EXAM PRACTICE QUESTIONS 2

Question 1

Adi and Dilan each owned 50% of the 100 shares of A&D Inc., a toys manufacturing company with a buy-sell agreement in place. When Dilan died, his 50 shares were transferred to his estate. Adi paid Dilan’s estate for his 50 shares with a promissory note. The company received the death benefit, and credited the amount to its capital dividend account. Dilan’s estate transferred the 50 shares to Adi who then received a tax-free capital dividend from the company which he used to pay off the promissory note.

This cross-purchase agreement is funded by:

a) corporate-owned insurance.

b) criss-cross insurance.

c) share redemption insurance.

d) business protection insurance.

Answer 1

If a cross-purchase agreement is funded by corporate-owned insurance, usually the corporation is named as the beneficiary of the policy. When one of the shareholders dies, the surviving owner(s) purchase the shares from his estate, often using a promissory note. The insurance company will pay the death benefit to the corporation, which will credit the amount to its capital dividend account. The surviving shareholder(s) will then direct the corporation to pay them a capital dividend, which they will use to pay off the promissory note.

[Ref: 8.4.4.2]

Question 2

Darrin is a life insurance agent. His client, Joanna, has had her 20-year term life insurance from ABC Insurance for five years. Darrin has recommended that she should buy a new 20-year term life insurance from XYZ Insurance to replace her current coverage even though it is not in Joanna’s best interest to do so.

What is Darrin attempting to do in this situation?

a) Churning

b) Rebating

c) Twisting

d) Holding out

Answer 2

When a life insurance agent replaces an existing life insurance policy with a new one, even if it is not in the best interest of the client, the practice is called “twisting” when the existing and new insurance policies are from different insurance companies. This is what Darrin is doing in this situation. The practice of “churning” takes place when the existing policy and the new policy are with the same insurance company. If Darrin were exercising his fiduciary duty properly, he would act in his client’s best interest and his recommendations would be based on this principle.

[STUDY REFERENCE: 12.4.1]

Question 3

George owns a life insurance policy on the life of his wife, Maya, who is a stay-at-home mom. George is totally disabled after an accident and is unable to return to work. George could not pay the premiums for the policy after the accident, but the policy remains in force as the premiums were waived. Which of the following supplementary benefits did George add to his policy?

a) The payor waiver benefit

b) The waiver of premium for total disability benefit

c) The parent waiver benefit

d) The guaranteed insurability benefit

Answer 3

George added the payor waiver benefit to his policy.

The payor waiver benefit (if the life insured is someone other than the policyholder’s child) or the parent waiver benefit (if the life insured is the policyholder’s child) operates much like the waiver of premium benefit. Depending on the policy, premiums may be waived upon the policyholder’s death, as well as upon his total disability.

[Reference: 5.2.4]

Question 4

Salvatore, aged 55, would like to review his insurance needs. Keeping costs low is important to him. He would like to insure the amount equivalent to his income so that his family can maintain their current lifestyle if he passed away. What would be an appropriate product type to recommend for Salvatore’s needs?

a) Term 10

b) Term 100

c) Participating whole life

d) Universal life

Answer 4

The standard retirement age is 65, so a term 10 product would be appropriate to recommend for income replacement needs.

[Ref: 11.4.1]

Question 5

Walter had designated his wife, Kathleen, as the primary beneficiary of his whole life insurance policy, and his nephew, Adrian, as the contingent beneficiary. Kathleen died two years ago, but Walter neglected to change the beneficiary designation on his policy. Three weeks ago, Walter died, and the insurance company is in the process of settling the claim on his policy.

After obtaining proof of death for Walter as well as his primary beneficiary, Kathleen, what will the insurance company do?

a) Pay the death benefit to Adrian

b) Pay the death benefit to Walter’s estate

c) Pay the death benefit to Kathleen’s estate

d) Review Walter’s will to see if there is a difference in the beneficiary designation

Answer 5

After the death of the life insured, the claims examiner will need to confirm that the claimant is the beneficiary named in the policy, on record at the insurance company, or as directed in the will of the life insured if the beneficiary designation is to the estate. If the primary beneficiary predeceased the life insured, as is the case here with Kathleen predeceasing Walter, the insurance company will require her proof of death, before paying the proceeds to the contingent beneficiary, Adrian.

