Financial Career Institute (FCI) Workbook - Full

“If you think education is expensive, try ignorance.”

Chapter 01

Legal Framework Governing Life Insurance

• Legal Framework Governing Life Insurance

• Agent Types

• Managing General Agents (MGA)

• Licensing

• General Legal Principles Applicable to a Life Agent

º Legal Capacity

º Natural Person, partnerships and legal persons (corporation)

º Minors and Guardians

º Power of Attorney and Trusts

º Marriage & Common Law Relationships

º Divorce and Separation

º Wills, estates and successions

º Trusts and trustees

º Bankruptcy

º Civil Fault (Torts)

º Limitation Periods

• Legal Principles Required for the Validity of the Contract

º Civil Faults (Torts)

º Limitation Periods

Question 01

What do you call the law system that is practiced in all provinces and territories in Canada except in Quebec?

a. Civil law

b. Common Law

c. The Constitution

d. Insurance Act

Sources of Insurance Laws in Canada

• The Constitution – Takes precedence over all other sources/legislation. All enacted laws must comply with the Constitution

• Common Law – Originated from England

º Developed by courts based on prior decisions of judges

º Applies to all provinces except Quebec

• Civil Law – Originated in France

º Based on the Civil Code

º Practiced in Quebec

• Legislations and Regulations

º Based on laws in each province

º Provincial Insurance Act vs Quebec Civil Code

º Regulations to developed to enforce the Acts

Question 02

John is an agent for life insurance only for ABC Co. His friend, Ben also works for life insurance and other varieties of insurance for XYZ Co. Which is true?

a. John is an independent agent only for life insurance with ABC Co.

b. Ben is a captive agent that works for life insurance and other varieties of insurance for XYZ Co.

c. John is a captive agent that works for life insurance and other varieties for ABC. Co.

d. Ben is an independent agent that works only for life insurance for XYZ Co.

Agent/Advisor

Acts as the intermediary between the insurer and insured, acts on the best interest of both persons

There are 2 kinds of agents:

• Captive agent – can only offer products of one insurer, directly hired under the insurer

• Independent agent – (or broker) can offer products of multiple insurers, usually joins an MGA/brokerage

Managing General Agent (MGA)

Provides assistance with:

• Contracting agents with insurers

• Processing and tracking business submissions of agent

• Support and training

• Communication between insurer, agent, and client

• Compliance and Conduct

• Claims

• Product Development

Licensing

Agents must be licensed. There are 2 kinds of licenses:

• Life License – Could offer life insurance products: Term, T-100, Whole and Universal Life, Seg Funds and Annuities (LIFE and SEG FUNDS)

• A&S License – Could offer A&S products: disability, CI, LTC, extended health (A&S)

• Life + A&S = FULL LIFE LICENSE

Agency

Agency is either a corporation/partnership that holds a license, and must have at least one licensed agent. Employees should be licensed if they do the following:

• Solicits, negotiates, submits insurance applications

• Negotiates renewal / continuation

• Receives premium payments

• Develops an illustration for life insurance.

Question 03

What is TRUE regarding a Managing General Agency (MGA)? It:

a. Can sell policies from a number of insurance companies

b. Only sells a single company’s products in return for commission

c. Regulates licensing and qualification of agents by providing the exam, reviewing licensing applications and enforcing proper professionalism and industry standards

d. Facilitates business between agents, their clients, and insurers by providing services such as agent support and communication.

Question 04

All of the following below will require a license, except:

a. Property Insurance Agent

b. Securities Broker

c. Mortgage Broker

d. Deposit broker

Other Products and Services

Needs License

• Property and Casualty Insurance Agent

• Securities Broker such as stocks, bonds, ETF, Mutual Funds

• Mortgage Broker

Does Not Need License

• Deposit broker for banks or other deposit taking institutions

General principles applicable to a life insurance agent

1. Capacity and status of persons;

2. Natural persons, partnerships and legal persons (corporations);

3. Minors and guardians;

4. Powers of attorney (PoA);

5. Marriage and common law unions;

6. Divorce and separation;

7. Wills, estates and successions;

8. Trusts and trustees;

9. Bankruptcy

Question 05

Who/which of the following may not be allowed to purchase an insurance policy?

a. Kim, 25 year old part-time bookkeeper studying university

b. Bimby, 15 year old student and part time food service staff

c. Charles and Mason general partnership in construction

d. MARC’s Clothing Inc., a private corporation

1. Who can own contracts?

• Has legal capacity

• Depends on the provincial legal age, NOT mentally incapable

• FOR INSURANCE: Common Law: 16 years old (Civil Law in Quebec: 18 years old

2.

Natural persons, partnerships and legal persons (corporations)

• Natural person – Human being, makes decisions and takes the risks/rewards

• Partnership – Two or more parties in agreement together to earn a profit

• Legal Person – A separate entity from those that manage (director) or own it (shareholder). Corporation liability is separate from shareholder’s personal finances

3. Minors and Guardians

• Below 16 years old

º Policy must be owned by other person (parent / guardian)

º Being named beneficiary needs a trustee

• 16 – 18 years old

º Can own insurance contract

º Being named beneficiary needs a trustee

• 18 years old and up

º Can own insurance contract

º Could be named beneficiary without trustee

4. Power of Attorney

• A person (principal/grantor) naming someone (attorney/ agent) in charge of financial/legal affairs on someone’s behalf until a certain time (see below) or revoked

• Expires upon mental incapacity, unless it is “Enduring”

• Enduring Power of Attorney effective till death of principal (beyond mental incapacity of the principal)

• Generally, Attorneys are not allowed to change beneficiaries (except if court order, or if required to transfer of funds from one financial institution to another)

• Insurance Agent must request the certified true copy of the POA document, submit to insurer which will give instructions

• Insurance Agent must avoid accepting the role of the attorney: it is outside the work jurisdiction, and would not be protected by E&O

Question 06

What kind of document provides allows a person to give authority to someone to be in charge of financial/legal affairs on their behalf until a certain time (see below) or revoked?

a. Trust

b. Will

c. Power of Attorney

d. Instructional Directive

Question

07

Mandy recently lost her husband at the age of 60. Because Mandy was not financially savvy, she asked her only son to act on her behalf. Mandy would like to give her son authority to act on behalf of her starting today and also have authority to continue in the event that she became mentally incapable. With all those needs, she would like to keep her legal fees to a minimum. Mandy decides to make an Enduring Power of Attorney, naming her son the attorney.

Which of the following is true?

a. As attorney, the son must provide a notarized copy of the document to the insurance agent

b. The document becomes invalid once Mandy becomes mentally incapable

c. As attorney, The son could change the beneficiary on her policy

d. Mandy should name her insurance agent as attorney

5. Marriage vs Common Law Relationship

• In Common Law Provinces, spouse could be named IRREVOCABLE or REVOCABLE beneficiary, it will not be cancelled automatically upon divorce.

• In Quebec (Civil Law), when a spouse is named as beneficiary, it will be IRREVOCABLE automatically; but it will be cancelled automatically upon divorce.

