EXAM PRACTICE QUESTIONS 2 Flashcards
While applying for long-term care insurance for his mother, Mark asks the insurance agent about the ways used by the insurer to determine whether an insured qualifies for long-term care assistance. Which of the following explanations provided by the agent is FALSE?
a) The insured must be unable to independently perform at least three of the activities of daily living (ADLs).
b) Certification of qualification under the ADLs should be provided by the patient’s attending physician or by a physician associated with a care facility.
c) An umbrella test for qualification for long-term care benefits is to determine whether the insured is cognitively impaired.
d) A person who is severely cognitively impaired would be considered sufficiently “disabled” to qualify for LTC insurance benefits.
The most common ways that most insurers use to determine whether an insured qualifies for long-term care assistance is if the insured is unable to independently perform any two or more of the activities of daily living (ADLs).
[Ref: 3.3.3.1]
Jayce is a self-employed project management professional. He makes a net business income of $80,000 per year from his project management activities. He owns several rental properties that he inherited from his parents. The rental income Jayce earns from the apartment buildings is $100,000 per year after expenses. He does not own any disability insurance and is worried about the loss of his project management income in the event of a disability. He approaches his advisor to analyze his disability insurance situation. What does Jayce’s advisor tell him?
a) Jayce may not be able to obtain disability insurance because of his high unearned rental income.
b) He needs disability insurance to replace all sources of income in the event of a disability.
c) Rental income is earned income and, therefore, his disability benefits will be based upon the gross income of $180,000 annually.
d) Rental income will not be factored into the equation when determining Jayce’s disability benefits.
When considering Jayce’s eligibility for disability benefits, the insurer will consider both his earned and unearned income. In this case, the calculation will be as follows:
Disability benefit = (earned income + unearned income) × 60% – unearned income
($80,000 + $100,000) × 60% – $100,000 = $180,000 × 60% – $100,000
$8,000 per year or $667 per month.
As the proportion of unearned income in Jayce’s total income is very high, the insurer may decline to provide any disability insurance or, at the most, provide a policy for $667 per month of benefits.
[Refer to Section 6.2.2]
Lucy is in the process of applying for an accident and sickness insurance policy and is working with her insurance agent, Kam. While assessing Lucy’s financial situation, Kam reviews Lucy’s cash flow statement listing out all her income and expenses. Which of the following will increase the accuracy of a cash flow statement?
a) A budget based on actual spending patterns
b) Credit card statements
c) Home equity line of credit (HELOC) statements
d) A review of current assets
The cash flow statement lists all sources of net income (income after income tax) and all expenses including debt payment for liabilities. It is most accurate when it is backed up with a budget based on actual spending patterns.
[Ref: 6.4.1.3]
Amina, age 50, owns a critical illness insurance policy which matures at age 75. She purchased the policy 20 years ago and has never filed a claim. Amina decides to surrender the policy as she feels there is no need for coverage anymore. What outcome can be expected upon policy surrender with regard to refund of premiums?
a) She will receive a refund of premiums only if she had added the return of premium rider to her contract.
b) She will receive a refund of premiums as the return of premium rider is an intrinsic provision of the contract.
c) She will not receive a refund of premiums as there is no such provision in a critical illness insurance policy.
d) She will not receive a refund of premiums as she is surrendering the policy before its maturity date.
She will receive a refund of premiums only if she had added the return of premium rider to her contract.
As an optional benefit (rider) many insurance companies offer their critical illness policyholders the opportunity to add a return (refund) of premium clause to their contracts that would pay back some, or all, of premiums previously paid by the policyholder should the insured die or the policy expire with no claim ever having been filed. Premiums would be refunded to the policyholder, in whole or in part, should the policyholder surrender (cancel) the policy after a prescribed number of years (10, for example) with no claim having ever been filed.
[Reference: 3.1.4.1]
Phyllis is a young marketing executive with a salary of $90,000. She is concerned that the group disability insurance provided by her employer is insufficient. She is in good health now but is concerned about how she can protect her future income against disability risk. She goes to her agent and asks for advice. He recommends a disability policy with a future purchase option rider.
Which requirement must Phyllis meet to increase her benefit when exercising the future purchase option?
a) She must be employed by the same company.
b) She must have a clean claims record.
c) She must meet medical underwriting requirements.
d) She must provide proof of income to justify the increase.
The key restriction in exercising the future purchase option (FPO) is that the insured must qualify for the additional coverage financially.
