EXAM PRACTICE QUESTIONS

Question 1

Shri purchases a universal life (UL) insurance policy with the paid-up additions (PUA) rider. The rider allows him to buy additional coverage of $20,000 per year for the next 10 years. Which of the following statements about the use of this rider is true?

a) Shri can make lump-sum payments under PUA only at the time specified in the contract.

b) Shri can increase his coverage by $20,000 every year after proving his insurability.

c) Shri can carry forward unused coverage to the next year and obtain $40,000 additional coverage.

d) There are no age restrictions in purchasing additional coverage under the PUA rider.

Answer 1

Shri can make lump-sum payments under PUA on the dates specified in the contract.

The PUA rider is underwritten at the same time as the base policy, so no additional evidence of insurability is required when the policyholder purchases the PUAs. However, the insurance contract usually places limits on the rider, such as:

• The minimum PUA that can be purchased at any one time;
• The maximum PUAs that can be purchased in any one year;
• The cumulative maximum PUAs that can be purchased over the life of the policy;
• When the policyholder can purchase PUAs (e.g., on policy anniversary);
• The maximum age of the life insured at the time of purchase.

Under this rider, the policyholder is permitted to buy additional coverage without proving insurability, by making lump-sum payments. The policyholder is not required to purchase the additional coverage in any one year, but if he does not do so, he cannot carry that purchase forward.

Reference: 5.1.1

Question 2

Rick and August are equal shareholders of Prime Plus Inc., which is worth $750,000. They meet with their lawyer to do some financial planning and their lawyer suggests that they purchase a criss-cross insurance to fund their cross-purchase buy-sell agreement. When meeting with their insurance agent Abu, he tells them that August’s annual premium will be $985 and Rick’s premium will be $3,245. When they inquire about the vast discrepancy in premiums, Abu tells them that Rick’s premium is higher because he has high blood pressure, is a smoker, and is 20 years older than August.

Who is at a disadvantage in paying higher premiums in this scenario?

a) August

b) Rick

c) Prime Plus Inc.

d) No one

Answer 2

August is at a disadvantage with this arrangement because he will pay the premiums on Rick’s insurance. In a criss-cross insurance policy, each shareholder purchases insurance on the other shareholder. One of the disadvantages of criss-cross insurance is that there may be significant differences in the premiums for the coverage required on each party, depending on their age and health. Since Rick is older, unhealthy, and a smoker, his premiums are higher than that of August, yet he will only pay $985 on August’s life.

[Ref: 8.4.3]

Question 3

Billy and Christie are meeting with their insurance agent Joel to assess their life insurance needs. They want to make sure that, in the event of their death, their two-year-old twins will be financially secure. Joel has determined that the need would be $2,000 a month until the twins turn 18. They also have a cottage as joint tenants with an FMV of $700,000 and an ACB of $440,000 and would like to insure the tax liability based on a projected value of $800,000 and a marginal tax rate of 50%. Which recommendation is optimal for Billy and Christie?

a) Joint last-to-die term policy for $384,000 payable to the trustee and joint last-to-die whole life policy for $90,000 payable to the estate

b) Joint first-to die whole life policy for $540,000 payable to the surviving spouse

c) Joint last-to-die whole life policy for $450,000 payable to the trustee

d) Joint first-to-die term policy for $360,000 payable to the trustee and whole life policy for $180,000 payable to the surviving spouse

Answer 3

To satisfy the need for $2000 a month for 16 years for the twins, Billie and Christie will need a term policy for $384,000 ($2000 × 12 × 16). This is needed only if something happened to both of them, so last-to-die is optimal.
To satisfy the tax liability that would be payable upon the second death, the insurance need would be:
$800,000 – $440,000 = $360,000
$360,000 × 50% capital gain = $180,000
$180,000 × 50% marginal tax rate = $90,000 tax payable
The estate would be responsible for the tax and should be the beneficiary of the death benefit.