• Spousal status is important in pension plans’ determination the eligibility of beneficiary

Common-Law Relationship

• No presumed division of property

• Dissolving relationship: separation

Marriage

• Presumed division of property

• Dissolving relationship: separation and divorce

Question 08

Which of the following best summarizes the rights in a common-law relationship?

a. When it comes to the division of assets, a common-law spouse has no presumed rights to property division, but could potentially seek child or spousal support

b. Common-law spouses have identical rights to those of traditionally married spouses

c. A common-law spouse has no presumed rights to the division of assets or to spousal support, but could potentially have the right to claim child support because that is essentially the right of the child.

d. Common law spouses have no rights in terms of asset division and support as compared to the rights of traditionally married spouses

6. Divorce and Separation

Alimony (child & spousal support) may still be payable in relationship breakdown; even on death, outstanding balances may be claimed against the deceased ex-spouse’s life insurance through the court

• Life insurance beneficiary designation and Wills are not affected by Separation

• If there is a need to change the beneficiaries, there must be a signed SEPARATION AGREEMENT

• Life Insurance Beneficiary designation is not affected by divorce

• Wills are affected by divorce: Ex-spouse is revoked from the will, as if erased

Family/Conjugal Property

• Properties acquired during the marriage (not inherited)

• Properties enjoyed/used/benefited by family

Question 09

Matt and Melissa have been married for 15 years. Two years ago, they divorced. Matt recently died of an automobile accident. Years before they separate, Matt drafted a last will and testament naming Melissa as beneficiary to certain assets and also beneficiary of his whole life policy. What impact, if any would their divorce have on Melissa’s rights under Matt’s last will and testament and her beneficiary designation in the lift insurance policy?

a. The beneficiary designation under the life insurance policy will stand; However, Melissa will lose right to any assets left in Matt’s will

b. Melissa loses her beneficiary designation under the life insurance policy; However, Melissa’s right to any assets left in Matt’s will stand

c. Melissa is no longer entitled to any assets in Matt’s last will and testament and loses her beneficiary designation under the life insurance policy

d. Their divorce has no impact on Matt’s last known will and testament nor life insurance. Melissa is still entitled to the assets stated in the last will and testament and remains the designated beneficiary in the life insurance

Question 10

Which one of the following refers to the individual who is in charge of a deceased person’s estate?

a. Testator

b. Executor

c. Attorney

d. Trustee

7. Wills, Estate and Designations

• All property is deemed to be disposed off by person at death

• Assets go to deceased person’s estate, where it is subject to liabilities before transferred to heirs

º If there’s a will: testate

º Estate managed by Executor

º If there’s no will: intestate (distribution is determined by provincial intestate law, Estate managed by administrator)

Question 11

• Properties not owned by the will (by passes estate and probate)

• Life insurance (with beneficiary)

• Registered investments (with beneficiary, but may still have tax)

• Properties owned in Joint Tenancy (example: homes owned by spouses)

• Pension Plans (surviving spouse is the primary priority)

Wills vs Life Insurance

• Wills could be challenged in court, because it becomes a public document

º “Dependent’s relief legislation” – prioritizes immediate family especially if there are dependents

• Life Insurance is discreet, beneficiaries are not public knowledge

Mon has agreed to act as his brother Andy’s POA, and also the trustee of a trust his sister has established for her children. Mon is going through a divorce while managing his time as a busy financial planning practice, thus would like to ease off some of his family responsibilities. Can Mon relieve himself of any of his duties?

If so, which?

a. Mon can resign as his brother’s POA, but he has a legal obligation to act as a trustee for Andy

b. Unless Mon signed a contract with both Andy and his sister, he is no obligation to act either POA or trustee

c. Once Mon has agreed to act as POA or trustee, he cannot quit or delegate either of those roles to another person

d. Mon is legally obligated to carry through with his commitment to be a POA due to the personal nature in that role. He can, however, resign from the role of trustee or delegate it to another trustee or trust companies

8. Trusts

• Settlor gives property to be held “in trust” by trustee for beneficiary.

• Usually used if beneficiary cannot receive the properties until a certain time.

• Trustees have the legal title, so they own the property “in trust” and may act whichever way/when the trustee sees fit

Settlor Trustee

Types of Trusts

º Inter vivos – created while alive; disposing properties while alive

º Testamentary trust – created at death

Trusts vs Power of Attorney (PoA)

Trusts and PoA can be similar in which someone is put in charge of properties/affairs. But there are key differences

Trust

• Ownership is transferred to the trustee (in trust)

• Trustees may not resign from duty

Power Of Attorney

• Ownership is retained by the principal

• Attorney may resign from duty

Question 12

Which one of the following individuals may find protection under “dependent’s relief legislation”?

a. Sarah, whose husband died and left all of the assets to his mistress

b. Petra, whose husband was collecting pension, but then died. The benefits will continue to Petra

c. Jose, who is 15 yrs old and whose father is collecting disability benefits under CPP

d. Arlene, who is 14 yrs old and whose mother is collecting OAS and qualified for GIS because their family income is below a certain threshold

Question 13

A client of your, Rommel, passed away last week and his son, Clark, came to discuss with you his parent’s affairs. Before meeting with his lawyer next week, Clark wants to know which of his father’s assets would likely most attract probate fees.

Which one of the following assets would likely attract probate fees?

a. A whole life policy that names Rommel’s estate as the beneficiary

b. A term life insurance policy that names Rommel’s best friend, Richard, as revocable beneficiary

c. A segregated fund in which Rommel named his favourite charitable institution as the beneficiary

d. Rommel’s home, which was held in joint tenancy with Clark

• Unable to pay debts, creditors may seize assets. Certain personal properties are not touched (limits depending on province)

• Insurance products are usually protected assets from bankruptcy under the conditions:

º If beneficiaries are irrevocable or preferred revocable (see Beneficiaries)

º If the policy was made without intent to shelter funds from creditors

º RRSP, RRIF, Pensions are also creditor proof

Question 14

If a person dies with more debts than assets, can the creditors claim against the deceased family members/relatives?

a. Yes, as the family members are responsible to handle the deceased’s affairs

b. Yes, but only to the extent of immediate family members (parent, spouse, child, grandchild)

c. No, however creditors may claim the debt against someone co-signed or guarantor

d. No, debt must be written off as unclaimable once all the assets in the deceased’s estate is exhausted

Question 15

Katrina and Alex Dugarova are married and owners of a Graphic Design shop. Alex’s suffered disability leaving him unable to run the business. Katrina sought their nephew’s help in managing the business, however Jonatas’ lack of experience lead their company to be exposed to creditors and the funds of the company started to diminish. Months after, Alex had to file for bankruptcy. Aside from his assets, Alex also purchased a life insurance policy years ago naming their nephew Jonatas as his beneficiary, the policy now have about twenty thousand as cash value.

Will Alex have to surrender his policy in the event of bankruptcy?

a. No, because life insurance is protected against creditors

b. No, because there is a named beneficiary who is not the policyholder

c. Yes, because the beneficiary is Jonatas who is not preferred or irrevocable

d. Yes, because life insurance is not protected against creditors

Civil Faults (Tort)

• They lead to liability/damages, intentional/unintentional

• Example: auto collisions, breaching confidentiality, theft, fraud, assault)

Question 16

Which of the following is not a tort (civil fault)?

a. A life agent lost control of a vehicle and destroyed the fence of his client

b. A life agent disclosed to another person about the client’s assets and liabilities

c. A life agent failed to report suspicious activities of money laundering to authorities

d. A life agent vandalizing the office of a competitor brokerage

Limitation periods

There is a time-frame which a court action must start, otherwise the person loses the right to file a civil case.

If a civil fault is discovered, the limitation period starts.