If a contingent beneficiary had not been named, the death benefit would have been paid to Walter’s estate. Since Adrian was specifically named as the contingent beneficiary, he will receive the death benefit. The insurance company is not required to double-check Walter’s will to see if there is a difference in beneficiary designation.

[Ref: 12.8.8]

Question 6

Zain purchased a life insurance policy when he was 45-years old. Fifteen years later, he wishes to assign his son, Rayan, as the new policyholder. How should Zian complete this absolute assignment?

a) The assignment form should be signed and filed at the insurance company’s head office.

b) He should notify his insurance agent about his preference and Rayan should acknowledge.

c) He should write a letter along with Rayan’s consent and post it to the insurance company.

d) The assignment should be approved by the underwriter who signed the policy initially.

Answer 6

Under an absolute assignment, the policyholder transfers the legal title of the contract, including all rights and obligations, to the assignee or recipient. The assignment is not binding unless the prescribed assignment form is signed and filed at the insurance company’s head office.

[Ref: 12.7.1]

Question 7

Gregory purchases an increasing term insurance for $200,000 coverage with an annual premium of $180. In three years, the death benefit increases to $230,000 based on a fixed percentage.

How much premium is Gregory likely to pay with respect to the increased death benefit?

a) $207

b) $180

c) $302

d) $195

Answer 7

Gregory’s benefit amount increased from $200,000 to $230,000 which is a 15% increase. Therefore, Gregory’s premium also increases by 15% and he is likely to pay $207, calculated as ($180 + 15% = $207). The premiums for an increasing term policy usually increase at the same time as the death benefit increases, and by a proportionate amount.

[Ref: 2.2.3]

Question 8

Mark was born on March 15, 1980. On November 5, 2005, he bought convertible term life insurance on his own life. His insurance company uses the nearest birthday to determine the attained age. On April 10, 2015, Mark converts his term policy into a permanent policy.

What ages were used to determine the permanent insurance’s premiums if a conversion was made at the original age and at the attained age?

a) Permanent insurance premiums based on age 25 for original-age conversion and age 35 for attained-age conversion.

b) Permanent insurance premiums based on age 25 for original-age conversion and age 36 for attained-age conversion.

c) Permanent insurance premiums based on age 26 for original-age conversion and age 35 for attained-age conversion.

d) Permanent insurance premiums based on age 26 for original-age conversion and age 36 for attained-age conversion.

Answer 8

Because the insurance company uses the nearest birthday to determine the attained age, Mark’s attained age when he bought his life insurance was 26 (nearest birthday is March 15, 2006). It will also be the original age should the conversion be on an original age basis.

If the conversion is made at the attained age, Mark’s attained age at the time of conversion was 35, since his nearest birthday at that moment was March 15, 2015.

[Ref. 2.6.2]

Question 9

Assuming the policyholder is also the life insured, in which of the following situation will the claims examiner most likely request a copy of the probated will of the deceased life insured?

1) If the primary beneficiary on the life insurance policy is an individual other than an immediate family member of the life insured.

2) If the primary beneficiary is the life insured’s estate.

3) If the primary beneficiary on the life insurance policy is dead and there is no contingent beneficiary.

4) If the primary beneficiary on the life insurance policy is dead and a charitable organization is the contingent beneficiary on the policy.

a) 1 and 2

b) 1 and 3

c) 2 and 3

d) 3 and 4

Answer 9

The claims examiner will most likely request a copy of the life insured’s probated will when the estate is named as the beneficiary. When the policyholder is also the life insured, and there is no designated beneficiary such as the case in point no. 3, the estate becomes the beneficiary and thus, a copy of the probated will is going to be requested.

When a specific individual or organization is the beneficiary of the policy and they are still alive or in existence, it is most likely that the claims examiner will not request a copy of the probated will.

[STUDY REFERENCE:12.8.5]

Question 10

While there is no statutory requirement for when the death benefit of a life insurance policy must be paid, some claims take longer to process than others.

