Exam Questions Flashcards
Bruno and Diane were divorced four years ago. The court ordered Bruno to pay Diane $1,800 per month until their 4-year-old son turns 18.
Two years later. Bruno moved in with Édith, his new common-law partner.
Three months ago, Bruno died in an accident. In his will, he left everything to Édith and their 6-month-old baby, neglecting to provide funds to respect the court order in favour ofDiane. Edith had taken out a $50.000 life insurance policy on Bruno from ABC Insurance, naming herself as beneficiary, to provide some income replacement in the event of Brunos death.
What recourse does Diane have in this situation?
a) She can sue Édith personally.
b) She can sue Bruno’s estate.
c) She can sue ABC Insurance.
d) She has no recourse.
b) She can sue Bruno’s estate.
Explanation:
When a court orders someone to pay spousal or child support, that obligation does not automatically disappear upon their death.
Since Bruno did not make provisions to continue the payments, Diane can file a claim against his estate to enforce the court order.
The estate includes any assets Bruno owned at the time of his death (e.g., property, savings, investments, etc.).
Francesca and John are in their late 50s and retiring soon. They did very well in the stock market over the years and have enough saved up to start living their retirement dreams. Although they plan to keep their family home, they have recently purchased a condo in Mexico to spend the winter months in.
Otherwise, they will split their time between their home and the cottage that john’s father left him upon his death ten years ago. They have three children that are young adults and would like to transfer these valuable assets to them upon their deaths.
In their current situation, what should their main concern be?
a) In the event John passes away, the cottage would need to be sold in order to pay the estate taxes.
-b) Once both Francesca and John have passed away, the tax liability would force the executor to liquidate whatever assets necessary to settle the estate.
c) In the event that either Francesca or John passes away before the other, the tax liability would force the executor to liquidate one of the properties.
d) in the event that Francesca passes away, the condo would have to be sold in order to pay the estate taxes.
b) Once both Francesca and John have passed away, the tax liability would force the executor to liquidate whatever assets necessary to settle the estate.
Explanation:
In Canada, when a person dies, their assets are deemed to be sold at fair market value unless they transfer to a spouse (spousal rollover) or a qualified trust.
Since Francesca and John own multiple valuable assets (a family home, a cottage, and a condo in Mexico), there will be capital gains taxes due upon the second spouse’s death (because the first spouse can defer taxes through the spousal rollover).
Their estate could face a large tax bill, which may require selling some assets to cover the cost.
Mike, a 41-year-old non-smoker, has been living with 32-year-old Nancy for three years. Nancy has just given birth to a little boy. Their insurance agent suggests that Mike purchase individual life insurance.
Mike tells him that he is covered by group life insurance convertible for the full coverage amount if the plan were to be terminated or if he left his job in 10 or even 20 years.
By not taking his agent’s suggestion, what disadvantage could Mike face in 10 or 20 years?
•a) Mike would not face any disadvantage.
• b) Mike would lose his life insurance coverage.
c) His premiums could be substantially higher.
d) His coverage amount would be reduced.
c) His premiums could be substantially higher.
Explanation:
Mike is currently 41 years old and in good health.
His group life insurance is convertible, meaning he can switch it to an individual policy without medical underwriting if he leaves his job or the plan is terminated.
However, if he waits 10 or 20 years to get individual coverage, he will be older (51 or 61 years old) and possibly less healthy.
Life insurance premiums increase with age, so waiting will likely result in substantially higher costs compared to locking in a rate now.
Jerry and Margaret, both aged 70, are reassessing the need to keep their whole life insurance policies.
Jerry’s policy has a CSV of $50,000 and an ACB of $20,000, while Margaret’s policy has a CSV of $40,000, and an ACB of $14.000. Jerry is currently in a 40% marginal tax bracket and Margaret is in a 30% marginal tax bracket.
What would jerry and Margaret have left after tax if they proceed with surrendering their policies?
a) $7,800.
b) $12,000.
c) $19,800.
d) $70,200.
d)70,200
Step 1: Calculate the Taxable Gain for Each Policy: TaxableGain=CashSurrenderValue(CSV)−AdjustedCostBasis(ACB)
Step 2: Calculate the Tax Payable: taxable gain X Marginal tax rate
Step 3: Calculate the After-Tax Amount =CSV−TaxPayable
Chris and Irene are a young married couple. They got married just last year and recently had their first child together. Irene is on maternity leave but expects to go back to work as a paralegal when the baby turns one. Chris is a director at a logistics company but is planning to step down into a lower management position with all the changes to their life. They meet with their life insurance agent Shawn to complete a needs analysis for life insurance. During the process they learn that their cost of living is quite high and they spend most of the income that they make. Besides their mortgage, which is covered by mortgage protection insurance, they have no other debts.
What would be the most concerning risk that needs to be addressed for Chris and Irene?
a) Loss of either of their incomes
b) Debt repayment on mortgage
c) Estate creation to establish a legacy
d) Pay for final expenses
a) Loss of either of their incomes
Explanation:
Chris and Irene are a young family with a high cost of living and no major savings since they spend most of their income.
Chris is also planning to step down to a lower-paying position, reducing their household income.
While their mortgage is covered by mortgage protection insurance, it only covers the mortgage balance, not daily living expenses.
If either Chris or Irene were to pass away, the surviving spouse would struggle financially, especially with a child to care for.
Dominic and Magalie have been married for five years and have three children, aged four, seven and nine. Dominic and Magalie are divorcing and Magalie has been ordered to pay child support, until the youngest reaches age 20. The court has specified her monthly obligation to be $2,000.
What type of insurance provides the most cost-effective solution and how much insurance is needed?
a) Whole life insurance with coverage of $600.000.
b) Term-to-100 with coverage of $600,000
c) 25-year term life insurance with coverage of $480,000.
d) 20-year term life insurance with coverage of $480,000.
d) 20-year term life insurance with coverage of $480,000.
Why:
Magalie’s child support obligation is $2,000 per month until the youngest child reaches age 20.
20-year term life insurance matches the time frame, ensuring coverage during the support period.
The coverage amount of $480,000 ensures that if Magalie passes away, there will be enough to cover 20 years of child support at $2,000/month.
Jocelyn and Jeannine recently divorced. The divorce judgment orders Jocelyn to pay $600 per month in child support to Jeannine to support their two children for a period of 20 years after the divorce. The judgment also orders Jocelyn to guarantee payment of said support in the event of his death by means of life insurance. Jocelyn earns $250,000 per year and has several rental buildings. His marginal tax rate is 48%.
Which type of insurance policy should Jocelyn buy?
a) Whole life insurance of $250,000.
b) Term insurance to age 65 of $120,000.
c) T-20 insurance of $144,000.
d) T-20 insurance of $120,000.
c) T-20 insurance of $144,000.
Why:
Child support is $600/month for 20 years, totaling $144,000 in support payments.
T-20 (20-year term) insurance provides the most cost-effective coverage, matching the child support period (20 years).
The coverage amount of $144,000 ensures the child support can be paid if Jocelyn passes away.
David agreed to drive his young children via a major highway to an amusement park Despite his reservations, he rode with them on roller coasters, ate junk food, and ran an obstacle course to win a prize.
From a risk perspective, what strategy did David employ?
a) Risk avoidance.
b) Risk reduction.
c) Risk retention.
d) Risk transfer.
c) Risk retention.
Why:
Risk retention means accepting the risk and not taking action to avoid or reduce it.
David accepted the risks (driving on a highway, riding roller coasters, eating junk food) without taking steps to mitigate them, which shows he retained the risks.