Chapter 02

Insurance Application and Policy Provisions

• Parties to Individual Policy

• Formation of Policy

• Temporary Insurance

• Non-disclosure/Misrepresentation Fraud, Misrepresentation, Age/Sex

• Sources of Underwriting Info

º MIB

º APS

º Inspection Report

• Termination of Policy

• Policy Provisions

• Assignment

º Collateral Assignment

º Absolute Assignment

Parties to an Individual Policy

• Policy holder (“Insured”) – owns the policy, has rights/ decisions on the policy. One or multiple owners. Can name successor/subrogated policyholder to receive ownership if policyholder dies

• Life Insured (“Annuitant”) – the covered person(s) in the contract, death of life insured triggers payoutof death benefit

Guide Questions:

1. Can the life insured and policyholder be the same person?

• YES

2. Can the life insured be a non-relative (stranger)?

• Must have insurable interest: a financial loss if that person dies, thus strangers most likely cannot be life insured

3. Who has to take medical insurability tests?

• Life Insured

Question 17

Colin and Shirley Matthews are your clients. Colin purchased a life insurance on their daughter Sandra. Naming Shirley as the beneficiary. He did not name a successor policy holder on this purchase.

When Colin passed away, who will be the policy holder?

a. Sandra

b. Shirley

c. Colin’s estate

d. Both a and b

Parties to an Individual Policy

Beneficiary – Receives benefits on death of life insured

Revocable can be revoked without consent of said beneficiary Irrevocable can’t be revoked without consent of said beneficiary

• Consent must be given by said beneficiary to access cash value (collateral, policy loans, surrenders)

• Commonly used for:

º Court orders/legal agreements (ex. Divorce)

º Protection from creditor seizure

• Primary the first choice

• Contingent second choice in case primary beneficiary dies before the life insured

Beneficiary Rules

• If beneficiary is minor, must have a trustee.

• If there is no living beneficiary, benefit goes to policy owner (or estate).

• Policy is protected from creditor seizure on BANKRUPTCY if beneficiary is Irrevocable or Preferred Revocable (Preferred: parent, spouse, child, grandchild)

• On DEATH, there is CREDITOR PROTECTION if beneficiary is anyone except self/estate. However, child support payments and collateral loans could diminish death benefit.

• Policyholder cannot name themselves as beneficiary.

• Beneficiaries may also be designated through the will, in which insurer would honour the latest update.

Question 18

Jeremy has purchased a life insurance policy on his wife, Wendy, and named himself as the beneficiary. Which of the following is true?

a. The life insurance policy is protected against creditors

b. Jeremy cannot qualify as a beneficiary

c. No benefits would be paid out in case Wendy passes away

d. Both b and c

Question 19

Diana is Jeff’s second wife. One day, he suffers a massive heart attack at work and dies. Diana remembers the insurance policies the couple took out when they were married three years ago. Jeff has a $500,000 whole life policy and Dianna is named as a revocable beneficiary in the contract. A short time after she begins the claim process, she receives notice that there are other claimants. Jeff had fallen behind in his child support payments to his first wife, to a total of $100,000. Furthermore, Diana finds out that Jeff had changed the beneficiaries to herself and his two children (equally) from his first marriage about a year ago, without her knowledge. Finally, a creditor has provided proof that Jeff pledged his policy against a debt he owed them, in the amount of $100,000.

How much of the death benefit will Diana be entitled to?

a. $100,000, because the debtor assignee and the child support payments need to be paid first, then the remaining benefit is distributed between the beneficiaries

b. $166,667, because beneficiaries can only be individuals related to the insured, with an insurable interest

c. $400,000, because the debtor assignee and child support payments need to be honoured; children, however, cannot be beneficiaries

d. $500,000, because the policy was taken out while he was married to Diana

1. Insurance Application

• Agent’s role is to help client understand and correctly answer the questions.

• Do not shortcut the application

• No Paraphrasing

Question 20

The question on the life application form specifically asked: “Have you ever been treated for or had any known indication of disease or disorder of the brain or nervous system, such as” … and then listed separate symptoms, conditions, diseases, or problems. Larissa, the agent, wanting to save time, just asked the proposed life insured: “You don’t have any problems with your nerves, or brain tumours or anything, do you?”

What could be the result of this failure to perform her duties?

a. Nothing. There is nothing wrong with her paraphrasing the questions

b. The validity of the policy will be open to challenge

c. If anything goes wrong, the agent could be involved in a law suit for failing to perform her duties

d. Both b and c

Question 21

Harry had applied for life insurance for his own life just last afternoon. His agent had collected the cheque together with the application, and issued a temporary insurance. The office was closed for the evening, so the agent would have to submit the documents the following day. That night Harry died in a car accident. Which is true?

a. Benefit would not be paid out because the policy was not yet in force at the time of death

b. The insurer would have to confirm insurability, and if Harry was insurable, insurer would pay out the benefit

c. Benefit would not be paid out if the insurer finds out Harry had a medical risk

d. Both b and c

2. Temporary Insurance Agreement (TIA)

• Coverage from application until underwriter makes a decision (approve or decline)

• Coverage is subject to approval

• Typically set as the lesser of the face amount being applied for, or a maximum limit set by the insurer

• Must pay premium up front (at least one month) with application

• Must be healthy/no extraordinary risk (including non-medical risks)

• Maximum coverage period is 90 days

Sources of Underwriting Info

• Medical Information Bureau (MIB)

º To check if client is telling the truth on the application

º Shows codes for medical impairments & non-medical concerns

º Only accessible by Insurers

• For additional information:

º For medical risks: Full Medical; Attending Physician’s Statement

º For non-medical risks: Inspection Report

Question 22

Maja has recently been divorced with her ex-husband, Gerald. They both had purchased life insurance together naming each other irrevocable beneficiaries. Unable to change the beneficiary designation, she decided to get a new policy for herself. Which possible source would insurers find out about non-disclosed risks?

a. Attending Physician Statement (APS)

b. Provincial Insurance Council

c. Inspection Report

d. Medical Information Bureau (MIB)

Question 23

Congratulations! Your client, Margaret, has her policy approved, and you are about to deliver the policy to Margaret this afternoon. Upon reaching her house, you notice that she was holding a vape pen and smoke was coming out of it. In the application form, Margaret did not declare her smoking. What course of action should be taken?

a. Do not deliver the policy and return the policy as not taken

b. Do not deliver the policy, and inform the insurer of the change

c. Deliver the policy, and inform the insurer of the change

d. Deliver the policy as is without change

3. Changes in Insurability

• Insurability Changes before policy delivery must be disclosed

• Insurability Changes after policy delivery does not need to be disclosed.

4. Approval of application by Insurer

The underwriter may make a decision on the policy, depending on the facts presented in the application process

Risk classes and its impact to premiums:

• Standard risk – normal premium ; average risk (100%)

• Rated policy – premium will be higher; higher risk than actual age (125%, 150%, 200%)

• Preferred rating – premium will be lower; health risk than actual age

• Exclusion – not covered in the policy; pre-existing condition/ hobbies

• Declined

Question 24

On August 3rd, Cecina meets with her insurance agent, Gilbert, and decides to apply for a term life policy.

On August 26th, Gilbert is advised by his head office that Cecina’s application has been approved. On September 5th, Gilbert delivers the policy to Cecina and she confirms her banking information with him so that she can begin her monthly premium payments as of September 10th. When is Cecina’s new policy deemed to be in force?

a. Cecina’s policy is in force as of August 3rd, the date of her application.

b. Cecina’s policy is in force as of August 26th, the date she was approved for coverage.

c. Cecina’s policy is in force as of September 5th, the date it is delivered to her and she accepts it.

d. Cecina’s policy is in force as of September 10th, the date the first month’s premium is received.

Delivery of Policy

The policy is in force when all elements are in place:

• Application was made (offer made by insureds application)

• Policy is approved (acceptance made by insurer)

• Consideration is provided (first premium is paid)

• Effective date on the policy

Insured may request to backdate a policy, to make the age on the policy younger, but premiums for the backdating must be paid.