(Refer to Section 2.2.4.3)
Merlia is covered under a group plan that offers enhanced medical and hospital care benefit. Which of the following statements about the benefits received by Merlia under the enhanced health care plan is FALSE?
a) The benefits are usually subject to an annual deductible.
b) The insured will be required to make co-insurance payments.
c) The benefit covers professional medical services not insured by the provincial health care plans.
d) The benefit often covers medical expenses including transportation by ambulance
Enhanced medical or hospital benefits are not usually subject to an annual deductible, but may incur a co-insurance payment on the part of the insured member.
Ref: 4.3.1.2
Donna, an insurance agent, is discussing a new group disability plan with Greg, the HR director of ABC Inc. Before the meeting, she makes a list of the questions she needs to ask, including average age and gender and the number of members. What other key information should she ask for?
a) The turnover rate of employees.
b) Recent history of any serious illnesses of any employees.
c) The level of sick days taken in the past year.
d) The average salary of the employees.
In addition to dealing with factors such as the number of members and their average age and gender, that composite identity also relies on the stability of the group (turnover rate). Donna should ask about the turnover rate of employees in order to assess the stability of the group.
[Reference: 8.1.1]
Nikhil owns a toy store which generates a monthly net income of $7,000. He has a disability business overhead expense (BOE) insurance which pays $4,000 a month. He becomes disabled after an illness and claims $3,500 of his business’ qualifying expenses in the first month that benefits are payable. Which of the following is NOT true about the taxation of the BOE benefit?
a) The $3,500 benefit provided by the BOE policy is paid tax-free to the business.
b) The $3,500 of qualifying expenses paid is a tax-deductible expense.
c) The business had no tax to pay on the $3,500.
d) The $3,500 received by the business from the BOE policy will be treated as taxable income.
The $3,500 benefit provided by the BOE policy is NOT paid tax-free to the business. Since the expenses covered by the BOE policy are normally themselves tax-deductible as business overhead, the tax on the benefits and the deductions for the expenses generally offset each other for tax purposes. Any benefits paid to the policyholder, or on the policyholder’s behalf, are treated as taxable income.
[Ref: 5.3.1.10]
Layla is 60 years old. Her children are adults and live on their own. She has lived alone since her husband died two years ago. She has adequate life insurance coverage and a critical illness policy which provides her with a lump-sum benefit of $200,000 in the event that she is diagnosed with one of the 20 conditions listed in her policy. She has saved enough to meet her retirement needs. Layla is worried that if she were to lose her ability to perform her activities of daily living independently, her children would be too busy to look after her. She approaches her insurance agent to see if she would be adequately covered in this situation. Which of the following best describes the risk Layla faces with respect to her current insurance coverage?
a) Layla’s critical illness benefit would be subject to tax, reducing the benefit available.
b) Layla would only receive benefits if her inability to perform the activities of daily living are a result of a covered condition.
c) Layla may not be able to obtain long-term care insurance, as she is 60 years old.
d) If Layla loses her ability to perform the activities of daily living, the only benefit she may be eligible for is a terminal illness benefit from her life insurance policy.
Critical illness insurance provides a lump-sum benefit only if the insured is diagnosed with one of the illnesses or conditions listed in the policy.
While a critical illness policy will provide funds if the insured is diagnosed with a critical illness and these funds can be used to pay for long-term care, long-term care might be required without the insured becoming critically ill. Long-term care insurance is available for older persons, generally up to age 70 or 75.
A terminal illness benefit of life insurance is payable only if the life insured is diagnosed with a terminal illness and the life insured has less than 24 months of life expectancy after the diagnosis.
It cannot be relied upon to provide benefits for long-term care unless such care is required as a result of a terminal illness. Therefore, it is advisable for Layla to obtain long-term care coverage.
(Refer to Section 6.1.5)
Amrita and Phoebe are both accountants who own an individual disability insurance (DI) policy that provides coverage for low-risk occupational classes. They pay annual premiums which are higher than the traditional policies. The plans set out a number of restrictions based on size of the group, minimum annual premium commitment, and minimum average age for the group members. Based on this information, it can be inferred that Amrita and Phoebe are covered under a:
a) guaranteed issue policy.
b) guaranteed renewable policy.
c) non-cancellable & guaranteed renewable policy.
d) cancellable policy.
Guaranteed issue DI plans involve individually issued policies that are an alternative to traditional long-term disability (LTD) group insurance coverage and are available to groups in the low-risk occupational classes of executives and professionals: lawyers, doctors, accountants, etc. Because of the guaranteed nature of the plans, they are subject to a number of possible restrictions based on: size of the group, occupational class of the group members, minimum annual premium commitment, minimum average age for the group members.