Jérémie, Pascal and Stéphane are equal shareholders in Désauto Inc. Each shareholder has a life insurance policy naming the co-shareholders as beneficiaries so they can buy the shares of the deceased shareholder. Upon Stéphane’s death, his wife Dominique inherited his shares. When Jérémie and Pascal wanted to buy her shares, Dominique asked for a much higher price that not only exceeded the amount the shareholders had discussed but that was also much higher than the amount stipulated in the policy. This forced Jérémie and Pascal to be co-shareholders with Dominique, who has no experience managing such a company.
What measure should the shareholders have taken to prevent such a situation?
a) Have a written buy-sell agreement in place.
b) Have legal representatives draft a formal will for each shareholder.
c) Fund the purchase of the shares with business-owned insurance.
d) Fund the purchase of the shares with the “criss-cross insurance” method.
Jérémie, Pascal and Stéphane are equal shareholders in Désauto Inc. Each shareholder has a life insurance policy naming the co-shareholders as beneficiaries so they can buy the shares of the deceased shareholder. Upon Stéphane’s death, his wife Dominique inherited his shares. When Jérémie and Pascal wanted to buy her shares, Dominique asked for a much higher price that not only exceeded the amount the shareholders had discussed but that was also much higher than the amount stipulated in the policy. This forced Jérémie and Pascal to be co-shareholders with Dominique, who has no experience managing such a company.
What measure should the shareholders have taken to prevent such a situation?
a) Have a written buy-sell agreement in place
b) Have legal representatives draft a formal will for each shareholder.
c) Fund the purchase of the shares with business-owned insurance.
d) Fund the purchase of the shares with the “criss-cross insurance” method
Richard was recently divorced. He has made a new will and is bequeathing all his assets to his children, including an antique car collection he inherited from his father. The ACB of the collection is $100,000, but its current market value is $400,000. Richard’s marginal tax rate is 40%. He is considering buying life insurance to relieve his estate of the tax burden created by the value of the collection.
What amount of life insurance should Richard buy?
a) $400.000.
b) $300,000.
c) $100,000.
d) $60,000.
b) $300,000.
Why:
The estate tax liability arises from the capital gain on the antique car collection.
The capital gain is calculated as:
Market value ($400,000) - ACB ($100,000) = $300,000 gain.
The tax liability on the gain is:
$300,000 x 40% tax rate = $120,000.
Richard should buy $300,000 in life insurance to cover the potential tax liability.
Glen and Ted have recently entered into a purchase and sale agreement. Glen is buying Ted’s public accounting practice for $250,000: the small commercial building for $50,000, and the book of business for $200,000. The business is to be paid for with a lump-sum deposit of $50,000 and the annual billings across three years. The building itself will be paid for in annual instalments across five years, and Ted will charge an extra 10% of the value of the building to hold what is essentially a private mortgage.
Ted is concerned about mortality risk. He is 65, and had a life-threatening heart attack when he was
40. He wants to ensure his wife is paid out what he is owed in this deal if he were to die within the next five years.
Which option would best suit this purchase and sale agreement?
a) A $250,000 joint first-to-die policy on Ted and Glen’s lives.
b) A $250,000 whole life policy on Ted’s life.
c) A $200,000 term-5 policy on Ted and Glen’s lives.
d) A $205,000 term-5 policy on Ted’s life.
d) A $205,000 term-5 policy on Ted’s life.
Why:
Ted needs life insurance to ensure his wife is paid if he dies within the next five years.
The $250,000 sale agreement is broken down into two parts:
$50,000 for the building (with installment payments over 5 years)
$200,000 for the book of business (with payments over 3 years).
Ted’s concern is ensuring his wife is paid the amount owed for both parts in case of his death.
Term-5 insurance for $205,000 will cover the remaining payments for the building ($50,000) and the book of business ($200,000), aligning with the structure of the deal.
Julie is a single mom with a 10-year-old daughter named Aby.
Julie has regular employment at a bank that gives her financial security, as she doesn’t receive any support payments for either her or Aby.
Almost all her income goes towards their current expenses (rent, food, clothing and car). Julie believes a university education is important and invests a portion of her savings in an education fund for Aby. Julie wants to get life insurance coverage that will allow Aby to finish her university studies if Julie dies.
What type of life insurance policy would allow Julie to meet this need?
a) A 15-year term insurance policy on Aby’s life.
• b) A 15-year term insurance policy on Julie’s life.
• c) A 15-year joint first-to-die tem insurance policy.
• d) A 15-year joint last-to-die term insurance policy.
b) A 15-year term insurance policy on Julie’s life.
Why:
Julie needs life insurance to ensure that Aby can finish her university studies if Julie dies.
A 15-year term policy on Julie’s life would provide the necessary coverage for Aby’s education until she finishes university (assuming this takes about 15 years).
The policy would cover Aby’s education expenses in case Julie passes away within that term.
Fifteen years ago, Tony purchased a $200,000 UL policy. The policy provides for a death benefit equal to the initial coverage plus account value. When Tony died last month, his marginal tax rate was 48% and the policy’s account value was $10,200.
How much of the death benefit will the estate keep after filing Tony’s final income tax return?
a) $104,000
b) $109,304.
c) $200.000.
d) $210,200.
D) $210,200
Why:
Tony’s UL policy has a death benefit equal to the initial coverage plus the account value.
Initial coverage: $200,000
Account value at death: $10,200
Total death benefit:
200,000+10,200=210,200
In Canada, life insurance death benefits are tax-free, meaning Tony’s estate does not owe income tax on the $210,200.
Since the full $210,200 is received tax-free, the estate will keep the entire amount.
Damien and Jennifer are shareholders of Aurora Inc., each of them holding 50%. They have prepared a buy-sell agreement between them which is funded by criss-cross life insurance. The shareholders’ marginal tax rate is 45%.
What percentage of the premiums will Damien and Jennifer be able to deduct from their income tax?
• a) 0 %.
• b) 45 %.
• c) 50 %.
d) 100 %.
a) 0%.
Why:
Criss-cross life insurance is a type of insurance where each shareholder buys a policy on the other shareholder’s life to fund a buy-sell agreement.
Premiums paid for criss-cross life insurance are not tax-deductible as they are considered a personal expense, not a business expense.
Therefore, Damien and Jennifer cannot deduct any portion of the premiums from their income tax.
Deductible Life Insurance Premiums = 0% (if personally owned in a criss-cross buy-sell agreement).
If the corporation owned the policy (instead of individual shareholders), the situation might be different, but here, because Damien and Jennifer own the policies personally, they cannot deduct premiums.
Auston is a 25-year-old carpenter. He started his career a couple of years ago, and is looking at different ways to put money away for the future. He has a TFSA and an RRSP which he is putting quite a bit into. As an alternative, his father suggests he meet with the family’s life insurance agent to start a life insurance policy while he is young and healthy. Auston speaks with the agent and really likes the idea of policy dividends and guaranteed cash values.
Which type of policy is best suited to Auston’s needs and preferences?
a) A term-100 policy.
b) A universal life policy.
c) A participating life insurance policy.
d) A non-participating life insurance policy.
c) A participating life insurance policy.
Why:
Auston wants policy dividends and guaranteed cash values, which are features of participating whole life insurance.
Participating policies allow policyholders to receive dividends, which can be used for premium reductions, cash withdrawals, or accumulating more cash value.
These policies also offer guaranteed cash values, making them a good option for long-term savings and financial security.
Fernand purchased a $100,000 whole life insurance policy on his son Jacob when he was born. The policy includes several riders and supplementary benefits. When Jacob turned 25, Fernand assigned ownership of the policy to him. Since then, Jacob was able to increase the amount of coverage on his policy three times despite having high blood pressure and diabetes. He added $25,000 when he got married and $25,000 on the birth of each of his two children.
Which rider or supplementary benefit allowed jacob to increase his insurance?
a) Family coverage rider.
b) Child coverage rider.
c) Guaranteed insurability benefit rider.
d) Critical illness benefit.
c) Guaranteed insurability benefit rider.