[Ref: 11.5]

Question 4

Layla has a universal life (UL) insurance policy. Her policy has a face amount of $400,000. The investment account has accumulated a value of $124,000. For the current policy year, the cost of insurance (COI) is $19.52. Calculate the mortality deduction that will be made from Layla’s account.

a) $5,388

b) $7,808

c) $20,492

d) $2,970

Answer 4

The first step is to calculate the net amount at risk (NAAR).
= Death benefit – value of investment account
= $400,000 – $124,000
= $276,000
The second step is to calculate mortality deduction.
= (COI x NAAR) ÷ 1000
= ($19.52 × $276,000) ÷ 1000
= $5,387.52 (rounded off to $5,388).

[Ref: 4.3]

Question 5

Gino has a universal life (UL) policy with an indexed death benefit. He inherited a family cottage and wants to cover the increasing tax liability so that his children can enjoy the cottage without having to sell it to fund the taxes. Which statement best describes how the indexed death benefit impacts Gino’s UL policy?

a) The NAAR increases over time

b) The NAAR decreases over time

c) The mortality deductions decrease over time

d) The NAAR stays level while the investment account increases

Answer 5

The NAAR for a UL policy with an indexed death benefit will not be level. Depending on the growth rate of the investment account and the index rate chosen by the policyholder, the NAAR (and thus the mortality deductions) could be increasing over time.

[Ref: 4.4.4]

Question 6

John, Joan, and Robert are the three shareholders of a large incorporated financial consulting firm. They each own 100 shares and each share is worth $100,000. They recently entered into a cross-purchase buy-sell arrangement with a share redemption plan.

If Robert dies today and the company pays $10,000,000 to his estate, how many shares do John and Joan own now?

a) 150

b) 100

c) 200

d) 0

Answer 6

A share redemption plan is an additional layer to a cross-purchase buy-sell agreement where the corporation redeems the shares of the shareholder who passed away. John, Joan, and Robert each own 100 shares. When Robert passes away, their corporation buys up his shares, pays $10,000,000 to his estate, and then cancels those 100 shares. The number of outstanding shares drops to 200 and as John and Joan are the only remaining owners, they now each own 100 shares and 50% of the company.

[Ref: 8.4.1]

Question 7

Carl reviewed his life insurance needs with his life insurance agent. It was determined that in order for his family to maintain the same lifestyle they currently have, Carl should have $1,000,000 of life insurance coverage, before taking into consideration any life insurance coverage he already has in place. Currently, Carl has a $300,000 personal whole life policy on his life and his employer owns a $500,000 key person life insurance on Carl.

In order for his family to maintain their current lifestyle, what amount of life insurance coverage should Carl purchase?

a) $200,000

b) $500,000

c) $700,000

d) $1,000,000

Answer 7

Of the two life insurance policies on Carl’s life, only the $300,000 whole life policy will benefit his family. The $500,000 key person insurance owned by Carl’s employer is for the benefit of the employer. If Carl dies, his family will not receive the $500,000 death benefit.

Therefore, in order for his family to maintain the same lifestyle if he dies, Carl should purchase $700,000 of coverage ($1,000,000 needed - $300,000 already in place).

[Ref. 10.4.2]

Question 8

Five years ago, Samantha had an insurance needs analysis and set up an insurance policy to meet her needs. Recently, she has had some big life changes that could potentially affect the amount of coverage she needs.

Which of the following changes could affect her financial plan and insurance needs?

a) Samantha’s month-old niece takes up a lot of her time because she cares for her in the evenings.

b) Samantha has been dating her boyfriend for over three years and thinks that they will be engaged soon.

c) Samantha has a two-week trip planned to South America.

d) Samantha recently changed employers so that she could take care of her niece.

Answer 8

The only change in Samantha’s life that has an immediate effect on her current financial plan is her change in employment. She may have changes to her group life insurance plan that would affect her current amount of coverage.

(Refer to Section 12.1.4)

Question 9

Jaspreet, who is 40 years old, neglected to save money and has accumulated $100,000 in debt. He married recently and decided to cut back on his expenses and to make debt repayment his primary goal, which he predicts would take him five years. He also wants to purchase a life insurance policy that would take care of his wife in the event of his death. However, he cannot afford the high premiums of whole life insurance but would like to consider it when his debts are paid off.