Among the following claims, which one will most likely be processed the fastest?

a) Ten years after the policy was issued, the life insured died in a hospital following an illness. The beneficiaries on the policy are “all my children”.

b) Less than two years after the policy was issued, the life insured died at home under suspicious circumstances. The beneficiary of the policy is “my wife Sarah”.

c) Less than two years after the policy was issued, the life insured died in a car accident. The primary beneficiary also died in the same car accident and there is no contingent beneficiary.

d) Ten years after the policy was issued, the life insured died in a car accident. The beneficiary of the policy is “my husband Harry”.

Answer 10

Among the things that will slow down the claims process are the identification of the beneficiaries when the designation is not specific (for example, “all my children”) or the request for a probated will when the estate is the beneficiary (which would be the case when the primary beneficiary is dead and there is no contingent beneficiary). Also, when the death of the life insured occurs within the first two years of the policy, the insurer will want to investigate to ensure it is not a suicide, because of the suicide exclusion within the first two years.

Among the four situations, the accidental death with the specific beneficiary is the claim that will most likely be settled the fastest.

[STUDY REFERENCE: 12.8.8]

Question 11

Which of the following statements about renewable policies is true?

a) Renewable policies renew automatically at the end of the term, without requiring new evidence of insurability.

b) Renewable policies do not provide any schedule of guaranteed renewal rates when the policy is first issued.

c) When the life insured is in good health, the guaranteed rates upon renewal tend to be much lower than the rates offered on new policies with the same term.

d) The guaranteed rate upon renewal tends to reflect the health of the life insured at the time of policy renewal.

Answer 11

Renewable policies renew automatically at the end of the term, without requiring new evidence of insurability. Most policies provide a schedule of guaranteed renewal rates when the policy is first issued. The guaranteed rates upon renewal may be significantly higher than the rates being offered on new policies with the same term, particularly if the life insured is in excellent health. While the rate for the initial term reflects the health of the life insured at policy issue, the guaranteed rate upon renewal tends to reflect the health of the average life insured.

[Ref: 12.3]

Question 12

Eva purchases a $300,000 life insurance policy on the life of her husband, Franco. Eva and Franco decide to buy a house and Eva assigns the policy to a lender as a collateral for a loan. Which of the following is true in this case?

a) If Eva defaults on the loan while Franco is alive, the lender can force Eva to surrender the policy.

b) The lender cannot limit Eva’s rights on making a policy withdrawal.

c) The lender becomes the new owner of Eva’s policy.

d) If Franco dies while there’s an outstanding loan, Eva has first rights on the death benefit.

Answer 12

The use of a life insurance policy as security for a loan requires the policyholder to execute a collateral assignment. If the policyholder defaults on the loan while the life insured is alive, the lender can force a surrender of the policy, in order to recover the unpaid loan balance.

[Ref: 12.7.2]

Question 13

Catherine is an insurance agent and has done a life insurance needs assessment for her client Bruce. Bruce has $85,000 in life insurance through his employer based on his salary, but he knows that this will not be adequate for his needs. Based on the assessment, Catherine has determined that Bruce’s monthly shortfall is $2,100 for the next 16 years, based on an inflation rate of 2.1% until his children are grown, and then the expenses would stop. Bruce’s wife has adequate income and savings, so Bruce expects the insurance proceeds to be fully used up to cover the children’s expenses. Calculate the face amount of the life insurance policy that Catherine should recommend for Bruce.

a) $318,200

b) $403,200

c) $118,600

d) $1,440,000

Answer 13

Capital required at death = ($2,100 x 12) x 16 = $403,200 Face amount of life insurance policy = $403,200 – $85,000 (existing coverage) = $318,200

[Ref: 11.3]

Question 14

Fred has a take-home income of $50,000 and is married to Penny. While reviewing the couple’s insurance needs, it is determined that if Fred dies, Penny will have a net annual income of $32,000 and net annual expenses of $48,000 for her and her children to maintain the same lifestyle.