Why:
This rider allows the policyholder to increase coverage at specific life events (like marriage or childbirth) without requiring medical evidence.
Jacob was able to increase his coverage despite having high blood pressure and diabetes, which suggests he had a rider that waived the need for medical underwriting.
Suzanne is 81 years old and the proud great-grandmother to Marcel. She always bought life insurance policies on her children, at birth, and would like to gift one to Marcel. She wants the peace of mind in knowing that the policy will grow over time, with little supervision.
In addition to a participating whole life policy, what type of coverage would be the best suggestion to Suzanne?
a) A guaranteed insurability benefit (GIB) rider. so that he could continue to grow the coverage over time.
b) A paid-up additions (PUA) rider, so that the coverage continues to grow over time.
c) A payor waiver benefit upon the policyholder’s death.
d) A term rider that could be converted to permanent life insurance when Marcel is older.
b) A paid-up additions (PUA) rider, so that the coverage continues to grow over time.
Why:
A PUA rider allows the policy’s cash value and death benefit to grow over time without requiring additional premiums.
Since Suzanne wants the policy to grow with little supervision, this is the best option.
Simon and Maryse are married and have two children aged two and four. They have agreed that Maryse would stay home with the children until the youngest turns 18. Simon would like to purchase and pay premiums on a $200,000 term life insurance policy on Maryse so that he can hire a caregiver for his children in the event Maryse dies prematurely. Simon tells his insurance agent that he would not like to see the policy lapse due to non-payment if he were to become disabled before his children turned 18.
Which rider or supplementary benefit should the agent provide on the policy to reassure Simon?
a) Waiver of premium for total disability of the insured.
b) Waiver of premium for total disability of the payor.
c) Paid-up additions rider.
d) Child coverage rider.
b) Waiver of premium for total disability of the payor.
Why:
Simon is the payor of the policy (he’s paying the premiums).
If Simon becomes disabled, he wants to ensure the policy stays active.
A waiver of premium for total disability of the payor ensures the insurance company covers the premiums if Simon becomes disabled.
Donald finds out from his doctor that he only has about 10 months to live. He owns a $100,000 life insurance policy with a terminal illness benefit of $50,000. Donald has named Yvana as the policy’s irrevocable beneficiary.
Donald wants to know whether he has to obtain Yvana’s consent concerning the amount he will be paid as the terminal illness benefit. He would also like to know how much yvana will receive after his death.
What should his insurance agent tell him?
(a) He does not have to obtain Yand’s consent. He will collect $50.000 before taxes and Yvano will receive $50,000 tax free
b) He does not have to obtain Yvana’S consent. Both he and Yvana will receive $50,000 before
c) He must obtain Yvana’s consent. He will collect $50,000 tax free and Yvana will receive $50.000 before taxes.
d) He must obtain Yvana’s consent. Each of them will collect $50,000 tax free.
(c) He must obtain Yvana’s consent. He will collect $50,000 tax-free, and Yvana will receive $50,000 before taxes.
Why:
Yvana is an irrevocable beneficiary, meaning Donald needs her consent to make changes that affect the death benefit.
The terminal illness benefit allows Donald to access $50,000 tax-free while still alive.
After Donald’s death, Yvana will receive the remaining $50,000, which is typically tax-free as a life insurance payout.
André bought whole life insurance of $250,000 on the life of his son Jean when he was born 35 years ago. Jean is now the policyholder since his father died last year. The policy currently has a cash surrender value of $ 100,000 and an ACB of $18,000. Recently, Jean assigned the policy to his bank in return for a business loan of $50,000.
What policy gain will be triggered by assigning the policy to the bank as collateral?
• a) No policy gain.
• b) $18,000.
• c) $32,000.
• d) $50,000.
(c) $32,000
Why:
A policy gain occurs when a policy is assigned as collateral for a loan, and the cash surrender value (CSV) exceeds the adjusted cost basis (ACB).
Policy gain formula:
PolicyGain=min(LoanAmount)−ACB
=min(50,000,100,000)−18,000
=50,000−18,000=32,000
This $32,000 is taxable as income in the year of assignment.
Since the policy gain is based on the lesser of the loan amount or the CSV, we take $50,000$ (loan amount) instead of $100,000.
Devon is a single, fourth-year medical student at Prince University. He would like to have a $10,000,000 policy, just like his mother, who is a world-renowned oncologist. He is thinking far ahead to his estate planning needs and would like to lock in the price of his premiums while he is still young.
What must his agent advise Devon to expect from an underwriting standpoint?
a) It is not a justifiable amount of coverage at this time in his life. The agent should then show him the value a guaranteed insurability benefit rider can provide
b) As long as his mother is the payor of the policy, there should not be a problem with the financial underwriting.
c) He can probably get around the underwriter justifying the amount of coverage by taking out a $2.000,000 policy each year for the next five years
d) He should take out a term policy in that amount; the premium will be much lower and it will cause less concern with underwriting as far as his ability to pay the premium is concerned
Correct answer: (a)
Explanation:
Insurance companies require financial justification for high coverage amounts. Since Devon is still a student with no established income, a $10,000,000 policy is not justifiable at this time. Instead, the agent should suggest a guaranteed insurability benefit (GIB) rider, which allows him to increase coverage later without proving insurability.
Dr. Marc Leblanc has joined Doctors without Borders and is planning to leave within two weeks for a posting in a refugee camp in the Middle East. He has four children, all younger than 12, a spouse, and an elderly father who depends on Marc’s support. Marc is applying for a $5 million policy on his life and his health is excellent.
Marc is requesting that a Temporary Insurance Agreement (TIA) be issued for $500,000.
What should the agent do?
a) He should issue the TIA for $100,000 to limit the insurers risk
b) He should suggest Marc reduce the requested sum of coverage to improve the likelihood of the policy being issued
c) He should issue the TIA since Marc has a very high need for immediate insurance coverage.
d) He should not issue the TIA since Marc may be uninsurable due to his travel plan.
Correct answer: (d)
Explanation:
A Temporary Insurance Agreement (TIA) provides coverage before full underwriting is completed, but it is only issued if the applicant is likely insurable under normal conditions.
Marc’s imminent travel to a high-risk area (a refugee camp in the Middle East) could make him uninsurable due to war, terrorism, or poor living conditions. The agent should not issue the TIA, as the insurer may deny coverage based on travel risks.
Richard and Carol are divorcing. While they were married, Carol did not work. In the last five years of the marriage, Richard earned no less than $150.000 annually. Carol is unlikely to ever work due to her medical conditions. Richard has been ordered to pay Carol $5.000 per month for 20 years. At the time of the settlement, investment returns average 5% and the inflation rate is 3.1%.
How much life insurance should Richard acquire to meet his obligation, using the capital drawdown method?
Find real rate of return: (1+ ret.avg / 1 + inf. Rate) - 1
Present value of annuity: P X ( 1- 1/(1+r)^n/ r
a) $1 million
b) $1.2 million
c) $3.16 million
d) $63.2 million,
Correct answer: a) $1 million
Explanation:
The capital drawdown method calculates the present value of future payments, considering investment returns (5%) and inflation (3.1%).
Richard must pay $5,000 per month ($60,000 per year) for 20 years.
The real rate of return (adjusted for inflation) is (1.05 / 1.031) - 1 ≈ 1.84%.
Using the present value of annuity formula, the required life insurance amount is approximately $1.2 million to fund these payments.
Erin and Jaymie, both aged 35, are married and currently don’t have any children. Erin works as a veterinarian making $100,000 a year, and Jaymie is a seasonal truck driver, making $25,000 a year.
