EXAM PRACTICE QUESTIONS 3 Flashcards
Nancy is covered by a group disability policy for 50% of her salary after a three-month waiting period. She is covered for $2,500 per month for a period of two years. She approaches her insurance agent as she believes that she requires a coverage of $3,000 per month (60% of her salary). She would also like to be covered for five years for any disability. Which of the following should Nancy’s agent suggest?
a) An individual policy for $500 per month for a two-year benefit period, and an individual policy for $3,000 per month for a three-year benefit period, after a two-year waiting period.
b) An individual policy for a benefit of $3,000 per month with a five-year benefit period.
c) An individual policy for $800 per month for a three-year benefit period, and an individual policy for $2,000 per month for a two-year benefit period, after a three-year waiting period.
d) An individual policy for $3000 per month with a three-year benefit period, after a two-year waiting period.
Nancy requires an increased benefit of $500 per month for the first two years and a policy that will pay her $3,000 per month after two years for a three-year benefit period. Therefore, she should get an individual policy for $500 per month for a two-year benefit period and another individual policy with a benefit of $3,000 per month after a two-year waiting period.
(Refer to Section 7.4.3.1)
Kingston needs disability insurance and is meeting with an advisor to discuss his personal situation. He has been self-employed for the last six years and earns a steady annual income of $65,000. He is concerned that he and his wife, Denise, will not be able to cover their expenses if he becomes disabled. Denise was previously married and receives $300 a month from her ex-spouse in addition to her full-time employment. Kingston’ daughter Josie is 18 years old, is going to school full-time, and receives $500 a month from a family trust from her grandmother. Identify which income source(s) are factored into determining the amount of disability benefits that Kingston would be eligible for.
a) Only Kingston’ earned income
b) All sources of earned and passive income for Kingston, Denise, and Josie
c) All sources of earned income for Kingston and Denise
d) All sources of earned and passive income for Kingston and Denise
When considering a client’s overall sources of replacement income or income to defray medical or care expenses, earned income is generally the first thing that an agent will review. However, “passive” income—income available to the client even when he is not working—must also be taken into consideration. Passive income could include income earned by other family members, investment income, and income received as a beneficiary of a trust or sources of cash flow that are not strictly “income”, but which could be utilized as a substitute for income.
(Refer to sections 2.2.2.1, 6.2.1)
Karen paid $2,200 annually for her LTC insurance policy, including a $550 annual extra premium for a return of premium rider that provides a 35% refund of total premiums paid over a 10-year claim-free period. If she dies this year after having paid into the policy and after being claims-free for 10 years, how much death benefit will be paid?
a) $7,700
b) $5,500
c) $6,600
d) $8,800
If Karen dies, the insurance company will pay a death benefit of $7,700 calculated as 35% × $2,200 × 10. Many long-term care policies offer a return of premium benefit at time of death of the insured if the policy has been claims-free. The amount returned (refunded) will vary from contract to contract, but is usually a function of the number of years the policy has been in force and claims-free: as much as 50% of premiums paid for a 10-year period or 100% for 20 years. The cost of the rider can add anywhere from 25% to 50% to the basic policy fee.
Ref: 3.3.4.2
Sam is planning to travel to Mexico next week for vacation and meets with his agent to purchase a travel insurance policy. Sam prefers to spend less on insurance premiums and asks the agent to list out the factors that tend to increase the premiums. Which of the following factors is the agent LEAST likely to mention?
a) The occupation of the traveller
b) The amount of coverage
c) The number of days of travel
d) The age of the traveller
The agent is least likely to mention the occupation of the traveller. The two most important factors impacting travel insurance premiums are the amount of coverage and the number of days that the traveller expects to spend outside his province of residence. The age and medical history of the traveller can have a major impact on premiums.
Reference: 4.2.3.5
Lachlan meets with an insurance agent to replace his company’s existing group plan with a better product. While analyzing the group’s claims experience, the agent notices that the number of claims made are higher than average. Which of the following is LEAST likely to be a reason behind the group’s high claims rate?
a) Presence of an employee assistance plan (EAP)
b) Absence of deductibles and co-insurance factors
c) Absence of contract exclusions and limitations
d) Presence of broad coverage with liberal definitions
An unusually high past claims experience might be attributed as much to the plan design as to the plan members, particularly if there are no proactive programs in place, like an EAP. Hence, presence of an employee assistance plan is not a reason behind a group’s high claims rate. All other factors are reasons for a high claims rate.
Ref: 8.3.1.2
Sergei is a key employee and one of two major shareholders of ABC Corp. He is covered by a corporately owned individual disability policy with ABC Corp as the beneficiary. ABC Corp will be paying the $135 premium every month. Which of the following statements best describes the tax treatment of this policy?
a) ABC Corp can deduct the premiums paid
b) The premiums paid are a shareholder benefit
c) There are no tax implications for Sergei
d) The benefits received by ABC Corp are a taxable inclusion
Disability insurance purchased to protect the corporation’s financial interests in the event of the long-term disability of a key employee, or to buy out the interest of a permanently disabled shareholder, is treated the same as a personally owned DI policy: the premiums paid are not tax-deductible, nor are benefits received by the corporation a taxable inclusion.
If the life insured under a corporately owned policy is a shareholder of the company (or both an employee and a shareholder), the Canada Revenue Agency (CRA) is likely to rule the premiums paid to be a shareholder benefit, non-deductible by the employer but taxable in the hands of the shareholder.
(Refer to Section 2.2.5.2)
Crystal is employed in a firm that provides a group insurance plan to its employees. She is covered by her group plan for life insurance, disability insurance, and extended health care benefits. Crystal’s employer pays 50% of the premiums of the Long-Term Disability coverage. Crystal has various health issues and has made disability claims previously and received benefits for varying periods of time. Which of the following is the greatest benefit of Crystal’s group insurance plan?
a) The group insurance does not require evidence of insurability
b) She can convert her group coverage to individual coverage within 90 days of exiting the group plan
c) Crystal’s Long-Term Disability benefits are tax-free
d) There is no waiting period for Short Term Disability claims under a group insurance policy
Group disability insurance (DI) coverage is usually offered to the members of the group without medical underwriting. Crystal has had previous health issues and would likely have difficulty getting insurance, or would be rated, paying additional premiums.
Benefits under STD plans start after the 7-day waiting period.
When the employee pays a portion of the Long-Term Disability premiums, benefits are taxable with the dollar amount of employee premiums reducing amount taxable, not based on the percentage split of contributions. Group life insurance is convertible to individual insurance within 31 days of quitting the plan; group disability insurance may be convertible if the policy provides for conversion.
(Refer to Section 2.3)
Niran works as a supervisor for a company that offers its employees a group plan which includes short-term disability (STD) coverage. He earns a monthly income of $5,300. Which of the following statements about Niran’s STD coverage is true?
a) Niran is likely to receive a maximum monthly benefit of $3,975 under the plan.
b) Niran will have to pay 50% of the premiums for the STD coverage.
c) STD disability benefits will be a non-taxable benefit to Niran.
d) The definition of disability for STD coverage is generally “any occupation.”
STD benefits are based on a percentage of salary. Because plans are usually designed such that the employer pays 100% of the premiums for the STD coverage and benefits are taxable income. STD benefits are likely to be in the range of 70–75% of pre-disability income. Hence, Niran will receive a maximum monthly benefit of $3,975 ($5,300 x 75%) under the plan. The definition of disability for STD coverage is generally “own occupation.”
Ref: 2.2.3.1
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