Example: Backdate by 5 months to preserve younger age on policy, but 5 months premiums must be paid).

Question 25

On March 3rd, Maryhel meets with her insurance agent, Harvey, and decides to apply for a Universal life policy. She had given a cheque together with the application. On March 26th, Harvey is advised by his head office that Maryhel’s application has been approved, with the effective date on the same date, March 26. On April 5th, Harvey delivers the policy to Maryhel. The delivery receipt was received by the insurer on April 6th.

When is Maryhel’s

new policy deemed to be in force?

a. Maryhel’s policy is in force as of March 3rd, the date of her application

b. Maryhel’s policy is in force as of March 26th, the date she was approved for coverage

c. Maryhel’s policy is in force as of April 5th, the date it is delivered to her and she accepts it

d. Maryhel’s policy is in force as of April 6th, the date The delivery receipt was received by the insurer

Question 26

A week ago, you have delivered a policy to your client Justin Wilson. He called you today to inform you that he has lost his job and he estimates that, it will be at least six months until he is once again earning a steady income. What options does Justin have available to him?

a. Take advantage of the grace period and begin repaying his missed premiums in six months’ time

b. Exercise the non-forfeiture options built into the policy and maintain his current coverage

c. Exercise his right of rescission and have premiums returned to him in full

d. Exercise his right of rescission and have premiums returned to him less a market value adjustment

Term and Termination of Policy

Termination by the client

1. Rescission – the policy holder has 10 days to examine the policy, return for changes or full refund if they intend to cancel the policy.

• Life Insurance: 10 days

• Segregate Funds: 2 days

2. Surrender – Individual life policies are referred to as “unilateral” contracts, in that the individual policyholder can always cancel the policy at any time.

• Cash Surrender Value (CSV) is paid out, less any penalties and loans

3. Expiry or termination such as term insurance

Termination by the insurer

• Fraud/Misrepresentation

• Non-payment

Suicide and Incontestability Provisions – 2 years

• If life insured dies within 2 years, insurer could contest the claim.

• If cause is suicide, insurer does not pay benefit (just premium refund).

• After 2 years, insurer may void the policy in fraudulent cases, not minor ones.

Question 27

What happens if the life-insured commits suicide more than two years after the policy is issued?

a. The death benefit will be denied, as payment would be considered a violation of public policy

b. The death benefit will still be paid

c. The death benefit will be denied because it was a suicide

d. The death benefit will be denied, the policy will be cancelled, and the premiums will be refunded to the life-insureds beneficiaries.

Question 28

Marco dies of colon cancer five years after buying a policy. A thorough review of his medical history in response to the claim for the death benefit reveals that Marco had a previous round of colon surgery for cancer four months before he applied for the insurance. But he stated on the application that he had never had any indication of, or treatment for, cancer. When Marco passed away, he is 2 days behind from paying his insurance premium.

When his family file the claim, how would the insurer deal with it?

a. The insurer will pay the claim because he passed the incontestability period already

b. The insurer will deny the claim because he concealed the information from the insurer

c. The insurer will not pay because he did not have active insurance coverage when he passed away

d. The insurer will pay a claim after the missed premium has been paid already

Misrepresentation/Fraud

• Advisor’s Duty: ASK, WARN, then NOTE

• If found out during application – insurer may adjust coverage, or not continue the application

• If found out when policy is in force:

º Intentional – fraudulent, serious. Claim denied/policy termination

º Unintentional – innocent, minor. Claim denied/policy termination within first 2 years only

º Age and sex – Insurer will only adjust benefit

Question 29

Greg applied for life insurance at age 54. In error, the year of birth was entered to indicate the he was 45. The policy was whole life with a $500,000 face value. The premium he quoted was $9.40 per year per $1,000 coverage. At his correct age, the premium would have been $17.20 per $1,000 coverage. The misstatement of age was noticed after Greg died and the claim was being assessed.

What would happen now?

a. The death benefit of $273,256 would be paid

b. If the policy was issued less than two years ago, the insurer could deny the claim on the basis of material misrepresentation. If the policy was issued more than two years ago, the insurer can deny the claim only if they can prove fraud

c. The death benefit would be denied on the basis of material misrepresentation

d. A death benefit of $416,666 would be paid

Question 30

Alwyn had purchased a whole life insurance policy 10 years ago. Recently he had encountered serious marital and financial problems, and was not able to make premium payments. The last monthly premium was paid 2 months ago. This morning, he was found dead in an apparent suicide. Which of the following would be correct pertaining to Alwyn’s policy?

a. There is no benefit payout due to the cause of death being suicide

b. There is no benefit payout due to the grace period expiring, and reinstatement is impossible

c. There is a benefit payout due to the non-forfeiture options in the policy

d. Re-instatement may be done if the missed premiums are made

Non-payment of Premiums

If you don’t pay premiums:

1. If policy has cash value, that can be used that to maintain coverage (non-forfeiture)

º Whole life

º Universal life

2. If there is no cash value (or runs out) there is grace period (30 days) *after that, policy lapses*

3. Can reinstate lapsed policy within 2 years of lapse

º Must pay missed premiums + interest

º Must declare medical/insurability

º Restart 2 years suicide and incontestability

Question 31

Tara had purchased a 10 year Term life insurance policy 7 years ago. 30 months ago, her premium was due but Tara did not make premiums since. Which of the following is true at this point?

a. If Tara dies today, the policy will pay the benefit, less the monthly premium

b. If Tara dies today, the policy will pay the benefit in full

c. If Tara dies today, there will be no benefit

d. If Tara reinstates the policy today, and commits suicide the following day, the policy will pay the benefit in full

Question 32

What do you call a transfer of policy ownership?

a. Collateral Assignment

b. Absolute Assignment

c. Revocable Designation

d. Non-forfeiture

Assignments

Transfer of rights. There are 2 kinds:

• Collateral assignment – using policy as security for a loan from lender. Transfer right of claim to the lender

• Absolute assignment – transfer of policy right & ownership. Tax deferred if assignee is spouse, or child/grandchild (if they are insured)

Question 33

Garry had purchased a $150,000 universal life insurance policy on his 5 year old son. What is the advantage of purchasing a policy on his child?

a. Preserving future insurability

b. Tax-deferred wealth transfer by absolute assignment

c. Lower cost of insurance

d. All of the Above

Chapter 03

Claims

• Rules pertaining to Claims and Payments of benefits

• Disappearance and presumption of Death

• Payment

• Time to pay the claim

• Denial of Claim

Question 34

Which of the following documents is NOT needed for filing a life insurance claim?

a. Certificate of death

b. Certificate of birth

c. Statement of cause of death

d. Beneficiary’s ID

Claims

Agents assist in the claims process.

On death of life insured (or maturity of contract) the claimant must provide:

• Proof of life insureds death

• Proof of life insured age

• Proof of claim entitlement (usually policy document)

• Claimant’s identity

Who can be the claimant?

• Beneficiary normally

• Policyholder (if still alive) if there is no living or named beneficiary

• Estate (handled by executor/administrator) if policyholder or beneficiary passed away

• Creditors if policy is pledged as collateral to the loan

• Ex-Spouse (through the court) claiming missed alimony payments

• Attorney through POA

• Trustee if beneficiary is minor

Conflicts of claimant – submit the claim, but inform the insurer of the potential conflict.