They recently purchased their first home, which has a mortgage balance of $300,000. They have a line of credit with a current balance of $15,000. Two years ago, Erin unfortunately lost her mother to cancer, and would like to leave $25,000 to the local cancer society office. As the higher income earner, Erin feels it’s necessary to provide Jaymie with some income replacement coverage so that he can maintain their standard of living. They both would like funeral expenses covered.
Based on the above information, which of Erin’s needs would term insurance be best suited for?
a) Covering the mortgage, paying off current debts, leaving money to local charity.
b) Covering the mortgage, income replacement for Jaymie, paying off current debts.
c) Covering the mortgage, funeral expenses, leaving money to local charity.
d) Covering the mortgage, income replacement for Jaymie, funeral expenses.
(b) Covering the mortgage, income replacement for Jaymie, paying off current debts.
Explanation: Term insurance is a suitable option for Erin’s needs because it provides a temporary solution with a defined coverage period. The following needs would be well-suited for term insurance:
Covering the mortgage: Term insurance can be used to pay off the mortgage balance if Erin passes away.
Income replacement for Jaymie: Term insurance can provide Jaymie with financial support to replace Erin’s income for a specified period.
Paying off current debts: The line of credit and any other debts can also be covered under the term insurance policy.
While the charitable donation and funeral expenses can be considered, term insurance is most commonly used for income replacement and debt coverage needs.
Thierry and Rosemarie have been married for 25 years and have no children. Thierry purchases a $300,000 life insurance policy to provide financially for Rosemarie in the event of his death. Thierry’s only relatives are two brothers, Luc and Marc. He is very close to Luc, but had a fight with Marc and still does not talk to him. Thierry has no will. He does not want the proceeds of his life insurance to be paid to his estate if Rosemarie and he die together in an accident.
What should the agent advise Thierry to do when he purchases the policy?
• a) Designate Rosemarie and Luc as beneficiaries.
b) Designate Rosemarie as the beneficiary and Luc as the contingent policy owner.
c) Designate Rosemarie as the beneficiary and Luc as the contingent beneficiary.
(c) Designate Rosemarie as the beneficiary and Luc as the contingent beneficiary.
Explanation: In this case, Thierry should designate Rosemarie as the primary beneficiary to ensure that she receives the life insurance proceeds in the event of his death. Since Thierry is concerned about what would happen if he and Rosemarie were to die together in an accident, he should designate Luc as the contingent beneficiary. This way, if Rosemarie is unable to claim the benefit (e.g., if they die together), Luc would be next in line to receive the proceeds, ensuring that the money does not go to his estate.
Dr. Winger does volunteer work, offering her medical services to an international charity called MSF One day, she volunteers to go fight an infectious disease in a developing country. Her superior at MSF is concemed. He worries that Dr. Winger might contract the disease. He wants to apply for an insurance policy on Dr. Winger’s life, naming MSF as beneficiary. In the event of Dr. Winger’s death, the money would serve to set up an internship program in her name.
Assuming the underwriters determine that Dr. Winger represents an acceptable risk, what condition must be satisfied in order for the policy to be issued?
a) Dr. Winger must agree to the insurance in writing.
b) The policy must name Dr. Winger as beneficiary.
c) The policy must name MSF as irrevocable beneficiary.
d) MSF must give approval for the policy in writing.
(a) Dr. Winger must agree to the insurance in writing.
Explanation: For a life insurance policy to be issued on Dr. Winger’s life, she must give her consent. This is typically done in writing. Without her consent, the insurance company cannot issue a policy on her life, even if the beneficiary is a third party (in this case, MSF). This ensures that Dr. Winger is aware of and agrees to the insurance being purchased.
Life insurance agent Alexandra completes a life insurance application with her client, Joshua. After three months in underwriting, the application is accepted and the policy is issued on a standard rate.
Alexandra goes to deliver the policy. When she gets to Joshua’s, he tells her how he just got out of the hospital with a serious blood clot.
What should Alexandra do?
a) Simply deliver the policy to Joshua, as his application has already been accepted.
b) Deliver the policy to Joshua, but notify the underwriter of the new medical information.
c) Tell Joshua that, because of the new medical information, she cannot deliver the policy and must put an end to the entire application process.
d) Tell joshua that, because of the new medical information, she cannot deliver the policy and must notify the underwriter for further consideration.
(d) Tell Joshua that, because of the new medical information, she cannot deliver the policy and must notify the underwriter for further consideration.
Explanation: When new medical information comes to light after a policy has been issued, the life insurance agent has a duty to inform the underwriter so that the situation can be reassessed. In this case, Joshua’s recent hospitalization due to a serious blood clot is relevant to the risk evaluation, and the underwriter will need to review the new information to determine if the policy should be amended or canceled, or if additional premiums should be charged. Therefore, the agent should not deliver the policy until the underwriter has been notified and the situation has been re-evaluated.
Twenty-five years ago, Claudette purchased a $300,000 whole life insurance policy whose current cash surrender value is $55,000. Recently her husband had a stroke and is now paralyzed. Claudette would like to adapt her home to accommodate her husband’s reduced mobility, but it will cost her $50,000 to do so. She plans on using the policy’s cash surrender value to cover the cost and meets with her life insurance agent for advice. Claudette would like to obtain the necessary funds without triggering an additional tax liability.
What should her agent tell her?
a) Withdraw the policy’s entire cash surrender value.
b) Withdraw $50,000 of the cash surrender value.
c) Obtain a bank loan, using the policy as collateral.
d) Convert the policy’s cash surrender value into an annuity.
(c) Obtain a bank loan, using the policy as collateral.
Explanation: When you withdraw or surrender a life insurance policy’s cash value, the amount that exceeds the policy’s adjusted cost basis (ACB) is considered taxable income. In Claudette’s case, the cash surrender value is $55,000, and the policy’s ACB would need to be known to determine whether there is a taxable gain. By obtaining a bank loan and using the policy as collateral, Claudette can access the needed funds without triggering a taxable event, as loans are not taxable income. The loan must be repaid, but this option avoids triggering taxes that would result from a withdrawal or surrender of the policy’s cash value.
Tanya recently died from an incurable disease. She owned a life insurance policy that was in force, with her niece named as beneficiary. The insurance company has received the death claim, but requires that specific documentation be provided before it will pay the death benefit.
What documentation is required by the insurance company?
a) Proof of age and gender of the life insured.
b) A Medical Information Bureau statement.
c) An inspection report.
d) A letter probate.
(d) A letter probate.
Explanation: When the beneficiary is named in a life insurance policy, the insurer typically requires the death certificate and a letter of probate to verify that the beneficiary is entitled to the proceeds. The letter of probate is a court document that confirms the legal authority of the individual (the niece in this case) to manage the deceased’s estate. The other options mentioned (proof of age, Medical Information Bureau statement, and inspection report) are not commonly required in this situation.
Marius took out an uninsured loan to purchase his vehicle. He died while on vacation. He had a balance to pay off on his car loan and not enough personal life insurance to cover it. His will shows that he named his spouse as sole heir of the car.
How will the lender treat this debt?
a) The loan will be transferred to the heir only if she qualifies for a loan.
b) The lender will require the immediate repayment of the loan.
c) The loan is automatically cancelled by the lender and the car is repossessed
d) The loan is automatically transferred to the person inheriting the car upon Marius’s death.
(b) The lender will require the immediate repayment of the loan.
Explanation: When someone dies with an outstanding loan, the lender typically requires the loan to be repaid. The debt does not simply transfer automatically to the heir, unless they take on the responsibility or qualify for it. If the loan is not paid off, the lender may repossess the vehicle. The spouse may inherit the car, but they would still be responsible for paying off the loan or dealing with the lender to settle the balance.
Michael has a mortgage on his house which is expected to be paid off in about 7 years. He recently inherited some money from his distant relatives. He did not want to pay off the mortgage because there would be penalty for early repayment. However, he wants to make sure his premature death will not be a liability to his wife and their two young children. He decides to consider purchasing a life insurance.
