Personal Finance 6th Edition By Madura – Test Bank

Chapter 11 Auto and Homeowner’s Insurance

11.1 Background on Insurance

1) Insurance protects you against potential financial losses or liability that result from unexpected events.
Answer: TRUE
Diff: 1
Question Status: Previous edition

2) In the context of insurance, the term liability is used to mean that you may be required to pay other individuals for damages that you caused to them or their property.
Answer: TRUE
Diff: 1
Question Status: Revised

3) Having liability coverage as part of auto and homeowner’s policies helps protect your ________ in the event of an accident.
A) insurance rates
B) credit rating
C) net worth
D) house value
Answer: C
Diff: 1
Question Status: New

11.2 Managing Risk

1) The first step in the risk management process is to insure against risk.
Answer: FALSE
Diff: 2
Question Status: Previous edition

2) One method of managing risk is to limit your exposure to a financial loss.
Answer: TRUE
Diff: 2
Question Status: Revised

3) The decision to obtain insurance should be determined by weighing its costs and benefits.
Answer: TRUE
Diff: 1
Question Status: Previous edition

4) Insurance can protect your existing net worth and also increase the likelihood that you will be able to increase your net worth in the future.
Answer: TRUE
Diff: 1
Question Status: Previous edition
5) Insurance should be considered even when there is a high likelihood than an event will cause a small financial loss.
Answer: FALSE
Diff: 1
Question Status: Revised

6) The most popular forms of insurance for individuals are property and casualty, life insurance, and health insurance.
Answer: TRUE
Diff: 2
Question Status: Previous edition

7) ________ is not a suggested risk management method.
A) Avoiding risks
B) Ignoring risks
C) Accepting risks
D) Insuring against risks
Answer: B
Diff: 1
Question Status: Previous edition

8) The primary function of insurance is to
A) insure you against all types of risk.
B) become wealthy from the claims you file.
C) maintain your existing level of wealth.
D) give you peace of mind.
Answer: C
Diff: 1
Question Status: Revised

9) Lessening your exposure to an illness by getting periodic health checkups is an example of
A) avoiding risks.
B) reducing risks.
C) accepting risks.
D) transferring risks.
Answer: B
Diff: 1
Question Status: Previous edition

10) Which risk management alternative is feasible when the likelihood of an event that could cause a financial loss is very low and the potential financial loss due to the event is small?
A) Avoid risk
B) Reduce risk
C) Accept risk
D) Insure against risk
Answer: C
Diff: 2
Question Status: Previous edition