He would still like to purchase a life insurance policy immediately. What is the best policy to suit his need?

a) Five-year, $100,000, decreasing term insurance

b) Five-year term insurance

c) Universal life insurance

d) Convertible term life insurance

Answer 9

Jaspreet should purchase a convertible, term life insurance policy. The premiums on term insurance are inexpensive and since the policy is convertible, he can convert his insurance in the future to life insurance after his debt is paid off and he can spare the money to pay for permanent life insurance. The five-year term insurances do not have the option to convert to a permanent life insurance like he wants to for the future. Universal life insurance is the most expensive of all the permanent life insurances because of its savings component.

[Ref: 2.8]

Question 10

Sophie and Daniel have three children under the age of 10. Because they both work during the day, they pay for daycare services for their children. The couple figures they will need these services for another 10 years. They also have a mortgage with a remaining amortization of 22 years. Before meeting Sophie, Daniel was married to Veronica. In their divorce agreement, Daniel has to pay spousal support to Veronica in fixed, monthly amounts until she reaches 60 years of age or gets married. Sophie and Daniel want to ensure there is sufficient life insurance to cover their final expenses when they die.

Which of the couple’s needs is NOT covered by decreasing term insurance?

a) Daycare costs

b) Mortgage repayment

c) Daniel’s spousal support obligations

d) Final expenses

Answer 10

Not only are daycare costs, the mortgage, and Daniel’s spousal support obligations temporary in nature, the amount needed to cover these needs decreases over time. Therefore, they can be covered with decreasing term insurance. Final expenses, on the other hand, are permanent in nature and do not decrease. One could argue that this need increases because of the impact of inflation.

(Refer to Section 2.8.2)

Question 11

Jennifer, a widow, is the sole owner of a cottage by the water that she acquired many years ago for a total cost of $75,000. Today, the property is worth $650,000. It is estimated that the market value of the cottage will increase by 5% each year because of the rising demand for waterfront properties. Jennifer plans on bequeathing her cottage following her death to her only son, Ben. She does not want her son to be forced to sell the cottage to cover the income tax that will have to be paid on the capital gain of the cottage when she dies.

Which type of life insurance would be the best fit to cover this insurance need?

a) Decreasing permanent insurance

b) Increasing permanent insurance

c) Increasing term insurance

d) Decreasing term insurance

Answer 11

Cindy’s life insurance need arises from the taxable capital gain that will be realized upon her death. If the tax liability cannot be satisfied with liquid assets, the cottage may have to be sold, which would not satisfy Cindy’s wishes of leaving the cottage to Carl. With an increasing permanent life insurance, the tax liability will be funded by the insurance and there will be no need to liquidate additional assets. Since the market value of the cottage is increasing, the amount of tax due will also increase. Therefore, an increasing life insurance is the best option.
Cindy also needs the coverage to extend for her lifetime vs a defined period of time and would require permanent insurance instead of term insurance.

[Ref: 2.3.3]

Question 12

Ann meets with her client, Narinee, to help her apply for some much-needed term insurance. Ann walks her through an insurance application to ensure Narinee understands the importance of answering these questions accurately and completely. Ann confirms Narinee’s identity by examining her passport and spends a lot of time helping her know what to expect during underwriting. Narinee asks to have some more time with the application, to make sure she completes it thoroughly. Ann says she will pick it up tomorrow from Narinee’s mailbox and asks her to ensure it is signed beforehand.

What is the important step Ann missed to fulfill in her role as the advisor?

a) She did not witness Narinee actually sign the contract.

b) She should not have left the application unattended.

c) She should not have accepted the passport as a form of identification.

d) She should not have stressed the importance of answering questions truthfully. Clients should be left to conclude that on their own.

Answer 12

An insurance advisor must act as an agent of the insurance company during the application process. It is important that they be the “eyes” of the insurer.

Witnessing the policyholder and insured’s signature on the application is one of the pertinent requirements of the insurance advisor. Ann did not witness Narinee’s signature, so did not fulfill her responsibilities as the advisor.