Using the capital needs approach and assuming a 2.5% after-tax inflation-adjusted rate of return, how much life insurance would Fred need if the capital retention method is applied, in order for his family to maintain their current lifestyle?

a) $480,000

b) $640,000

c) $280,000

d) $920,000

Answer 14

When using the capital needs approach, the first step is to determine the income shortfall of the surviving family members. In this situation, the shortfall is:
$48,000 (expenses) − $32,000 (Penny’s net income) = $16,000

When using the capital retention method, we must determine the amount of capital needed to generate the same amount as the income shortfall, as follows:

$16,000 ÷ 0.025 = $640,000.

[Ref. 11.3.3.1]

Question 15

Caroline just finished taking an insurance application for a new client, Carl. During their appointment at Carl’s home, Carl mentions that he smokes occasionally and has not had any major medical concerns other than a dislocated shoulder from a skiing accident several years ago. His shoulder has been bothering him recently, so his doctor examined him last week and recommended physiotherapy for the sore muscles but no further tests were needed.

Caroline completes the application and Carl informs her that he will pay his first premium next week. Carl wishes to have some temporary insurance (TIA) in place until his contract is delivered.

What should be Caroline’s next step?

a) Inform Carl that he is not eligible to receive TIA due to his smoking status

b) Issue Carl a temporary insurance agreement (TIA), because he answered “No” to all the health questions apart from the smoking issue

c) Inform Carl that his pending appointment with the physiotherapist may cause issues with underwriting and explain she cannot issue a temporary insurance agreement

d) Submit the application but not a temporary insurance agreement (TIA) because she has not received his first premium yet

Answer 15

Caroline cannot issue a TIA (Temporary Insurance Agreement) to Carl because she will not collect his first premium until the following week. First premiums must be collected with the application for a TIA to be issued. Carl’s smoking status does not prevent the TIA from being issued and his medical referral to the physiotherapist is not for further examinations, tests, or surgery.

[Refer to Section 9.3, 9.3.1]

Question 16

Tim is the life insured of a UL policy with a $400,000 death benefit and a CSV of $120,500. Using his policy, Tim is planning to obtain a series of loans from a bank to fund his other investments. He will not be required to repay the principal or the interest amount while he is alive. The accrued debt will be discharged upon his death.

Which of the following non-forfeiture benefits of a UL policy is Tim planning to use?

a) Leveraging

b) Capitalization

c) Distribution upon death

d) Policy loans

Answer 16

Leveraging is a variation of a third-party loan. A UL policyholder may be able to obtain a loan, or series of loans, from a bank, where the cash surrender value and death benefit are used as collateral. In this case, the principal and interest are generally not repaid while the life insured is living. The accrued debt (i.e., the principal plus accrued interest) is discharged only upon the death of the life insured.

[Ref: 4.6.6]

Question 17

Ria and Saif each own 50% of the 200 shares of RS Inc., an apparel company. They wanted to make sure that upon their death, their spouses are not burdened with the task of selling the shares.

Therefore, they implemented a buy-sell agreement. The most secure way of funding this buy-sell agreement is through:

a) life insurance.

b) Assuris guarantee.

c) business protection insurance.

d) business overhead expense insurance.

Answer 17

The most important provision of a buy-sell agreement is establishing how the transaction will be funded, because there is no point in mandating a sale at a specific price if the buyer does not have the funds to complete the transaction. The most secure way of funding a buy-sell agreement is through life insurance.

[Ref: 8.4.2.4]

Question 18

Tim doesn’t smoke as smoking is the leading cause of lung cancer and death. However, he is exposed to cigarette smoke in his workplace. To be on the safer side, Tim gets his annual health checkups done regularly. Which of the following risk management strategies is Tim using?

a) Risk reduction

b) Risk retention

c) Risk avoidance

d) Risk suspension

Answer 18

If it is not possible to avoid risk entirely, it may be possible to take action to reduce the probability or severity of that risk. This is called risk reduction.

Though Tim cannot completely avoid exposure to cigarette smoke, he tries to reduce the severity of that risk through risk reduction by not smoking and by maintaining a healthy lifestyle and going for annual health checkups.

[Ref: 1.3]

Question 19

Alice is a single mother and she is critically ill. Her son, Craig, is 18-years-old. She owns a $500,000 life insurance policy with Craig named as the beneficiary. However, now that she is in her final days, she is concerned about Craig’s handling of the lump-sum death benefit after her death. Alice meets with her agent regarding this issue for suggestions.

