest rate charged by credit card companies
Answer: b) The interest rate charged by banks to their most creditworthy customers
Explanation: The prime rate is the interest rate that banks charge their most creditworthy customers, and it is often used as a benchmark for other loans.
Question 37
What does the term “deleveraging” refer to in an economic context?
a) Increasing the use of credit in the economy
b) Reducing the overall use of credit in the economy
c) Raising interest rates to reduce inflation
d) Increasing government debt to stimulate growth
Answer: b) Reducing the overall use of credit in the economy
Explanation: Deleveraging occurs when individuals, businesses, or the economy as a whole reduce their reliance on credit by paying down debt or avoiding new borrowing.
Question 38
What does a “brokered CD” offer?
a) Higher yield compared to regular bank-issued CDs
b) A fixed interest rate for the entire term
c) No early withdrawal penalties
d) Unlimited liquidity
Answer: a) Higher yield compared to regular bank-issued CDs
Explanation: Brokered CDs are purchased through brokerage firms and typically offer higher yields than bank-issued CDs due to their bulk purchasing and resale to individual investors.
Question 39
Which of the following describes “vested” retirement funds?
a) Employer contributions that belong to the employee after meeting certain conditions
b) Employee contributions that are invested in the stock market
c) Retirement funds that are used to pay off medical bills
d) Retirement savings used to purchase life insurance
Answer: a) Employer contributions that belong to the employee after meeting certain conditions
Explanation: Vesting refers to the process where employees earn the right to keep employer contributions to their retirement accounts, usually after meeting specific service requirements.
Question 40
What is the “debt-to-income method” used to calculate?
a) The total amount of debt a person can safely borrow
b) The percentage of monthly income used to make debt repayments
c) The number of years required to pay off all debts
d) The difference between secured and unsecured debt
Answer: b) The percentage of monthly income used to make debt repayments
Explanation: The debt-to-income method calculates the percentage of a person's monthly gross income that goes toward debt repayments, helping determine financial health.
