Long Term Care Certification Practice Test

What is the purpose of the reserve account?

1. To guarantee an insurer can cover current and future policy claims

2. To accumulate funds for marketing future policies

3. To provide bonuses to agents

4. To invest in high-yield securities only

The correct answer is: To guarantee an insurer can cover current and future policy claims

The reserve account serves a critical function in the insurance industry by ensuring that an insurer can meet both its current and future policy claims. This account is essentially a financial buffer that allows insurers to allocate a set amount of funds specifically reserved for paying out claims made by policyholders. By having a reserve, an insurer demonstrates financial stability and reliability, which is vital for maintaining consumer trust and regulatory compliance. Insurance policies often have varying terms and durations, and claims may arise long after the policyholder has purchased their insurance. Therefore, a well-funded reserve account is necessary to cover these potential liabilities, ensuring that the company can fulfill its obligations to policyholders regardless of when claims occur. This is crucial to the overall functioning and sustainability of insurance products, as it enables insurers to manage risk while providing protection to their clients.