In this case, the agent is most likely to recommend:

a) naming Craig as the contingent beneficiary so that he is not overwhelmed with the lump-sum death benefit.

b) removing Craig’s name from the beneficiary designation and let Alice’s estate deal with the death benefit until Craig is ready for it.

c) an absolute assignment of the insurance policy to Craig at the earliest.

d) a term certain annuity, which would provide monthly payments to Craig until he reaches a specific age.

Answer 19

The claimant or the estate’s executor may be unaware that there are alternatives to receiving the death benefit as a lump sum, such as using the proceeds to buy term certain or life annuities. A term certain annuity will provide monthly or annual payments for a fixed period of time, while a life annuity will provide payments for life.

[Ref: 12.11]

Question 20

While applying for a life insurance policy, Harry’s agent requires him to name a beneficiary to his insurance proceeds. Harry informs him that he wishes to name his estate as the beneficiary. Under which of the following circumstances is it appropriate to name one’s estate as the beneficiary?

a) When proceeds are to be used to pay income taxes

b) To prevent the death benefit from being subjected to probate

c) When the jurisdiction involves low probate fees

d) To avoid contest with regard to the distribution of the death benefit

Answer 20

If the proceeds are to be used to pay income taxes, then the estate may be the appropriate beneficiary. If the estate is named the beneficiary, then the death benefit will be subject to probate. It is not appropriate to name one’s estate as the beneficiary merely because the jurisdiction involves low probate fees. If the estate is the beneficiary, the death benefit becomes a matter of public record and increases the chances of contestation of the distribution of the death benefit.

[Ref: 11.5.4.3]

Question 21

Who among the following beneficiaries is most likely to receive a death benefit that is equal to the policy’s face amount?

a) Whan, who is the beneficiary of his wife’s policy which was assigned as a collateral to secure a business loan and its outstanding balance is $50,000.

b) Fathima, who is the beneficiary of her dad’s whole life insurance policy with paid-up additions option enabled since policy issue several years ago.

c) Eddie, whose mother died one year after purchasing a term insurance rider using dividends from her existing participating whole life insurance policy.

d) Corina, who is the beneficiary of her husband’s life insurance policy with accumulating funds which her husband never used.

Answer 21

Eddie is most likely to receive a death benefit that is equal to the policy’s face amount. The term insurance option will temporarily increase the death benefit, for the duration of the one-year term only. Fathima, Corina are likely to receive a death benefit higher than the face amount, whereas, Whan will receive a death benefit lesser than the face amount. The amount paid upon death could be more or less than the policy’s face amount, depending on a number of factors. Depending on which payment option the policyholder chose when setting up the policy, participating policy dividends may affect the amount paid out at death.

[Ref: 12.10.1]

Question 22

Linda, a resident of Quebec, married her high school sweetheart at the age of 19. At the time of their marriage, her marriage contract stipulated that she provide life insurance for the benefit of her spouse if something were to happen to her. At the time, and per the agreement, she made her spouse the beneficiary of a participating whole life insurance policy. They divorced last year, and Linda is now 55 years old, and remarrying. She would like to change the beneficiary on her life insurance policy to her new spouse, but her request was rejected by the insurance company.

Why would the life insurance company have rejected her beneficiary change request?

a) Linda did not specify that the beneficiary was revocable when she first designated her ex-spouse

b) Beneficiary changes are not permitted on insurance policies owned by Quebec residents

c) Beneficiary changes cannot be made after the policy has been active for more than 20 years

d) Linda did not have her ex-spouse’s permission to change the beneficiary designation

Answer 22

In Quebec, when a resident policyholder designates their spouse as beneficiary, it is automatically irrevocable unless originally specified that the beneficiary is revocable. This would be the reason Linda’s insurance company rejected her request to change the beneficiary on her policy.

[Ref: 11.5.4.2]

Question 23

Samson and Martina are new clients. Samson earns $175,000 a year and Martina stays at home to care for their youngest child, Karim age 3, who has special needs.

