Free SOA Exam FAM (Fundamentals of Actuarial Mathematics) Long-Term Insurance Coverages and Retirement Financial Security Programs Practice Questions

Personal auto liability is a short-term P&C coverage, not long-term health insurance.

(A) long-term disability is health coverage. (B) LTC is health. (C) major medical is health. (E) Medigap is health.

The answer is personal auto liability.

In practice, the rules regarding the extent of a creditor's insurable interest vary by jurisdiction. However, the general principle is:

**A creditor has insurable interest in a debtor's life.** While some jurisdictions may limit the insurable interest to the amount of the debt, many jurisdictions allow a policy with a face amount exceeding the debt, recognizing that:
- The debt may grow with interest
- There are costs of collection and replacement financing
- Life insurance is not treated as an indemnity contract (unlike property insurance)

For exam purposes, the standard teaching is that **life insurance policies are generally valid for the full face amount** once insurable interest exists at inception, even if the face amount exceeds the financial interest.

The answer is: The policy is valid for the full \$300,000 because insurable interest is not limited to the debt.

APV of total benefits:
1. Base whole life: $200{,}000 \times 0.16132 = 32{,}264$
2. Double indemnity rider: $200{,}000 \times 0.00480 = 960$

Total APV: $32{,}264 + 960 = 33{,}224$

Level annual net premium:
$$P = \frac{33{,}224}{17.577} = 1{,}889.7 \approx 1{,}890$$

The answer is 1,890.

Why other choices fail:
- Choice A (1,835): Omits the rider entirely: $32{,}264 / 17.577 = 1{,}835$.
- Choice C (2,315): Uses a much larger rider APV factor.
- Choice D (1,780): Uses a larger annuity factor in the denominator.
- Choice E (2,090): Doubles the rider factor: $200{,}000 \times 0.0096 = 1{,}920$; total $34{,}184 / 17.577 = 1{,}944$. Not exactly 2,090.