Life Insurance Flashcards
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 getting obtain to replace his after tax income?
a. $2,750,000
b. $2,222,000
c. $888,888
d. $750,000
The correct answer is $2,750,000
Rationale
11.2.2.1 Accounting for income taxes shows the formula.
Step 1: 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
Relevant sections of the manual;
11.2.2.1 Accounting for income taxes
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?
a. Amanda’s minimal premium will increase to compensate for the shortfall in her account
b. Amanda does not have to make additional deposits but the value of the death benefit is reduced
c. Amanda must deposit an additional 5,000 to compensate for the loss of the investment
d. Amanda is not responsible for the loss in her UL policy; the insurer must make up the loss
Amanda must deposit an additional 5,000 to compensate for the loss of the investment
Section 4.5.4 states that, “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”
Relevant sections of the manual:
4.5.4 Impact of investment returns on policy viability
4.7 Advantages and disadvantages of universal life (UL) insurance, Table 4.3, Disadvantages bullets 2 and 4
Melissa and Jeff understand that their assets will cause tax liabilities when they die. They are currently each other’s beneficiary for their individual taxable assets, and would like to know which of the following life insurance arrangements would be most beneficial to their estate planning for their 2 adult children
a. $500,000 participating Whole Life with paid up additions on Jeff’s life
b. $500,000 level death benefit plus account value on Melissa’s life
c. $500,000 10 year R&C to 70 on each of their lives
d. $500,000 level death benefit plus Joint Last to Die term-to-100 policy on both if their lives
$500,000 level death benefit plus a joint Last to Die term-to-100 policy on both of their lives”
This is the only option that pays their children, which is their concern.
Relevant sections of the manual:
11.1.2 Financial impacts of death
11.3.4.2 Tax Liabilities
Which of the following statements are NOT true about life insurance riders and supplementary benefits?
a. Riders can customize coverage to meet unique needs of the insured
b. Riders can provide benefits indefinitely, long after the base policy expires
c. Riders can be cheaper than stand-alone policies
d. GIBs can give policyholders access to higher coverage in the future
Riders can provide benefits indefinitely, long after policy expires
Rationale: 5.4 Advantages and disadvantages of riders and supplementary benefits. A rider is an option and cannot be in force longer than the base policy.
Relevant sections of manual:
5.4 advantages and disadvantages of riders and supplementary benefits, Table 5.2 under Disadvantages, which states that “Coverage expires when the base policy expires”;
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?
a. This is allowed and the life insurance agent must have his client sign the LIRD
b. This is allowed as long as the life insurance agent gets approval from the current insurance compant
c. This is not allowed as it is considered twisting
d. This is not allowed as it is considered churnung
This is allowed and the life insurance agent must have his client sign the LIRD
Rationale
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), as shown in Document 12.1”
Jonah is a 22 year old pharmacist who has applied for a whole life insurance policy. Underwriting required a paramedical and blood work which found he has Type 1 early onset diabetes. They also found that he has an at fault accident and 2 speeding tickets within the last 2 years on his driving record. Given this scenario which of the following statements is most correct? This policy will:
a. Have a permanent rating on his driving record
b. Have a temporary rating for diabetes
c. Have a temporary rating on his driving record
d. Be issued as a standard risk with standard rates
Have a temporary rating on his driving record
Rationale
Section 9.5 Risk classes and their impact on premiums
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?
a. $3,288,000
b. $394,560
c. $274,000
d. 328,800
3,288,000
Rationale
The question is asking how much would be invested earning 2.5% per year to equal 6,850 per month.
Amount =(6,850 x 12)/2.5%
Amount=82,200/2.5%
Amount = 82,200/0.25
Amount = 3,2888,000
Relevant sections of the manual:
11.2.1 Capitalization of lost income