[Ref: 2.2.1.4]
Wei is covered under his employer’s group insurance plan which offers an employee assistance plan (EAP). He is under severe mental stress due to an updated technology that requires him to cope in a limited time span. He is also dealing with a divorce and its legal issues simultaneously. Wei decides to use his EAP benefits. Which of the following is true about Wei’s EAP benefits in this case?
a) Wei’s benefits for legal counselling related to his divorce will be treated as a taxable benefit.
b) Wei’s benefits for psychological counselling related to work stress will be treated as a taxable benefit.
c) The services provided to Wei will not be subject to annual deductibles or any a co-insurance provision.
d) EAP services can be used by Wei to deal with occupational stress only and cannot be used for his personal situations unrelated to work.
Benefits are not a taxable benefit to the recipient employee for counselling services relating to physical or mental health of the employee or an individual related to the employee. Benefits for counselling for legal or financial matters are generally treated as a taxable benefit. The services provided are typically subject to annual deductibles, a co-insurance provision, a maximum number of hours of services per annum and a maximum allowable hourly rate. EAP services are designed to assist employees to overcome, or at least cope with, personal or work-related stressors.
[Ref: 8.2.1]
Which of the following individuals is most likely to have the lowest need for disability insurance?
a) Shaan who is married to Betsy. They both earn around $60,000 each annually with no dependents.
b) Fen who is single and earns $65,000 a year and has a dependent father.
c) Bosley who is married to Catlin. Catlin takes care of the kids and Bosley is the key person of a business that he owns which provides a net income of $70,000 a year.
d) George who is single and earns $55,000 a year and has no dependents or family members.
Shaan is most likely to have the lowest need for disability insurance because Betsy is likely to provide him with financial support if he is to become disabled. However, this is not the case with those in the other scenarios. Fen, Bosley, and George are solely dependent on their incomes and if they become disabled it will drastically affect their quality of life without a disability insurance in place.
[Ref: 6.1.2]
Teresa found recent employment at a recruitment firm and was informed that she will be covered under a group disability plan offered by the employer at the end of probation, which is 90 days. This period of time between Teresa joining the firm and becoming eligible under the group plan is referred to as the:
a) qualification period.
b) waiting period.
c) elimination period.
d) conditional period.
Most group DI plans require a new employee to undergo a qualification period before they can join the group plan. Not to be confused with the waiting period for disability benefits, the qualification period is a set number of days that must expire between the date of employment and the date that the employee qualifies to join the group plan. Often the qualification period is tied to the probationary period for employment: that period of 30 to 90 days when a new employee may be terminated without recourse.
[Ref: 2.3.3.1]
ohnathan works at a manufacturing facility earning $60,000 per year. His wife Lana works at a doctor’s office and also earns $60,000 per year. He and Lana approach their advisor, Michel, and indicate that they will require 60% of their combined monthly incomes for their family to remain solvent in the event that one of them were to become disabled.
What is the minimum amount of disability insurance that they each should buy if they expect that only one of them will become disabled at a time?
a) $1,000 per month
b) $1,500 per month
c) $2,500 per month
d) $3,500 per month
The combined income of Johnathan and Lana is $10,000 per month. The couple needs $6,000 per month (($60,000 × 2) × 60% ÷ 12) . If Johnathan is disabled, Lana’s income of $5,000 per month will continue, leaving them with a shortfall of $1,000 per month.
(Refer to Section 6.1.2)
Alison is 80 years old and she has a long-term-care (LTC) insurance policy which will pay a maximum of $250 per day. She lives all by herself and her health is deteriorating. She decides to live in a nursing home where she will be cared for funded by her LTC policy. Which of the following is true about her LTC benefit payments?
a) Alison will have to provide medical evidence of need certified by the attending physician in order to qualify for benefits.
b) Alison should be unable to perform at least one of the activities of daily living (ADLs) to qualify for LTC benefits.
c) Alison will receive the maximum daily benefit of $250 regardless of the actual expenses incurred.
d) Alison should provide receipts for proof of expenses to be able to reimburse daily costs that exceed $250.
Alison will have to provide medical evidence of need certified by the attending physician in order to qualify for benefits. Alison should be unable to perform at least two of the activities of daily living (ADLs) to qualify for LTC benefits. Reimbursement is determined as a maximum amount per day or per service/equipment, and the insured is only reimbursed for the amount actually spent on care. The maximum is not simply paid out regardless of the actual expenses incurred. Benefits provided by long-term care insurance are limited to a maximum daily rate.
[Ref: 3.3.5]