At the same time, he wants to see if he could utilize his inherited money with life insurance to create additional wealth.
Which coverage option can assist Michael in reaching his goal?
a) Universal life with YRT with maximum funding
b) Term 10 insurance with Paid-up additions rider
c) Term 10 insurance with non-registered investment
d)Universal life with LCOl with maximum funding
a) Universal life with YRT with maximum funding
Explanation: A Universal Life (UL) insurance policy with a Yearly Renewable Term (YRT) component allows Michael to get life insurance coverage while utilizing the inherited money to create wealth through the policy’s investment portion. The maximum funding option enables him to fund the policy to its maximum allowable limit, which can generate a cash value growth over time. This growth can be used for wealth creation, providing a financial cushion for his family in the event of his premature death, while still allowing him to keep his mortgage and avoid penalties from early repayment.
Malcolm is the policyholder of a $100,000 life insurance policy on his wife, Solia. In the contract, he named Lucie, his 15-year-old daughter, as beneficiary, and Mathieu, his brother, as trustee. Solia has been diagnosed with an incurable disease with a life expectancy of between 6 and 13 months.
Malcolm and Solia decide to apply for a terminal illness benefit of $50,000 to pay the medical expenses. The company approves their request and writes a $50.000 cheque.
To whom will the insurance company pay the benefit?
•
a) Malcolm, because he is the policyholder.
b) Solia, because she is the insured.
c) Mathieu, because he is the trustee.
d) Lucie, because she is the beneficiary.
b) Solia, because she is the insured.
Explanation: The terminal illness benefit is typically paid directly to the insured person (Solia in this case), as it is meant to help cover expenses related to the terminal illness. Even though Malcolm is the policyholder and Lucie is the named beneficiary, the benefit is given to Solia, the one who is diagnosed with the terminal illness. The beneficiary (Lucie) would receive the life insurance death benefit after Solia’s passing, not the terminal illness benefit.
Amanda is very frustrated because she thought her premium and coverage would remain the same for life. Her recent annual statement includes a lapse notice and suggests she increase her monthly premium or else have the policy lapse in three years. Her policy is a universal life coverage for $50,000, a term-10 rider for $250,000 and a term-10 critical illness rider for $25,000. Amanda is a healthy 33 years old, has a husband and two young children (ages 2 and 5), and has little to no debt. She would like to keep her coverage amounts in place until the boys are young adults, and possibly keep the critical illness longer than that.
Which option would work best for this policy?
a) Keep everything intact for the time being.
b) Start overfunding the universal life policy gradually so that the extra funds will be there when the riders renew.
c) Consider applying for separate term life and critical illness insurance policies and then cancelling the riders.
d)Consider converting her riders into permanent policies.
b) Start overfunding the universal life policy gradually so that the extra funds will be there when the riders renew.
Explanation: Universal life policies allow for flexible premiums and provide an opportunity to overfund the policy. By overfunding the policy gradually, Amanda can ensure that there is enough cash value in the policy to maintain the coverage as the riders renew. This helps avoid the potential lapse of coverage while keeping her premium manageable. Overfunding the policy would provide a more sustainable long-term solution without the need to cancel the riders or apply for separate insurance policies.
Carl and Myriam have been married for five years. They just had their first child, Tobias. Myriam does not plan on going back to work until Tobias is 18. Of the three, Carl is the only one covered by life insurance. He has a $150,000 group life insurance policy. He also has $500.000 whole life insurance, $250,000 non-renewable, non-convertible Term-20 insurance taken out five years ago, and $50.000 non-renewable, non-convertible Term-10 insurance taken out last year. Carl figures that his family will require $40,000 a year for the next 15 years. He has just renewed his $245,000 mortgage for 15 years and has taken out a 7-year bank loan of $48,000 for a new car. Today, Carl meets with his insurance agent to review his life insurance needs:
What recommendation could the agent make to Carl?
a) Add a family coverage rider to his whole life policy.
• b) Change his Term-20 insurance to renewable, convertible term insurance.
c) Increase his Term-20 insurance by $48,000 and cancel his Term-10 policy.
d) None, he has enough life insurance to meet his needs
b) Change his Term-20 insurance to renewable, convertible term insurance.
Explanation: Carl’s current Term-20 insurance is non-renewable and non-convertible, which means once the term ends in 15 years, he will not be able to renew or convert it into permanent insurance. Since Carl’s family will need coverage for longer (as Myriam is not working and they have a mortgage and other debts), switching to a renewable, convertible term insurance would provide flexibility. He could renew the coverage at the end of the term or potentially convert it into a permanent policy if his needs evolve. This would better ensure his family’s financial security over a longer period.
Justine is 53 years old. She does not work and the inheritance from her husband’s death allows her to live fairly well but not extravagantly. She would like to leave her religious community a substantial financial legacy. Representatives of this community have shown her that life insurance would meet their joint needs. She contacts you to purchase a $1 million life insurance policy for this community. She specifies that she would like to designate the chair of the fundraising committee of their community as irrevocable beneficiary and assign him the policy, since this was recommended to her. Since Justine is uninsurable, it was suggested that she take out the policy on the life of the committee chair’s oldest son. Since he is of full age, he will agree to sign a consent for the insurance to be taken out on his life.
Will this application be acceptable to the insurance company?
a) With the consent of the son and your client, the irrevocable designation and the charitable intent in favour of the committee chair, the policy application will be considered reasonable.
b) To recognize the insurable interest, the son’s written consent will be required. You will be asked to confirm that the policy will be assigned to the religious community and not its chair.
c) It is likely that the insurance company will consider the face amount unreasonable and question whether your client’s income is sufficient. The insurance company will want to know the relationship between the person to be insured and the policy’s charitable intent.
d) Since there is no direct relationship between Justine and the committee chair and his son, the insurance company will conclude an absence of insurable interest and refuse to issue the policy.
d) Since there is no direct relationship between Justine and the committee chair and his son, the insurance company will conclude an absence of insurable interest and refuse to issue the policy.
Explanation: Life insurance requires an insurable interest, meaning that the policyholder must have a legitimate reason to insure the life of another person, typically based on financial dependence or a close familial relationship. In this case, Justine does not have a direct relationship with the committee chair or his son, which creates a lack of insurable interest in the eyes of the insurance company. Without this relationship, the insurance company is unlikely to approve the policy application.
Sean is a smoker and travels frequently to developed countries to host scuba diving tours. In the past year, he received two traffic violations for running a red light and speeding. He drinks a glass of wine per week at social events. Sean is looking to buy life insurance.
After learning about his lifestyle, which aspect will make his insurance a rated policy?
1.Smoking status
2. Travel history
3. Avocations
4. Driving record
5 Drinking history
a) 1, 2, 3 and 4
b)2, 3 and 4
c)1, 3 and 5
d)2 and 4
Correct answer: b)
Explanations
Answer a:False. A smoking status does not call for a rated policy, but rather a standard smoker rate that is higher than a standard non-smoker rate.
Answer b: Correct answer.
Repeated trips, especially to politically unstable
countries, are subject to a rated policy. Certain avocations, such as scuba diving, may also affect insurance rates. A driving record containing a number of violations or major violations often has a bearing on premium rating
Answer c: False. The client drinks very little alcohol and this would not justify having a rated policy.
Answer d: It does not include the avocation element, which may be subject to a higher premium rate.
Mario and Danielle have been married for 10 years, are childless and have no desire to have children. Mario’s annual net income is $120,000, and he has group life insurance for the same amount. Danielle’s net income is $45,000 and she has no group insurance.
Their home is valued at $320,000, and they currently have 20 years left on their $250,000 mortgage.