The couple owns a $550,000 home with a $120,000 mortgage, and a cottage worth $250,000. Samson has $85,000 in an RRSP and has contributed another $20,000 to Martina’s RRSP. They have RESPs for their other two children, which would cover their education needs.

Which of the following is the most appropriate product combination for their insurance needs?

a) Disability policy on Samson with a 10-year renewable term, par whole life on Martina with a disability income benefit rider

b) Whole life on Samson with a disability income benefit, par whole life on Martina

c) Joint last-to-die life policy on Samson and Martina, with a 10-year term and a disability policy for the youngest child

d) Whole life on Samson with a disability income benefit, and par whole life on Martina, and a disability policy for the youngest child

Answer 23

Samson’s salary is essential to support the family hence a Whole life on Samson with a disability income benefit is the most appropriate option for him. As Martina is a caregiver to their child, and not employed outside the home, she cannot have a disability policy. A participating whole life policy will have several dividend options that is more beneficial than the other options presented and can be used to provide for the care of their disabled child when Martina dies. The youngest child would not qualify for disability insurance.

(Refer to Section 3.3.3)

Question 24

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 24

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 25

Rio owns a universal life (UL) insurance policy based on yearly renewable term (YRT). It has a death benefit of $400,000 and an account value of $94,000. For the current policy year, Rio’s policy has a cost of insurance (COI) of $17.34. What will be the mortality deduction made by the insurance company this year?

a) $5,306

b) $6,102

c) $4,389

d) $3,296

Answer 25

The insurance company will make a mortality deduction of $5,306 from his account, calculated as cost of insurance (COI) × net amount at risk (NAAR) ÷ $1,000 ($17.34 × $306,000 ÷ $1,000).

NAAR = death benefit – the investment account value

$400,000 – $94,000 = $306,000

Mortality costing or COI is usually expressed as a dollar amount per $1,000 of risk, or in the case of a UL policy, per $1,000 of the NAAR.

[Reference: 4.3.1]

Question 26

Sergio was the policyholder and life insured of a $500,000 whole life insurance policy with a cash surrender value (CSV) of $150,000 when he took out a policy loan of $100,000. The loan’s interest rate was 6% compounded annually. Two years later, Sergio died without ever having made a payment on the loan. His CSV at that time was $175,000.

How much did his beneficiary receive from the policy?

a) $331,460

b) $387,640

c) $400,000

d) $412,640

Answer 26

The policy loan and accrued interest had to be reimbursed following Sergio’s death. The death benefit was reduced by the amount of the loan ($100,000) and the amount of the accrued interest over two years ($12,360).

Thus, the beneficiary received $387,640 ($500,000 - $100,000 - $12,360).

[Refer to Section 3.5.1]

Question 27

Stephen is meeting with you to discuss his insurance planning. He brings a listing of his assets. Most of his wealth is in a term deposit with a maturity of two years. What type of asset is that?

a) Investment asset

b) Fixed asset

c) Liquid asset

d) Compounded asset

Answer 27

A term deposit with a maturity of two years is an investment asset. A term deposit with a maturity of less than one year is categorized as a liquid asset.

[Ref: 10.3.1.3]

Question 28

Lakshmi is the primary income earner and her husband Paul is the primary caregiver for their two young children. Lakshmi and Paul are purchasing life insurance policies and their insurance agent recommends that they each purchase a whole life policy. Their agent also recommends that Lakshmi be the policyholder of both policies and that she add a waiver of premium for total disability benefit to her policy and a payor waiver benefit to Paul’s policy. Identify the statement that best describes these additional benefits?

a) Lakshmi will need to provide evidence of insurability for both policies

b) If Lakshmi suffered a disability, only the premiums on her policy would be waived

c) If Paul suffered a disability, only the premiums on his policy would be waived

d) Waiver of premium benefit payments are limited to a specified time frame

Answer 28

Because the policyholder is not the same person as the life insured, the policyholder will have to provide proof of insurability for himself as well as for the life insured. The premiums would be waived on both policies for the duration of Lakshmi’s disability.