Question 35

Last week, your wealthiest client and his spouse had passed away in a private plane crash. They had owned their own policies on their lives. Unfortunately, they had named each other as beneficiary and failed to name contingent beneficiaries. On their will, they stated their “children as the inheritor of all their properties”. They also had some household debt and a mortgage. Who will be the claimant for their policies?

a. Their Estate through the executor(s)

b. Their Children

c. Their Creditors

d. All of the Above

Question 36

Three decades ago Pierre sold a $100,000 life insurance policy to Andre who was unmarried and who wanted to leave an estate to a niece and nephew, Wanda and Jacob. They are the children of a brother who had immigrated to Canada with Andre. He named Wanda and Jacob as equal beneficiaries under the policy describing them as his niece and nephew.

Andre died and at the funeral Pierre learned that the deceased had other brothers who had stayed in Europe and that one of them had also named a son Jacob who resides in Europe. The brother and sister in Canada have a copy of the policy and have asked Pierre to obtain the claim forms from the insurer. They have had no contact with their cousin in Europe but learned that another relative told the Jacob in Europe that he may be entitled to some insurance money. What should Pierre do knowing there is a second nephew of the deceased also named Jacob?

a. He should request the forms for the Canadian niece and nephew from the insurance company as requested and inform it that there is a potential problem because there is a second nephew named Jacob.

b. He should obtain the forms for the Canadian niece and nephew. He should not inform the insurer about the possibility of a conflicting claim because he believes the Canadian nephew is the intended beneficiary.

c. He should request forms for the Canadian niece and nephew and one for the European nephew as he has been made aware of his existence. He should inform the insurer that there are two possible claimants with the same name and relationship.

d. He should advise the Canadian niece and nephew to negotiate a split with the European cousin to avoid a court case and a delay in receiving the benefit.

Question 37

It was March 1st seven years ago when Jordan boarded a cruise ship. Two nights after the ship sailed they met a strong typhoon. Since then the ship went missing. On March 28th, Jordan’s premium for his life insurance has been due. Now, Jordan’s family is requesting to the court that Jordan should be declared dead to be able to claim the death benefits. If the court will do so, will the insurer pay the claim?

a. No because his insurance premiums have lapsed already

b. Yes, because it was still under the grace period when he passed away

c. Yes, because it will be considered that he passed away on March 3rd and he still has the insurance coverage

d. No, because he was declared dead after 7 years

Disappearance and Presumption of Death

Person who disappeared can be declared presumed dead after 7 years of missing

Question 38

Stan and Gina have been married for two years when Stan decides to purchase life insurance on Gina’s life naming him as the beneficiary. After a bitter argument Stan runs over Gina with his truck and Gina dies on the scene. How would the insurer deal with this?

a. A claim will be paid as long as the premiums have been paid

b. A claim will not be paid as this is considered as payment against public policy

c. A claim will be paid, because there was no evidence of non-disclosure

d. A claim will not be paid because Stan is the owner of the policy

Denial of Claims

• Fraud – serious, intentional, even after 2 years

• Lapsed policy – after grace period is over

• Payment against public order – If death of life insured was caused by beneficiary, no benefit is payable to that beneficiary (i.e. murder)

Question 39

Regarding disability claim, which of the following would NOT be required?

a. Incident report from police or medical professional

b. Diagnosis of medical condition from the designated medical professional

c. Statement or proof of income

d. Follow-up medical assessments

Disability Claims

Financial evidence may be needed for income replacement benefits. Periodic follow up assessment is also needed after initial claim to determine the current condition of insured.

Time to Pay Claim

• Insurer must pay a claim within 30 days of receiving satisfactory evidence/documents

• Segregated fund (IVIC) death benefit must be calculated after death. It would then depend if the market value vs. guarantee (see Segregated Funds & Annuities Module)

Death of Two or More People

Where two or more people pass away, whoever died first would have an impact to whom the benefit would be given:

• Insured passed away, beneficiary is alive –death benefit is payable to the beneficiary

• Insured & beneficiary passed away at the same time –contingent beneficiary (if there is), or if none, policyholder (or policyholder’s estate if policyholder is life insured)

• Beneficiary passed away, before the insured – benefit is payable to the estate of the policyholder if the there is no new named beneficiary

• Insured passed away, beneficiary passed the day after –beneficiary’s estate

Question 40

John purchased a whole life insurance policy on his daughter Amy’s life. As the policyholder, John chose his wife Manilyn as the beneficiary. After four years, on June 15, 2015, Amy died due to health complications. The claim was submitted on June 17, 2015. While the claim was being reviewed, Manilyn also died in a car accident. To whom would the death benefit be payable?

a. John

b. Manilyn’s Estate

c. Manilyn

d. No death benefit would be payable

Chapter 04

Regulatory Institution and Acts

• Main responsibilities of Life Agent

• Agent Conduct

• Misconduct

• Making Proper disclosure

• Acting in compliance with regulations

• Licensing Process

• Revoking of License

Question 41

Which of the following ensures financial companies solvency (financial health / viability) by setting strict rules and reporting requirements?

a. Canadian Council of Insurance Regulators (CCIR)

b. Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)

c. Canadian Insurance Services Regulatory Organizations (CISRO)

d. Office of the Superintendent of Financial Institutions (OSFI)

Regulatory Institutions/Acts

Office of the Superintendent of Financial Institutions (OSFI)

– Ensures financial companies solvency (financial health / viability) by setting strict rules and reporting requirements

Office of the Privacy Commissioner of Canada – Enforcing the Personal Information Protection and Electronic Documents Act (PIPEDA) to protect clients’ personal information

OmbudService for Life and Health Insurance (OLHI) –For client complaints against insurers

Canadian Life & Health Insurers Association (CLHIA) –Sets agent conduct, guidelines

Provincial Council of Insurance – Gives agents license and exams, licenses provincially registered insurers

Canadian Council of Insurance Regulators (CCIR) –Association of provincial regulators to promote efficient regulatory system in Canada

Canadian Insurance Services Regulatory Organizations (CISRO) – Association formed by the provincial regulators to develop standards of qualifications

International Association of Insurance Supervisors (IAIS)–International organization to promote effective insurance supervision

Question 42

Who of the following has the authority to revoke/suspend an agent’s license?

a. Canadian Council of Insurance Regulators (CCIR)

b. Provincial Insurance Council

c. Canadian Insurance Services Regulatory Organizations (CISRO)

d. International Association of Insurance Supervisors (IAIS)

Question 43

P.F. Chang, one of your clients who has recently immigrated to Canada, is planning to deposit a very large amount of money into a universal life policy. Which of the following is false regarding reporting this to FINTRAC?

a. You have 30 days to determine whether P.F. Chang is a Politically Exposed Foreign Person if he is depositing more than $100,000

b. You have to report the identity of PF Chang to FINTRAC if the cash deposit is $10,000 or more within a 24 hour period

c. Certain provinces do not accept health card as an identification document

d. You are not required to report the identity of PF Chang if he was depositing $10,000 cash into a registered segregated fund

Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)

The anti-money laundering bureau

What/when to record?

• Client’s Identity: if $10,000+ cash deposits within 24-hour period

• Politically Exposed Foreign Person: if $100,000+ deposit in any form: report within 14 days

º PEFP – A person or close relative of a person who holds a political office outside of Canada

• Third Party Determination – if person is depositing on behalf of another person

• Suspicious transactions: report within 30 days.