[Ref: 9.1.2]

Question 13

Marissa is married to Victor and they have two children. She is the** co-shareholder of a company with the only other shareholder, Joan**. They have a buy-sell agreement that ensures that the surviving shareholder will purchase the shares of the deceased shareholder from her estate. Victor works for a meatpacking plant, but he is actively looking to change jobs as he does not like working for his current employer.

During a meeting with her life insurance agent, Marissa reviewed her life insurance needs and it was determined that for her family to maintain the same lifestyle if she dies, she needs a total of $1,500,000 of life insurance coverage, even after taking into consideration the amount her family will receive after the sale of her shares to Joan. She already owns a $500,000 policy with Victor as the beneficiary. There is also a $750,000 life insurance policy on her life, owned by Joan, to finance the buy-sell agreement purchase. Victor is a member of his employer’s group life insurance plan, which offers life insurance coverage for the whole family. The insurance for the employee is convertible to an individual policy, but not the insurance for his family members. With this group plan, Marissa is covered for $20,000.

In order for Marissa’s family to maintain their current lifestyle, what amount of life insurance coverage should Marissa purchase?

a) $230,000

b) $250,000

c) $980,000

d) $1,000,000

Answer 13

The insurance coverage needed to ensure Marissa’s family can maintain their current lifestyle if she dies is $1,500,000. This amount takes into consideration the fact that her family will receive $750,000 for the purchase of Marissa’s shares as stated in the buy-sell agreement. This purchase is funded by the life insurance that Joan owns on Marissa’s life.

The remaining coverage on Marissa’s life is the $500,000 personal life insurance policy and the $20,000 from the group plan. Because there is a good chance that Victor leaves his employer and that the coverage for the family members cannot be converted, we should not take the $20,000 coverage into account when determining how much life insurance Marissa needs.

Therefore, Marissa would need an additional $1,000,000 of life insurance coverage ($1,500,000 needed - $500,000 in place).

[STUDY REFERENCE: 10.4.2, 10.4.3]

Question 14

Which of the following forms the basis for a life insurance needs analysis?

a) The life insured’s net income

b) The life insured’s gross income

c) The life insured’s past income

d) The life insured’s potential income

Answer 14

A life insurance needs analysis is normally based on the take-home pay (also known as net income), or the amount that the life insured receives after all deductions, from now until normal retirement age.

[Ref: 10.2.1.1]

Question 15

What is an example of an administrative cost that would impact life insurance premiums?

a) Advisor’s commission

b) Mortality costs

c) Investment returns

d) MER fees

Answer 15

In relation to the size of a premium, one of the most expensive upfront administrative costs in an insurance company is the advisor’s commission. This is why if a policy cancels within the first one or two years, there is a substantial chargeback. The other options are not administrative in nature. MER fees are charged for segregated fund

[Ref. 9.7.2]

Question 16

Joseph was born on November 21, 1977. On August 25, 2002, he bought a convertible term life insurance on his life. His insurance company uses the nearest birthday to determine the attained age. On February 15, 2016, Joseph converts his term policy into a permanent policy.

Calculate what would be the age used to determine the permanent insurance’s premiums if conversion is done at the attained age.

a) 24

b) 25

c) 38

d) 39

Answer 16

If the conversion is done at the attained age, Joseph’s attained age at the time of conversion is 38 since his nearest birthday at that moment is November 21, 2015.
The insurance company uses the nearest birthday to determine the attained age, so Joseph’s attained age when he bought his life insurance was 25 (nearest birthday was November 21, 2002). This will also be the original age should the conversion be on an original-age basis.

[Ref: 2.6.2]

Question 17

Jonathan was insured under a convertible term life insurance policy for nine years before he converted his term policy into a permanent policy under the conversion provision last year. He also had an accidental death rider on his policy. Yesterday, Jonathan committed suicide.