Mario would like to bequeath an amount of $100,000 to the hospice that cared for his parents. Danielle inherited $250,000 recently upon the death of her father, which they are using to maximize their registered retirement savings plan (RRSP) contributions and use all unused contribution room. In the event of his own death, Mario would like to leave the house to Danielle mortgage-free.
To meet Mario’s needs, what is the minimum amount of life insurance coverage he should buy?
a) $420,000
b) $300,000
C)$230,000
d) $100,000
Correct answer: c) Mario’s need is $250,000 for the mortgage, then $100,000 for the donation to the seniors’ residence less the amount of the group insurance, $120,000.
Calculation: $250,000 + $100,000 - $120,000 = $230,000
Tom is turning 63 this year and has already retired. He has sizable non-registered assets with large unrealized capital gains and is concerned about the tax consequences upon the sale of the assets. He comes to you for risk management advice.
Which of the following statements is correct regarding Tom’s next action?
a) Under the risk avoidance technique, he can immediately apply capital losses.
b) Under the risk retention technique, he can choose to do nothing.
c) Under the risk transfer technique, he can transfer ownership to his son upon his death.
d) Under the risk reduction technique, he can invest aggressively to achieve a higher rate of return.
Correct answer: c) According to section 1.3.4 of the reference manual, the best way to reduce or avoid a financial or tax risk is to transfer the risk to a third party.
You are completing a universal life application for your client Nixon. He has chosen guaranteed investment accounts as his investment option. He is going to minimally fund the policy. He asks you if there is any difference if he pays monthly or annually.
Which of the following is the correct answer?
a) Universal life has no modal factor and the long term cash value is the same, whether paid monthly or annually.
b) Universal life has modal factor and long-term cash value will be higher if paid annually.
c) Universal life has modal factor and long-term cash value will be higher if paid monthly.
d) Universal life has no modal factor and long-term cash value will be higher if paid annually.
Correct answer: a) The annual premium is the same as the annualized premium for a universal life policy because no modal factor is applied. Cash surrender values are based on investment fund returns and not on the premium payment conditions.
Jacky is single and will turn 24 this year. He doesn’t have any dependents. He does not have any group coverage. He drives a motorcycle to work every day.
Which of the following riders or supplementary benefits should he add to his current individual insurance plan?
a) Accidental death and dismemberment b)
Accidental death and waiver of premium c)
Paid-up additions and guaranteed insurability benefit (GIB)
d) Term insurance and waiver of premium
Correct answer: a) Jacky’s main risk is suffering a serious injury or even dying in a motorcycle accident.
Ghislaine wishes to buy a $150,000 whole life insurance policy. She meets with her representative and completes an application form in which it is mentioned that she suffered minor health problems a few years ago. She also fills out a separate application form to obtain temporary coverage for 90 days pending the underwriter’s final decision.
She pays the first premium of $422. The insurer limits temporary coverage to $250,000
for all TIAs.
How much temporary coverage Ghislaine does obtain?
a) Zero
b)$150,000
c)$150,422
d)$250,000
Correct answer: b) Section 9.3.2 of the reference manual specifies that the maximum amount under the temporary insurance agreement is limited to the LESSER of the amount granted by the company and the amount of coverage requested in the application.
Ghislaine applied for temporary coverage while waiting for the underwriter’s final decision.
The insurer limits temporary coverage to $250,000 for all TIAs.
She applied for a $150,000 whole life policy.
She paid the first premium of $422, but this does not increase the temporary coverage amount.
Since the insurer allows up to $250,000, but Ghislaine only applied for $150,000, she will receive temporary coverage equal to her policy amount ($150,000), not more.
Cindy, who is age 22, just returned to the work force last week after giving birth to twins.
She has limited disposable income. She is healthy now but her family history indicates the incidence of stroke. She would like some insurance coverage for her children’s education in the event of her death.
What kind of plan would you recommend to Cindy?
a) A universal life with YRT to keep costs low so that the policy can accumulate cash value in the early stages.
b) A participating whole life with PUA rider, so both death benefit and cash value can increase in the long run.
c) A universal life with YRT and minimum funding option with child coverage rider so everybody can be protected.
d) A term 10 policy, with GIB rider, so coverage can be increased in the future.
Correct answer: d) At the moment the client has limited income, but the situation may change and she may want to increase coverage in the future regardless of her state of health.
Your client is looking to buy a T-20 life insurance. You submitted the completed application to the insurance company. A few weeks later, the application is approved and the contract delivered to you.
At this stage, what should you do to complete the delivery process?
a) Complete the medical questionnaire, obtain a signed illustration, premium for the insurance, declaration of insurability and confirmation of delivery receipt from the client.
b) Complete the agent’s comments
section, obtain a premium for the
insurance, declaration of insurability and confirmation of delivery receipt from the client.
c) Deliver the policy personally or by mail and obtain a premium for the insurance.
d) Meet the client, obtain the premium for the insurance, declaration of insurability and confirmation of delivery receipt from the client.
Correct answer: d) Correct answer. To close the underwriting process, the agent has to meet the client, obtain the premium for the insurance after a carefully analyze the contract with him, and finally, obtain the declaration of insurability and confirmation of delivery receipt from the client.
Marcel lives in Québec and purchased a $100,000 whole life insurance policy five years ago from ABF Insurance Company, through its agent Paul, an old friend. Paul contacted Marcel recently and proposed that he replace his existing policy with a whole life policy for the same amount, but from the company that Paul currently represents. Marcel agreed to sign the new application form.
What document is Paul required to have Marcel sign along with the new application form?
a)A personal letter
B) document from the CLHIA
C)The LIRD
d) The Notice of Replacement of Insurance of Persons Contract
Correct answer: d) Marcel lives in Québec. To protect clients against churning and twisting, provincial legislation requires the client to receive and sign the Notice of Replacement of Insurance of Persons Contract.
Tom just submitted a death claim for both his father’s individual universal life and group life policies. He would like to know if the death benefits are taxable.
How would you answer his question?
a) The death benefit for an individual is always tax-free. If the employer paid the group life premium portion, the premium would not be added to Tom’s income and the death benefit is tax-free too.
b) The death benefit for individual and group life insurance is always tax-free.
c) If the universal life is classified as non-exempt policy, the death benefit is fully taxable. The group life death benefit is always tax-free.
d) An individual life insurance death benefit is always paid out tax-free. If the employer paid and deducted the group life insurance portion, the benefit becomes taxable.
Correct answer: b) Death benefits from individual or group life insurance are always paid out tax-free
Policy gain is based on the lesser of the
loan amount or the CSV
a guaranteed insurability benefit (GIB) rider allows?
increase coverage later without proving insurability.
A Temporary Insurance Agreement (TIA) provides coverage before……, but it is only issued if the applicant is likely insurable under….. conditions.
full UNDERWRITING IS COMPLETED, but it is only issued if the applicant is likely insurable under NORMAL conditions.
Eve purchases a whole life insurance policy in 1981, and now wants to reduce the amount of coverage from $400,000 to $200,000 as her needs have changed. Her policy has a CSV of $220,000 and an ACB of $70,000. Given that her marginal tax rate is 35% how much tax will she be charged as a result of reducing her coverage?
A) $21,000
B) $26,250
C) $10,500
D) $14,000
TaxableGain=CSVReduction−
ACBReduction
Tax to pay= policy gain x marginal tax rate
A) $14,000
Since the policy was acquired before December 2, 1982, no prorating of the ACB is required when calculating the policy gain. Since Eve reduces her life insurance coverage by half, she will receive half of the CSV, or $110,000, which is the proceeds of disposition.
Policy gain = Proceeds of disposition − Policy’s ACB = $110,000 − $70,000 = $40,000
Tax to pay = $40,000 x 35% = $14,000
Out of the following scenarios which is NOT considered a taxable disposition?