The following may be signs of suspicious activities:

º Refusal or excessive delay to give ID’s

º Nervousness, feeling being watched, too much questions

º Knowing too much, interested about terminating the plan

º Complicated or unusual transaction, huge amounts of third party deposits

º Using a P.O. box in a big city

• Purpose of Product

• Registered investments are exempt from third party and PEFP reporting, but still subject to suspicious transaction

• SIN number, Health Card (some provinces), Credit card, bank statements are not valid IDs

Question 44

How much is the Assuris coverage for a life insurance coverage of $100,000?

a. $100,000

b. $85,000

c. $60,000

d. $0 Protection of insurers in case of bankruptcy (insolvency)

• Accumulation Annuity: up to $100,000 only Assuris

• Death Benefits: greater of 100% up to $200,000 or 85%

º Life Insurance, AD&D

• Health Expense: greater of 100% up to $60,000 or 85%

º Critical Illness, Extended Health, Travel Insurance

• Monthly Income: greater of 100% up to $2,000/mo or 85%

º Disability, Annuities, LTC monthly income

• Cash Value: greater of 100% up to $60,000 or 85%

º Cash Value, Seg Funds, Guarantees

Question 45

How much is the Assuris coverage for a disability insurance coverage of $5,000/mo?

a. $5,000

b. $4,250

c. $2,000

d. $0

Question 46

A Canadian resident who is the son of a congressman in the United States invests $50,000 into his RRSP. What statement is true?

a. Agent should file a report of PEFP to FINTRAC within 14 days

b. Agent should report third party connection to FINTRAC within 14 days

c. Agent should report the transaction to the insurer under FATCA

d. Agent does not need to report this transaction to FINTRAC

Regulatory Institutions/Acts

• Foreign Account Tax Compliance Act (FATCA) – counters tax evasion among American residents/citizens who invest outside USA.

• National Do Not Call List (DNCL) – people can register their number on this list to request telemarketers not to call their registered number. Business phone numbers may still be called by telemarketers

• Anti-Spam Legislation – prohibits the use of unsolicited email marketing (email spam)

Question 47

Alen, Alex, Jiro, Pepe are all part of the same networking group. They refer business to each other and also meet weekly to discuss business issue and marketing ideas. When the topic of telemarketing came up, each member outlines his telemarketing campaign.

Which individual is contravening federal laws?

a. Alen, who hired a telemarketing firm to contact other businesses and promote his services. The telemarketing firm did not consult the Do not call list (DNCL)

b. Alex, who called complete strangers from a phone directory to promote his product; before placing each call, he confirmed that the number was not on the DNCL

c. Jiro, who hired a telemarketing firm located outside of Canada to call random Canadian residences and solicit interest in his product. The telemarketing firm did not subscribe to DNCL

d. Pepe, who owns a window-cleaning business and randomly called local businesses to see if they had any interest in getting their windows cleaned

Question 48

Lorie sues her life insurance agent, Amir, to recover a financial loss stemming from him having provided incorrect advice on her investments. Amir is not threatened because he knows that he has an Error and Omission insurance in place. However, Amir is not aware that his E&O will not cover this claim because?

a. His E&O only covers any practice related to his life insurance license

b. His E&O will only cover any mistake that he committed

c. His E&O will not cover misrepresentations

d. All of the above

Agent Conduct

• Acting in good faith

º Duty of care – Avoiding carelessness/omissions

º Integrity – Honesty, dependability, reliable

º Competence – knowledgeable, otherwise asking for help

• Manage conflicts of interest

º Priority of clients’ interest – put client’s best interest first

º Product suitability – know your client, recommend correct plan and explain the plan

º Disclosure of conflicts of interest

• Making proper disclosure

º Product disclosure

º Disclosure about replacement

º Commission sharing

º Referrals

• Acting in compliance with regulations and codes of conduct

º Getting Errors & Omissions insurance

– If someone sues you for mistakes

– Does not cover crime, intentional misconduct.

º Documenting files: Keeping records to protect against lawsuit

– Deliver the contract

– Maintain CE (continuing education) Credits

Question 49

Which among the following conditions would likely be covered by the Errors and Omissions Insurance of a life insurance agent when sued by the client?

a. The agent intentionally locked the application in the drawer before going on holiday

b. Losing the delivery receipt when someone robbed his car

c. Telling the client to invest his funds based on historical figures

d. Delaying the delivery of policy

Question 50

Regulators prohibit certain practices that are unfair, misleading, or deceptive. Making the purchase or approval of one product contingent upon the purchase of another is an example of which unethical practice?

a. Tied Selling

b. Fronting

c. Churning

d. Coercion

Agent Misconduct

• Tied selling – Making purchase of one product conditional on the purchase of another

• Replacing policies – When replacing, need Life Insurance Replacement Declaration (LIRD) – confirming client understands the effects of the new and old policies, and replacement.

º Churning – Replacing own client’s policy for more commission

º Twisting – Replacing client’s competing policy with one which is not beneficial/not explaining the implication of replacing.

• Trafficking – Agent in selling an in-force policy for cash

• Inducing to insure– Gifting to convince a person to sign up

• Fronting – Other people (licensed or not) transact for an agent

• Premium rebating – agent giving back or rebating a portion of the premiums

Question 51

Claudia is a newly licensed life insurance agent who had just received her license. Yesterday, she met with her client, Angelo. With her “expert” advice, she had sold a term policy with $1,000,000, and urged him to cancel his universal life policy from another MGA, which has been in force for a year.

Which of the following is true regarding this replacement?

a. Replacement is recommended if the insurance face amount is more than the old policy’s

b. Claudia had committed churning

c. Replacement is always necessary if the plan you offer costs less than the current plan

d. Claudia’s action may be liable to twisting

Question 52

Under which of the following situations would the policyholder not required to receive a life insurance replacement declaration (LIRD)?

a. Alani, who was advised to surrender her existing policy for cash after her application for insurance with a new insurer has been approved.

b. Mimi, who was advised to buy a new policy with a new insurer. Once the policy is issued, he will cancel his existing policy.

c. Carmi, who was advised by her agent to take out a policy loan against her whole life policy because the interest rate is cheaper than what the bank is offering her on a new car loan.

d. Freddi, who was advised by his agent to take a policy loan against his existing whole life policy. He plans on using the funds to buy term coverage

Question 53

Henry is 60 years old now. He has investments in GIC worth $150,000; $300,000 in Mutual Fund and His coverage in his life insurance is $150,000. He feels like he won’t be able to reach 65 years old, because of his health condition. He asked his agent, Bob if he knows someone who can buy his plan for $50,000 so Henry can use the money now. Bob knows someone who can afford to buy his plan and told Henry about it.

What did Bob involved in?

a. Coercion

b. Churning

c. Trafficking

d. Undue Influence

Agent Misconduct

• Unnecessary delay – Must be prompt in business dealings

• Misrepresentation – Deception, lying

• Misappropriation of funds (commingling) – Using client’s money for personal purposes – tantamount to theft

• Forgery – Copying signature, falsifying documents

• Holding out improperly – Misleading qualifications

• Defamation – Malicious discrediting of advisors/companies

• Coercion – Putting client under duress

• Undue influence – Using influence over another person to gain an application

• Misusing company – Provided illustrations

Commission Sharing

• This means a percent of the commission on the sale is shared with another agent

• Agent must make sure that all agents commission is being shared with is licensed appropriately

• Agent must disclose to the client about the details of the commission split

Referrals and referral fees

• Referral arrangements is a fee given for each prospect, regardless if a sale is closed or not

• This is a fixed fee, not a percent

• This referral arrangement must also be disclosed to the client

Revoking of license

• If agent violated provisions of the license

• If agent is guilty of fraudulent acts

• If agent made misstatements in the application for license

• If agent has shown incompetence and untrustworthiness

Practice Bubble Answer Sheet

Student Name:

Student Number: Practice Bubble Answer Sheet

Student Name:

Student Number:

Practice Reviewer

Ethics & Professional Practice

V5.0.0

DISCLAIMER:

Do not memorize the answers. Understand the rationale (why that’s the answer). The questions in the exam may be different from the questions here, worded differently, or different situation. Refer to the the answer key in the subfolder for the explanations.