Considering the two-year suicide exclusion period found in life insurance contracts, what will the insurance company do in this situation?

a) Pay the death benefit because the conversion to a permanent policy is treated as an extension of the original policy

b) Not pay the death benefit because the permanent insurance obtained by converting the term insurance is considered as a new contract and the two-year suicide exclusion period applies

c) Reimburse only the premiums paid to date because the death benefit is never paid in full in the event of a suicide

d) Pay the death benefit under the double indemnity rider

Answer 17

A suicide exclusion period is found in every life insurance contract and is usually two years. However, a policy issued as a result of a conversion is treated as an extension of the original policy. Therefore, Jonathan suicide happened after the two-year suicide exclusion period since he had been insured for ten years. In this situation, the insurance company will pay the full death benefit, but not more.

A life insurance policy with an accidental death (AD) rider will provide an extra benefit, over and above the regular death benefit, if the life insured dies as a result of an accident. The most common multiple is two times the death benefit, and as a result, this rider is sometimes referred to as “double indemnity.”

Suicide is not considered an accidental death, so the accidental death rider does not play a role in this situation.

[Ref: 2.6.1]

Question 18

Penny, age 72, has accumulated a lot of wealth during her lifetime through a variety of conservative and careful investments, as her risk tolerance is low. She would like to begin transferring her wealth during her lifetime but recognizes that upon her death she will still have several properties under her name. Penny has no life insurance but is referred to an insurance advisor named Maurice, at the advice of her family office.

When she meets with Maurice to discuss purchasing a policy, what would an appropriate product recommendation be for Maurice to make?

a) Participating whole life insurance with paid up additions

b) Variable universal life insurance with asset allocation in a foreign exchange index

c) Term 30 insurance

d) Term 10 insurance

Answer 18

When it comes to finding a suitable insurance product for a client, many factors need to be considered, like selecting a suitable investment. At age 72, Leysa does not have a long-time horizon so selecting a variable policy which relies on the performance of a foreign exchange index fund is too aggressive, particularly since she has a low risk tolerance. Properties still under her name would trigger capital gain taxed only at death or disposition, so term insurance would not suffice. At age 72, she is not eligible for Term 30 insurance. A permanent product, with fixed pricing and conservatively managed investments such as participating whole life insurance would be an appropriate option for Maurice to suggest.

[Ref: 10.2.1.1]

Question 19

Ryan and Carter, residential contractors, have been partners for more than 20 years. They have a house in the suburbs with a mortgage balance of $200,000, which they are paying off regularly. Ryan and Carter are looking for an inexpensive insurance solution that will absorb their debt if one of them were to die prematurely.

Which option is suitable for their insurance need?

a) Decreasing term first-to-die life insurance

b) Level term last-to-die life insurance

c) Term buy-sell life insurance

d) Mortgage insurance

Answer 19

Ryan and Carter should purchase a decreasing term first-to-die insurance policy. Decreasing term insurance provides a death benefit that decreases over the course of the term, while the premiums remain level. This is a good option for them as they are paying off their mortgage and reducing the outstanding mortgage balance. A joint first-to-die life insurance coverage is appropriate whenever two or more people share a debt obligation because the benefit will be paid out as soon as one of the life insureds die.

[Ref: 2.3]

Question 20

Blake is the policyholder of a life insurance policy. He takes out a policy loan that is less than the policy’s adjusted cost basis (ACB).

What will be the likely outcome in this case?

a) The ACB will be increased to the cash surrender value of the policy.

b) He will have a policy gain equal to the amount of the loan, minus the ACB.

c) The ACB of the policy will be reduced to zero.

d) He will not have a policy gain.

Answer 20

If the policyholder takes out a policy loan that is less than the adjusted cost basis (ACB), he will not have a policy gain, but the ACB will be reduced by the amount of the loan.

[Ref: 7.5]

Question 21

In which of the following situations can an owner of a corporation NOT choose to leave his business interest to someone in his will, such as a spouse or children?

a) When a buy-sell agreement is in place

b) When the owner is a sole proprietor

c) When a split-dollar arrangement is in place

d) When the owner is the key person

Answer 21

If a buy-sell agreement is in place, the owner cannot choose to leave his business interest to someone in his will, such as a spouse or children. Buy-sell agreements typically specify that either the corporation or the other shareholders or partners buy an owner’s business interest if he dies.