Select one:
a)Neil withdraws $12,000 from his Universal Life Policy which has an account value of $62,500 and ACB of $47,300
B)Navid has owned a $125,000 Whole Life policy for 15 years. He has run into some financial difficulty and has surrendered the plan
C)Susan has been approved for a bank loan subject to her collaterally assigning her $100,000 Whole Life policy (CSV $47,000, ACB $45,000) to the bank
d)As a result of the great recession, Shania, age 60, is annuitizing her Whole Life policy that has a $327,000 cash value and an ACB of $239,000
C
Section 4.6.5 Collateral for third-party loans states that COLLATERAL IS NOT CONSIDERED A TAXABLE DISPOSITION
Barbara, the owner of a textile plant, has inquired about getting a group insurance policy for her employees. In speaking with Barbara, the life insurance agent has given her much information about the benefits, premiums and packages available. Out of the following list, what is NOT a benefit, premium or package that is available?
Select one:
a)People in poor health can get coverage at affordable rates
b)Generally no evidence of insurability is required during the enrolment period
c)Premiums are only guaranteed for 1 year at a time
d)The employer typically owns and defines all benefits and beneficiaries
d)The employer typically owns and defines all benefits and beneficiaries is false.
Section 6.1.2 Policyholder. The policyholder does not define the beneficiary.
Neil has an after tax income of $60,000 as an accountant, paying 27% in taxes. Neil is concerned about how his young family will replace his income if he dies. After speaking to his life insurance agent and assuming a 3% rate of return, how much life insurance would his agent suggest that he obtain to replace his after tax income?
Select one:
a. $750,000
b. $2,222,000
c. $2,739,726
d. $888,888
C) $2,739,726
calculate the after tax rate of return
3% x (1-27%)
= .03 x (1 - .27)
= .03 x .73
=.0219 or 2.19%
Step 2: calculate the amount required to be invested at that rate of return
60,000 / .0219
= 2,739,726.02740
= 2,739,726
Sabina is a married woman in her late thirties. She wants to assure that should she die prematurely her family would be assured of her income for life. She is currently making $6,850 per month and believes that the return on investment should be 2.5%. Given this scenario how much capital is required to satisfy this goal?
Select one:
A)$328,800
B) $3,288,000
C)$274,000
d)$394,560
Annual income / rate of return
B) $3,288,000
Amanda owns a $200,000 Universal Life policy with a level death benefit plus account value that is paid for using the level cost of insurance premium. Amanda is overfunding the premium and investing the excess amount in a Canadian Equity Fund Index offered by the policy. Amanda has just received her quarterly statement and learns that the investment value has shrunk from $24,000 to $19,000. Given this scenario which of the following statements is most correct?
Select one:
a. Amanda’s minimal premium will increase to compensate for the shortfall in her account
b. Amanda is not responsible for the loss in her UL policy; the insurer must make up the loss
c. Amanda must deposit an additional $5,000 to compensate for the loss of the investment
d. Amanda does not have to make additional deposits but the value of the death benefit is reduced
C)
“If investment returns are negative, which is a possibility if the policyholder chooses to base his interest income on index funds or mutual funds, then there is a very real possibility of the policy lapsing, unless the policyholder deposits additional premiums.”
What is not guaranteed in a UL policy with a level death benefit plus account value with the level cost of insurance?
Select one:
a. The level cost of insurance
b. The administration fee
c. The account value
d. The level death benefit
C
The account value is an investment value and is never guaranteed
Vivian has purchased a UL policy that has a $5,000 annual cost of insurance, annual administrative expenses of $200 and there is a 2% provincial premium tax in her province. She has decided to deposit $20,000 as a total annual premium that will earn her a return of 4% on the investment account portion of the policy. Given this scenario how much will her investment account be worth at the end of the year?
Select one:
a. $14,400
b. $14,976
c. $14,800
d. 519,600
Premium paid X premium tax
Premium paid - premium tax
^Premium tax - deductions
^ X 1 + rate of return
B) $14,976
Vivian paid a premium of $20,000 into her UL policy. The 2% premium tax ($400) is immediately deducted and $19,600 goes into the investment account. The cost of insurance and administrative expenses are paid in advance for the year, therefore $5,000 and $200 are taken immediately from the investment account, leaving $14,400, with a net return of 4% for the year, Sophie will have $14,976 in her policy’s investment account at the end of the year.
Brad is going to terminate his $650,000 whole life insurance policy. The $5,600 annual premium, which he hasn’t paid, was due 14 days ago and he does not plan on making that payment. The policy has a CSV of $102,000 and an ACB of $48,000. In addition, he has a $40,000 policy loan that is outstanding with interest owing of $5,300, and the outstanding premium for the last 14 days is $215. When Brad terminates this policy what will the taxable gain be?
Select one:
a. $62,000
b. $8,485
c. $2,885
d. $56,485
Taxable gain = (CSV+loan) - (ACB + outstanding premiums)
B) $8485
Since the policy is being canceled, the full next year’s premium isn’t deducted. Instead, only $215 is deducted, covering the premium up to the cancellation date.
Which of the following would best suit clients who wish to ensure that they have enough insurance to pay off their mortgage should one of them die, in the most inexpensive way possible?
Select one:
a. 25 year decreasing term policy
b. 5 year renewable term policy
c. 10 year renewable term policy
d. 25 year term policy
A) 25 year decreasing term policy
Section 2.3.2 Decreasing Term, which states that, “Decreasing term insurance is most often used by people who have mortgages, because the amount at risk (i.e., the outstanding mortgage) decreases over time. In fact, banks commonly encouraged their mortgage customers to buy “mortgage insurance”, which essentially is decreasing term insurance, sold as group insurance by a company affiliated with the bank.”
Premiums are calculated based on the attained age of the life insured at the time that the policy is issued. Based on this, which of the following is NOT true?
Select one:
a. If Clarice, an applicant for a whole life policy is 27 and her birthday is May 26, on March 27 her attained age would be 28 using age nearest birthday
b. If Sergio, an applicant for a term insurance policy, had turned 22 two months x ago, using age next birthday, his attained age would be 23
c. If Clive, an applicant for a universal life insurance policy, was turning 43
tomorrow, using last birthday, his attained age would be 43
d. For group insurance the rate is usually ‘yearly renewable term’ and the age rate is the average age of all life insureds covered
C)
As per section 9.6.1 Age, Clive’s last birthday is literally the age at the last birthday, which in this case is 42.
Frederick has a $1,000,000 UL policy with a $200,000 CSV and a $100,000 ACB. He is having a very tough time financially and desperately needs $120,000, but doesn’t have the cash flow to make any payments on it over the next five years. Given this scenario which of the following options would you suggest to Frederick that meets his requirements while minimizing the impact on his income taxes.
Select one:
a. Withdraw $120,000 from the accumulating fund
b. Take a $120,000 policy loan
c. Surrender the policy
d. Use the policy as collateral and take a $120,000 bank loan
B
While the collateral loan would not result in income taxes, it is most likely that he would have to repay at least the interest cost on a regular basis. He has stated he does not want to be obligated to make payments for the next five years, so the collateral loan would not be the ideal solution for him.
Among the three other options, the policy loan is the one that would have the least impact on income taxes. The policy loan would result in a $20,000 policy gain ($120,000
- $100,000), while the withdrawal would result in a $60,000 policy gain: 120,000 - ($100,000 x ($120,000/$200,000)).
Dave and Mary are a married couple with two children, Ben and Jerry. Dave cares for his sister, Angela, who lives in a nursing home. Dave owns a hotel with his partner, James.
Dave and James have a buy/sell agreement that is funded by a criss-cross life insurance policy. Dave wants to get insurance on everyone he can, but in this scenario there is one person who Dave cannot get insurance on. Who is that person?