QUESTION 1

What does risk-based regulation in the insurance industry signify?

a. Regulators put more attention on A&S insurers because of a higher likelihood of claim

b. Regulators put more attention on insurers who has a higher claim volume

c. Regulators put more attention on insurers whose records have more non-compliance incidents on per capita basis

d. Regulators give equal focus when auditing all insurers

QUESTION 2

Marie just won a lawsuit against BAC Company, as she was the victim of a slip-and-fall outside of BAC’s flagship store in Winnipeg. The injury caused Marie significant brain damage, which will prevent her from continuing her career. BAC has been ordered by the courts to settle the suit with an annuity contract that will make monthly payments to Marie for as long as Marie lives.

How will the monthly payments be taxed?

a. The entire amount will be taxed as income

b. The interest portion of the monthly payments will be subject to income tax

c. Marie will receive the monthly payments tax-free

d. Payments received prior to age 65 would be subject to tax. All future payment would be tax-free

QUESTION 3

Ken invested $175,000 into a segregated fund three years ago. He just passed away.

What is the minimum amount that Ken’s beneficiaries can expect to receive?

a. $175,000

b. $131,250

c. $111,562.50

d. $60,000

QUESTION 4

John has been a member of an employer’s group plan since the day that he satisfied the probationary period. He started his employment in a satellite office located in BC. John was recently promoted to district manager in Alberta. The company is headquartered in Saskatchewan. The insurer is headquartered in Ontario.

Which province’s laws would govern John’s insurance contract?

a. British Columbia

b. Ontario

c. Alberta

d. Saskatchewan

QUESTION 5

Which of the following clients is most likely to collect benefit under an AD&D policy?

a. Katie, whose face was permanently disfigured as a result of a botched plastic surgery

b. Brooks, who contracted HIV from using dirty needle at a party and died shortly as a result

c. Karla, who died accidentally of cocaine overdose

d. Tina, who was bitten by a mosquito that carried a virus causing permanent paralysis

QUESTION 6

Your client has a $500,000 whole life policy that currently has a cash value of approximately $20,000. The client needs as much money as possible, but does not want to surrender the policy. What advice would you give him?

a. A third party loan from a bank, which takes the policy as collateral, would result in a partial surrender and thus create a potential tax liability

b. A private third-party lender would potentially lend more than $10,000

c. Under a policy loan, the insurer will lend up to 100% of the cash value

d. Under a policy loan, the insurer will only lend a portion of the death benefit

QUESTION 7

What is a civil fault?

a. A statute that governs insurance contracts

b. A legal term for a collateral assignment on a life insurance policy

c. The division of assent when someone dies intestate

d. A civil wrong that caused someone loss or harm

QUESTION 8

Mon has agreed to act as his brother Andy’s POA, and also the trustee of a trust his sister has established for her children. Mon is going through a divorce while managing his time as a busy financial planning practice, thus would like to ease off some of his family responsibilities.

Can Mon relieve himself of any of his duties? If so, which?

a. Mon can resign as his brother’s POA, but he has a legal obligation to act as a trustee for Andy.

b. Unless Mon signed a contract with both Andy and his sister, he is no obligation to act either POA or trustee.

c. Once Mon has agreed to act as POA or trustee, he cannot quit or delegate either of those roles to another person.

d. Mon is legally obligated to carry through with his commitment to be a POA due to the personal nature in that role. He can, however, resign from the role of trustee or delegate it to another trustee or trust company.

QUESTION 9

What happens if the life-insured commits suicide more than three years after the policy is issued?

a. The death benefit will be denied, as payment would be considered a violation of public policy

b. The death benefit will still be paid

c. The death benefit will be denied because it was a suicide

d. The death benefit will be denied, the policy will be cancelled, and the premiums will be refunded to the life-insured’s beneficiaries.

QUESTION 10

Mandy recently lost her husband at the age of 60. Mandy’s deceased husband used to handle all of their financial affairs. Because Mandy was not financially savvy, she asked her only son to act on her behalf. She trusts her son entirely as he is a financial advisor. Mandy would like to give her son authority to act on behalf of her starting today and also have authority to continue in the event that she became mentally incapable. With all those needs, she would like to keep her legal fees to a minimum.

What would you recommend?

a. Mandy should make an Enduring Power of Attorney, naming her son Power of Attorney

b. Mandy should make a Regular Power of Attorney that will allow her son to act on her behalf today

c. Mandy should make a Power of Attorney for Personal Care

d. Mandy should make a will, naming her son the executor

QUESTION 11

Martin is an insurance agent. Four days ago he had a visit from Joey, who claimed to be a Power of Attorney (POA) for Martin’s client, Pops Martinez. Pops is currently travelling throughout Europe and out-of-reach. In his capacity as Pops’ POA, Joey would like to exercise the Automatic Premium Loan feature on Pops’ life insurance policy while Pops is on vacation.

How should Martin proceed?

a. Martin should request the original copy of the POA

b. Martin should request a certified true copy of the POA from a notary

c. Martin should require that Joey execute the insurer’s POA form naming Joey as POA

d. Martin should request to view the original POA and obtain a photocopy

QUESTION 12

When determining the premium on a group plan, the insurer factors in group consensus data and which of the following?

a. The plan administrator’s claims experience

b. The plan member’s claims experience

c. The insured’s claims experience

d. The insurer’s claims experience

QUESTION

13

Life insurance contracts are considered “unilateral” contracts. What is the meaning of unilateral?

a. Unilateral contracts are contracts of adhesion, meaning that the agent cannot make any changes to the questions asked on the application or make any amendments to the policy itself

b. Unilateral refers to the fact that the insured can cancel the policy for any reason whatsoever, while the insurer can only cancel the policy under specific circumstances

c. It means the life insurance policies are cancellable by the life insurance company, provided the company does so for the entire class of policies

d. It refers to the fact that the amount of financial consideration for the insurer (in terms of the premium) and for the beneficiary (in terms of the death benefit) are rarely equal

QUESTION 14

John purchased a whole life insurance policy on his daughter Amy’s life. As the policyholder, John chose his wife Manilyn as the beneficiary. After four years, on June 15, 2015, Amy died due to health complications. The claim was submitted on June 17, 2015. While the claim was being reviewed, Manilyn also died in a car accident.

To whom would the death benefit be payable?

a. John

b. Manilyn’s estate

c. Manilyn

d. No death benefit would be payable

QUESTION 15

How old must an individual be in order to be able to enter into an insurance contract?

QUESTION 16

Hillary is a newly licensed life agent who just passed the provincial exam two months ago. She has been a member of a local golf and country club for 20 years. In an effort to build her business, she approached a few selected club members and asked for referral. She described the type of clients she was targeting and offered to pay $100 per lead, regardless if the referral resulted in a sale or not. All potential clients were advised of the referral scheme. When Hillary was referred to a client who was interested in a complex UL strategy, she decided to request the assistance of his mentor, Clinton, and split the commission 50/50; this was disclosed to the client prior to the meeting. At the meeting, the client decided to apply. Hillary signed the application as an agent and forwarded it to the insurer.