[Ref: 10.2.2.4]

Question 22

Jenay owns a participating whole life policy insuring his husband Sebastian, and their four children are equal beneficiaries of the $2,000,000 death benefit. Janay appointed Sebastian as the contingent owner. Unfortunately, Jenay passes away prematurely. The cash surrender value (CSV) is $350,000, and the adjusted cost basis (ACB) is $250,000.

What gain amount will be reported on Jenay’ final tax return?

a) $0

b) $100,000

c) $350,000

d) $50,000

Answer 22

No policy gain was triggered upon the death of Jenay. The rollover of a policy to a spouse upon death is seen as a policy transfer, and the ACB moves over to the new owner and spouse. In this circumstance, Sebastian would have inherited the policy with an ACB of $250,000

[Ref: 7.9]

Question 23

Kayla is a Canadian citizen. She is married to Luis who is a Mexican citizen and a permanent resident of Canada. Kayla is a freelance writer and Luis is an electrician and both are in good health. Luis’ family still resides in Mexico and Luis and Kyla visit them frequently. They are meeting with their insurance agent Sam to purchase life insurance. Sam is discussing the application and underwriting process with Kayla and Luis based on their situation.

Which statement best describes the process for Kayla and Luis?

a) Both Kayla and Luis could be rated as a substandard risk.

b) Luis’ coverage will be limited to $2,000,000.

c) Luis is not eligible for life insurance until he becomes a Canadian citizen.

d) Kayla will not be eligible for coverage as she does not have a permanent job.

Answer 23

If the life insured is a frequent traveller, the insurance company may request further details about past travels and future plans, including the countries visited, and the frequency and duration of visits. As a result, the issued policy may have a substandard risk rating (which would result in higher premiums), or it may specify an exclusion for travel to specified countries.
If a permanent resident makes frequent or extended trips back to his country of origin or other countries, he may be rated as substandard risk (which would result in higher premiums), or the policy may include an exclusion for death occurring in the specified country.
A person must be a permanent resident to apply for life insurance. If the person is awaiting residency, their coverage may be limited based on their occupation.

[Ref: 9.4.9, 9.4.10]

Question 24

Frank and Allison have a participating whole life insurance policy with a paid-up additions dividend option to cover income taxes that will be due after the second death. They are concerned that if they live long enough, the taxes owed after their deaths will be minimal and they will have paid a considerable amount of money into an insurance policy they may no longer need.

How could Frank and Allison access cash from their policy to recuperate some of the money they have paid as premiums?

a) Stop paying premiums and allow the dividends to pay the premiums.

b) Surrender part or all of their policy to receive the cash surrender value and change the dividend option from paid-up additions to cash.

c) Surrender their whole life policy to receive the cash surrender value and apply for a new term policy with a lower premium.

d) Keep only the paid-up additions of their whole life policy and stop paying any premiums immediately.

Answer 24

They could surrender part of the policy to receive the cash surrender value, keeping only what they think they will need to pay their taxes. They could change the dividend option to cash. There is no guarantee that the dividends will be enough to pay the premiums and the face value could still be more than they need. If they surrender the whole policy the cash surrender value may not be enough to purchase a term policy that would cover their taxes and they are unsure of the term that they would be required to purchase.

(Refer to Section 3.4.4, 3.5.1)

Question 25

Imran has a 10-year renewable and convertible term policy with a face value of $150,000. In the first year of the policy, he is diagnosed with prostate cancer and begins treatment.

Which of the following will Imran be able to do?

a) Renew the policy with evidence of insurability, and the new premiums will be the same

b) Convert the policy to a whole life policy with a $100,000 face value without evidence of insurability, and the new premiums will be higher

c) Convert the policy to a whole life policy with a $150,000 face value without evidence of insurability, and the new premiums will be higher

d) Convert the policy to a whole life policy with a $50,000 face value with evidence of insurability, and the new premiums will be the same

Answer 25

Imran can convert his term policy to a permanent policy. His term policy is renewable and convertible, and therefore the entire face amount can be converted to a whole life plan without evidence of insurability. There are final conversion dates (deadlines) on term policies for conversions to be made before and Imran will need to make sure that he converts before this date.