Select one:
• a. James
• b. Angela
• c. Ben and Jerry
• d. Mary
B
It is typically accepted that a person has an insurable interest in his own life, as well as in the life of:
His children or grandchildren (Ben and Jerry);
His spouse (Mary);
Any person upon whom he is wholly or partially dependent upon for support or education;
His employee;
Any person in the duration of whose life he has a pecuniary interest (i.e., his business partner, James, with whom he signed a buy-sell agreement).
Although Dave looks after his sister, Angela, he does not depend on her financially.
Therefore, he does not have an insurable interest in her.
Out of the following list what is NOT an advantage of term-life insurance?
Select one:
a. It is often used as estate planning insurance
b. The premiums are typically lower than permanent policies
c. Term coverage can be customized to meet a specific need
d. Renewable provisions can be used to extend coverage
A
Term life insurance is not ideal for estate planning because it only provides coverage for a set period (e.g., 10, 20 years) and expires if the insured outlives the term. Estate planning usually requires permanent insurance, which guarantees a payout no matter when the person dies.
The other options are advantages of term life insurance:
• Lower premiums than permanent insurance.
. Customizable coverage to match specific needs.
. Renewable options to extend coverage if needed.
Sana is a physicist and the main income earner for her family. She expects her salary to increase 3.6% per year. She has a $1,000,000 whole life insurance policy with a paid-up additions rider. Under this rider, she is permitted to buy additional coverage of $10,000 per year for the next 15 years, without proving insurability, by making lump-sum payments. Given this scenario which of the following statements is most correct?
Select one:
a)If Sana doesn’t use this rider in one year, that unused amount will not carry forward
b) If Sana decides to use this rider she must buy at least $10,000 of additional coverage
c)Sana must purchase up to $10,000 per year or the rider will lapse
d)If Sana doesn’t use this rider in one year, that unused amount will carry forward
The paid-up additions (PUA) rider allows Sana to buy extra coverage each year without proving insurability, but if she doesn’t use it in a given year, she loses that year’s option-it does NOT carry forward. She must decide each year whether to purchase the additional coverage or not.
John, a life insurance agent, has suggested that his client, a 29 year old father of three purchase a universal life insurance policy to protect his family should he die within the next twenty years. John is recommending all of the following riders, EXCEPT:
Select one:
a. Payer waiver benefit
b. Guaranteed Purchase Option
c. Term insurance riders
d. Waiver of Premium
A
The Payer Waiver Benefit is typically used for policies on a child’s life, where the parent (payer) is insured. If the parent becomes disabled or dies, the insurance company waives the premiums.
Since the father is buying the policy for himself, this rider doesn’t apply-he wouldn’t need a waiver for someone else paying his premiums. Instead, a Waiver of Premium rider would be more relevant for him.
Sue and Paul are a married couple in their late 40s. After discussing their financial situation with their accountant, financial planner and life insurance agent they have decided that should Paul die, Sue would continue to work until she retires. Sue would also like to have half of their combined income so that she could maintain her current lifestyle. Given that Paul makes $100,000 per year, Sue earns $80,000 per year, and they want their insurance agent to use a rate of return of 5% using the capital retention method, how much coverage will Paul require now?
Select one:
a. $750,000
• b. $1,500,000
• c. $2,100,000
• d. $200,000
Capitalization of lost income
D) $200,000
Since Sue will still have her income when Paul dies, we have divide their combined income in half, and then subtract her income.
Next we capitalize the lost income
Out of the following list, which is NOT true about a temporary insurance agreement?
Select one:
a. It expires the date the policy becomes effective
b. The agent believes the policy will be issued
c. The applicant submits premium with the application
d. It can only cover life insurance and living benefits
D)
“It can only cover life insurance and living benefits” is incorrect. Section 9.3.3 Coverage limits. No mention of living benefits.
A life insurance agent wants to replace his client’s current life insurance policy with a new one from another insurance company. Given this scenario which of the following statements is most correct?
Select one:
a. This is allowed as long as the life insurance agent gets approval from the current insurance company
• b. This is allowed and the life insurance agent must have his client sign the LIRD
• c. This is not allowed as it is considered churning
d. This is not allowed as it is considered twisting
B
12.4.2 Disclosure requirements, which states, “To protect consumers from churning and twisting, most jurisdictions require the policyholder to receive and sign a life insurance replacement declaration (LIRD),
Gloria is considering replacing her current life insurance policy based on her life insurance agent’s recommendations. Given this scenario which of the following statements is NOT correct?
Select one:
a. Gloria’s agent must submit a completed LIRD with the application
b. There will be a 2 year suicide and contestability period on the replacement policy
c. Gloria should cancel her existing policy once she applies for the replacement
d. The major expenses of a policy are loaded into the first 7-10 years of a policy
C
Document 12.1 Standard Life Insurance Replacement Declaration (LIRD), which states in the Life Insurance Replacement Declaration, “Do not cancel your existing policy until the new policy is in force and you accept it.”
Arjun owns a whole life policy that has a CSV of $75,000 and an ACB of $25,000. Two months ago Arjun paid the yearly premium of $3,600 in full, meaning his next annual premium payment isn’t due for another ten months. Arjun has chosen to cancel his policy as of today and has submitted the proper cancellation documents, which have been accepted by the insurer. Given this scenario how much will Arjun receive from the insurance company?
Select one:
a. $78,000
b.$75,000
C.$75,300
d.$75,600
A
Upon cancellation of his policy, Arjun will receive the cash surrender value of $75,000 plus the prorated portion of the premiums he paid two months ago for the whole year.
Since he cancelled his policy two months after paying a premium that covered him for 12 months, he will receive a refund for the ten months remaining before his next premium was due. This is calculated as:
$3600 / 12 × 10
=300 × 10
=3000
So Arjun will receive $75,000 + $3,000 = $78,000.
An insured person has just died during the first year of what is considered a large insurance policy. Given this scenario which of the following will the insurance company most likely require?
Select one:
a. Coroner’s report
b. Inspection report
c. Medical Information Bureau report
d. Attending Physicians statement
D
As per section 12.8.6 Attending physician’s statement (APS), “For large claims, the insurance company may also request an Attending physician’s statement (APS), to certify the cause of death and to verify the medical information that was used to underwrite the policy.”
Simon is borrowing $1,000,000 from his/credit union to fund the construction of an apartment building. The loan is being secured by a collateral assignment of Simon’s $2,000,000 life insurance policy as per his bank’s request. This policy has an ACB of $280,000 and a CSV of $450,000. Simon’s annual premium is $15,000, with an NCP| of $10,000. Given this scenario what amount can Simon deduct from his income taxes?
Deductible amount= minimum NCPI OR Loan Interest Paid
Select one:
• a. 57,500
• b. $15,000
c. $10,000
d$5,000
C) $10,000
Deductible amount= minimum NCPI OR Loan Interest Paid
• The policy is collaterally assigned to the bank, which means Simon may be eligible to deduct the NCPI.
• The deduction is limited to the lesser of the NCPI ($10,000) and the loan interest paid.
• Since we do not have loan interest provided, we assume the NCPI is the maximum deductible amount.
Debbie would like to invest in her son’s new venture, but lacks the cash to do so. She does have a life insurance policy that has an account value of $210,000 and an ACB of $140,000. If she takes a policy loan of $90,000 what are the tax implications?
Select one:
a. She will have a collateral loan and have to include the loan in her taxable income in the year of the loan
b. There will be a reduction in the policy’s ACB but no tax implications in the year of the loan
c. She will have a partial surrender and must include the amount of the loan in her taxable income in the year of the loan
d. She will be partially surrendering her policy and will be liable for the pro-rata X taxable benefit in the year of the loan
B
This is correct because you can take a policy loan up to the value of the ACB without any tax implications. In this case, the amount of the loan ($90,000) is less than the ACB ($140,000). A policy loan also reduces the ACB.