[Ref: 5.2.4]

Question 29

Marco is planning terminate his $300,000 whole life insurance contract. The policy has a CSV of $37,000 and an ACB of $23,000. His premiums are paid to date and there are no outstanding policy loans. What outcome can be expected if he fully surrenders his policy?

a) He will receive $37,000 minus tax payable.

b) He will receive $14,000 which is his policy gain.

c) He will receive an amount equal to the CSV without being taxed.

d) He will receive $0 as this is a deemed disposition.

Answer 29

He will receive $37,000 minus tax payable. The amount of tax payable will be calculated based on the individual’s marginal tax rate. Whenever a policyholder disposes of an insurance policy, there may be tax consequences. In the case of a full surrender, the proceeds of this disposition are equal to the cash surrender value (CSV) of the policy, less any outstanding policy loans (including interest) or unpaid premiums.

[Ref: 7.1.2, 7.3]

Question 30

Sheila would like to stop paying for her life insurance policy using her non-forfeiture benefits. She is not sure which benefit is the best option for her situation. She would like to maintain her cash surrender value and ensure that the policy provides some coverage for the rest of her life.

Which of the following non-forfeiture benefits will best address Sheila’s needs?

a) Extended term insurance

b) Automatic premium loan

c) Reduced paid-up insurance

d) Limited payment insurance

Answer 30

The paid-up insurance benefit is the only option that will allow Sheila to avoid a loan and reduce her cash surrender values as well as maintain the permanent status of their policy.

[Refer to Section 3.5.3]

Question 31

Thea, an insurance agent, is discussing group insurance with Adela. Adela would like to offer the ability to purchase additional coverage to employees at their own expense. What could Thea suggest to Adela in order to discourage anti-selection?

a) Require evidence of insurability when applying for additional coverage

b) Make the additional coverage mandatory rather than optional

c) Do not let it be well-known that this additional coverage is available

d) Make the employees pay for 100% of the premiums

Answer 31

Usually, the group member will have to provide evidence of insurability when applying for additional coverage because the ability to choose the coverage amount creates the potential for adverse selection, also known as “anti-selection.” Adverse selection refers to the phenomenon where someone who is at greater risk (or who perceives himself to be at greater risk) is more likely to buy insurance to cover that risk and is more likely to make a claim than the average person within the group.

[Ref: 6.2.4]

Question 32

Imran is meeting with Jenny, who wishes to purchase a new insurance policy. After the needs analysis, Imran suggests that Jenny purchase a $600,000 T-100 insurance policy. To make sure the policy is appropriate for Jenny, Imran should have checked for all of the following, EXCEPT:

a) Does Jenny wish to opt for automatic premium loans (APL), which could help prevent the policy from lapsing if she misses any premium payments?

b) Does Jenny require a fixed amount of insurance to cover a need that is not expected to increase prior to death, regardless of when that death might occur?

c) Is Jenny certain that she will never want to surrender the policy?

d) Does Jenny have no need of the investment opportunities provided by universal life (UL) insurance?

Answer 32

Whether Jenny wishes to opt for automatic premium loans (APL) or not, is not a condition to ensure that a T-100 policy is appropriate. All other conditions apply.

[Ref: 3.11.6]

Question 33

Lily obtained a life insurance policy seven years ago for $250,000. At the time, she was participating in adventure sports and was issued a rated policy. Lily has since stopped participating in adventure sports but has started to smoke in the past year. Lily asks her insurance agent if the insurance company can remove the rating, now that she is no longer exposed to the risk of adventure sports. Which statement best describes how the risk on Lily’s existing policy will be assessed?

a) Lily can request to have the rating reassessed and removed.

b) The insurance company will add a rating to reflect Lily’s new smoking status.

c) Once the policy is issued, the insurance company will not reassess the policy.

d) Once the policy is issued, the insurance company will not remove a rating on the policy.

Answer 33

Once the insurance company issues a policy, it cannot reassess the life insured at a later date or add a rating and charge a higher premium if his health has declined. In other words, the insurance company cannot downgrade her risk rating after the policy is issued. However, if a policy is issued on a rated basis and the reason for that rating no longer exists, the policyholder may be able to ask the insurance company to remove or decrease the rating, with an appropriate decrease in premiums.

[Ref: 9.5]