(Refer to Section 2.7)

Question 26

Prem is currently employed at a manufacturing company in Ottawa. He is starting his own business soon and is quitting his job in a month. Prem is planning to convert his group-life coverage of $200,000 into individual life insurance. Prem has diabetes and is therefore concerned about the policy premiums upon conversion. Which of the following is a likely outcome if Prem transfers his group insurance to individual insurance?

a) Prem can convert only up to $100,000 coverage as per the guidelines of the Canadian Life and Health Insurance Association.

b) Prem can convert to individual insurance without showing proof of insurability, if he applies within a year after leaving the group plan.

c) Prem’s premiums after conversion to individual insurance are likely to be higher than the premiums paid under group insurance.

d) Prem can continue paying the same premiums if he coverts to individual insurance coverage within 31 days of leaving the group plan.

Answer 26

Prem’s premiums after conversion to individual insurance are likely to be higher than the premiums paid under group insurance. The guidelines set forth by the Canadian Life and Health Insurance Association (CLHIA) suggest that a plan member should be able to convert up to $200,000 of the group-life coverage on his own life to individual insurance without providing proof of insurability for at least 31 days after a plan member leaves the group. While coverage is usually convertible to an individual insurance policy, the premiums upon conversion are not guaranteed.

Ref: 10.4.3.3, 6.6.3

Question 27

Bon-Hwa has a participating whole life policy. She is single and does not have any children. She purchased the life insurance policy to fulfill her philanthropic wishes of donating the face amount of $200,000 to charity when she passes away. Bon-Hwa is a real estate agent and has sporadic income. She pays her premiums annually to keep them as low as possible. Bon-Hwa’s insurance agent is reviewing her policy to determine which dividend payment option is optimal for Bon-Hwa. Which recommendation is best suited for Bon-Hwa?

a) Premium reduction

b) Accumulation

c) Paid-up additions

d) Cash

Answer 27

Bon-Hwa does not require additional insurance in addition to her current face amount, and therefore the option that reduces her premiums is best for Bon-Hwa. The insurance company will apply the dividend to offset the premium payable for the upcoming year.

[Ref: 3.4.2]

Question 28

Anita was married for five years. She now has a court-mandated divorce agreement to pay her ex-spouse, $4,500 per month for the next 10 years. After her divorce she purchased a house with her new partner, Melinda. They own it equally and are each responsible for half of the $2,000,000 mortgage, which has ten years left on it.
Anita currently has a group insurance policy of $1,500,000 that names her ex-spouse and her brother as equal beneficiaries.
How much additional insurance should Anita have beyond her group policy?

a) $1,000,000

b) $790,000

c) $1,540,000

d) $540,000

Answer 28

Calculate what Anita would owe her ex-spouse if she passed away immediately.
1. ($4,500 x 12) x 10 years = $540,000

Calculate what Anita would need to provide Melinda with, to pay off her half of the mortgage.
2. $2,000,000 / 2 = $1,000,000

Anita’s group plan has her ex-spouse and her brother as equal beneficiaries, so half of Anita’s existing $1,500,000 of insurance will go to her brother. Her ex is the beneficiary of the remaining $750,000 which will cover her support payments owed to her ex-spouse. Her ex will also receive a surplus amount of $210,000.
3. $750,000 - $540,000= $210,000 surplus

If Anita had designated her ex as the beneficiary of $540,000 rather than being entitled to 50% as an equal beneficiary, she may have been able to apply the surplus against her mortgage. Anita still needs to cover her ten-year commitment to the $1,000,000 mortgage. As such, $1,000,000 of insurance would be an effective solution for Anita’s needs.

[Ref: 10.1, 10.1.2.1]

Question 29

Colin and Celine are married and have two children, aged 5 and 7. Colin’s mother, Ruth, lives with them and takes care of the children after school so that both Colin and Celine can work full-time. When discussing their priorities with their life insurance agent, Celine says that if Ruth dies, she would want to stop working in order to be home for the kids until the youngest turns 12. The couple would want to maintain their same lifestyle, without profiting from Ruth’s death.

Why should Colin and Celine consider buying life insurance on Ruth’s life?

a) To cover the cost of child care services for the next seven years

b) To repay Colin and Celine’s debts

c) To replace Celine’s current income for the next seven years

d) To create an estate for Colin, Celine and their kids

Answer 29

If Ruth dies, Colin and Celine will have the following priorities:

• Celine wants to stop working to take care of the children until the youngest is 12 (maximum period of seven years).
• They want to maintain the same lifestyle, but they do not want to profit from Ruth’s death to find themselves in a better financial position than they were before her death.
• If they buy life insurance on Ruth with an amount of coverage that will replace Celine’s income for the years she stays at home, it will address the couple’s priorities.
• Buying insurance to cover childcare costs does not respect the couple’s wish for Celine to take care of their children.
• Paying their debts does not guarantee Celine will be able to stop working to take care of the children and it could also be seen as profiting from Ruth’s death.
• Insurance to create an estate could also be seen as profiting from Ruth’s death. If Ruth wants to create an estate for Colin and Celine’s family, she can buy her own insurance.

(Refer to Section 10.5)

Question 30

Andrew, an agent, and Alexander, his client, are chatting over a cup of coffee after they have completed Alexander’s application for insurance. Alexander says that he is happy that he was able to discuss his insurance needs with an agent, rather than just filling out an application online. Andrew laughs and says that he is the “eyes of the insurance company”. What did Andrew mean?

a) The agent is usually the only person who actually meets the applicant.

b) The agent is the person who represents the face of the insurance company.

c) The agent has a responsibility to be vigilant when collecting information from the client.

d) The agent has a responsibility to monitor any changes in the applicant’s situation.

Answer 30

The agent’s role in the underwriting process is to help collect the information that the insurance company needs to perform its risk assessment. His role is critical because he is often the only insurance company representative who actually sees the applicant (or the life insured, if different from the applicant) in person.

[Ref: 9.11]

Question 31

Andrew’s participating life insurance was issued on April 26, 1998. Since then, he has paid $28,000 in premiums and received $4,000 in cash from policy dividends. The cumulative net cost of pure insurance (NCPI) is $11,000 and the cash surrender value (CSV) is $50,000.

Assuming Andrew’s marginal tax rate is 45%, how much tax will he pay if he fully surrenders his policy?

a) $9,900

b) $14,850

c) $16,650

d) $20,500

Answer 31

ACB = Total premiums − NCPI − dividends paid to policyholder

ACB = $28,000 − $11,000 − $4,000 = $13,000

Policy gain = Proceeds of disposition − ACB

Policy gain = $50,000 − $13,000 = $37,000

Andrew will have to pay the following amount in taxes: $37,000 × 45% = $16,650.

(Refer to Section 7.1.3)

Question 32

Zarah had some health scares a few months ago. Although they turned out to be nothing and she was issued a clean bill of health, it got her to think about purchasing life insurance. Zarah meets with her life insurance agent Leo to start the application process based on Leo’s recommendation of $500,000 of coverage. Leo explains that the underwriting process could take a few months as her recent health issues may take some time to assess. Zarah asks about obtaining a temporary insurance agreement (TIA) because she would like to have the peace of mind of knowing she has coverage before she goes on vacation next week. Which of the following is true about Zarah’s TIA?

a) Leo should not issue a TIA.

b) Leo should issue a TIA and collect the first premium.

c) TIA can be issued only after the underwriting process is complete.

d) The terms and conditions of the TIA will be different than that of the life insurance policy.

Answer 32

The issuance of a TIA is not an automatic or guaranteed part of the application process. Leo should only issue a TIA if he has no concerns about the application or the likelihood that the underwriter will issue the requested policy. Given Zarah’s health issues and Leo’s concern, he should not issue the TIA.

Ref: 9.3