What, if anything, did Hillary do wrong?

a. Insurance agents are prohibited from splitting commissions

b. Hillary is guilty of fronting

c. Hillary cannot pay a referral fee to non-licensed individual

d. None of the above

QUESTION 17

Regulators prohibit certain practices that are unfair, misleading, or deceptive. Making the purchase or approval of one product contingent upon the purchase of another is an example of which unethical practice?

a. Tied selling

b. Fronting

c. Churning

d. Coercion

QUESTION 18

Alen, Alex, Jiro, Pepe are all part of the same networking group. They refer business to each other and also meet weekly to discuss business issue and marketing ideas. When the topic of telemarketing came up, each member outlines his telemarketing campaign.

Which individual is contravening federal laws?

a. Alen, who hired a telemarketing firm to contact other businesses and promote his services. The telemarketing firm did not consult the Do not call list (DNCL).

b. Alex, who called complete strangers from a phone directory to promote his product; before placing each call, he confirmed that the number was not on the DNCL.

c. Jiro, who hired a telemarketing firm located outside of Canada to call random Canadian residences and solicit interest in his product. The telemarketing firm did not subscribe to DNCL.

d. Pepe, who owns a window-cleaning business and randomly called local businesses to see if they had any interest in getting their windows cleaned.

QUESTION 19

Aaron is covered under his group insurance plan through his full-time employer as well as under a group plan offered by his part-time employer. He is also married to Lisa, whose work group plan offers dependent coverage.

Which one of the following would prevent Aaron from being over compensated as a result of claims made with multiple insurers?

a. Anti-selection

b. Deductible

c. Co-insurance factor

d. Co-ordination of benefits

QUESTION 20

Which one of the following government benefits is received tax-free?

a. OAS

b. CPP

c. EI Sickness benefits

d. None of the above

QUESTION 21

Matt and Melissa have been married for 15 years. Two years ago, they drafted a separation agreement but have not yet divorced. Matt recently died of an automobile accident. Years before they separate, Matt drafted a last will and testament naming Melissa as beneficiary to certain assets and also beneficiary of his whole life policy.

What impact, if any would their separation have on Melissa’s rights under Matt’s last will and testament and her beneficiary designation in the lift insurance policy?

a. The beneficiary designation under the life insurance policy will stand; However, Melissa will lose right to any assets left in Matt’s will.

b. Melissa loses her beneficiary designation under the life insurance policy; However, Melissa’s right to any assets left in Matt’s will stand.

c. Melissa is no longer entitled to any assets in Matt’s last will and testament and loses her beneficiary designation under the life insurance policy.

d. Their separation has no impact on Matt’s last known will and testament nor life insurance. Melissa is still entitled to the assets stated in the last will andtestament and remains the designated beneficiary in the life insurance.

QUESTION 22

A client of your, Rommel, passed away last week and his son, Clark, came to discuss with you his parent’s affairs. Before meeting with his lawyer next week, Clark wants to know which of his father’s assets would likely most attract probate fees.

Which one of the following assets would likely attract probate fees?

a. A whole life policy that names Rommel’s estate as the beneficiary

b. A term life insurance policy that names Rommel’s best friend, Richard, as revocable beneficiary

c. A segregated fund in which Rommel named his favorite charitable institution as the beneficiary

d. Rommel’s home, which was held in joint tenancy with Clark

QUESTION 23

Which one of the following issues would a trust company not manage?

a. Personal health care issues

b. Estate Planning issues

c. Insurance issues

d. Cash management issues

QUESTION 24

Marlon is a sophisticated investor. He was able to develop his own system for picking stocks and has been able to beat the overall equity market for every year for the past 15 years. He works as a self-employed computer-programmer earning an income of approximately $80,000 per year. He has little faith in the government’s abilities to handle the economy and feels he would be better off investing his CPP contributions into an investment vehicle of his choice.

What would you tell Marlon?

a. In the 2013 federal budget, mandatory contributions to the CPP were deemed to be unconstitutional, so making contributions is now optional.

b. Marlon can opt out of the CPP, but the decision to do so would be permanent and he would have to waive his rights to any prior contributions.

c. The CPP is a mandatory program for those who earn over a certain threshold and are within a certain age range.

d. The CPP program is not available for self-employed individuals anyway.

QUESTION 25

Alfonso Ayala belongs to an affluent family. When Alfonso was getting married, his father, Juanito, suggested that Alfonso insist on a prenuptial agreement, but Alfonso refused. On December 25, 2002, Alfonso married his girlfriend Amor. At the time of their marriage, Amor had no assets and was earning a modest salary of $30,000 per year. On the other hand, Alfonso brought a vintage 1955 Corvette into the marriage, and it is still one of the most cherished possessions today. He also owns a business, which, at the time of their marriage, averaged annual sales is $200,000. Today, the business generates sales of close to $2.5 million per year.

Last year, Alfonso’s father was killed in a car accident. Alfonso is the beneficiary on his father’s life insurance and received $5,000,000 from the death benefit. Alfonso left the money on deposit with the insurance company. Alfonso also inherited a diamond family heirloom valued over $2,000,000. Last month, Amor learned that Alfonso was having an affair with his secretary over a year. Amor immediately left Alfonso and is filing for divorce. Alfonso is concerned about how the divorce will affect his assets.

Which of Alfonso assets would be most likely divided because of the divorce?

a. The business that Alfonso brought into the marriage

b. The diamond that Alfonso inherited from his father

c. The Corvette that he brought into the marriage

d. The life insurance death benefit that Alfonso received from his father

QUESTION 26

Redge and Roy are sweethearts but have not married. They bought a home and will take possession of the property in 60 days. Roy was previously married and went to a bitter divorce and promised himself never to marry again. While he loves Redge, he is only willing to enter into a common-law relationship with her. Both plan on having children. Although Redge is not concerned of traditional marriage, she is worried that her rights may be diminished in the event of a relationship breakdown.

Which of the following best summarizes Redge’s rights in a common-law relationship?

a. When it comes to the division of assets, a common-law spouse has no presumed rights to property division, but could potentially seek child or spousal support.

b. Common-law spouses have identical rights to those of traditionally married spouses.

c. A common-law spouse has no presumed rights to the division of assets or to spousal support, but could potentially have the right to claim child support because that is essentially the right of the child.

d. Common law spouses have no rights in terms of asset division and support as compared to the rights of traditionally married spouses.

QUESTION 27

Which one of the following individuals may find protection under “dependent’s relief legislation”?

a. Sarah, whose husband died and left all of the assets to his mistress.

b. Petra, whose husband was collecting pension, but then died. The benefits will continue to Petra.

c. Jose, who is 15 yrs old and whose father is collecting disability benefits under CPP.

d. Arlene, who is 14 yrs old and whose mother is collecting OAS and qualified for GIS because their family income is below a certain threshold.

QUESTION 28

Which one of the following refers to the individual who is in charge of one’s estate?

a. Testator

b. Executor

c. Enduring POA

d. MGA

QUESTION 29

From a legal perspective, which one of the following situations should be of the most concern to the insurer?

a. A 19 year old parents would like to purchase a small life insurance policy on their two-year-old child’s life.

b. A 16 year old female wishes to purchase a small life insurance policy on her own life in order to ensure that her car loan would be paid in full in the event of her death.

c. An individual named as the beneficiary on a life insurance policy in a last will and testament drafted and signed by the policyholder’s POA is making a claim on the death benefit.

d. All of the above.

QUESTION 30

Shagun have celebrated her fifteenth birthday today. Her parents are so proud that she knows to take a good sense of responsibility. She is doing well in class. Shagun understands the importance of having a life insurance, a good sense that she has acquired from her father who is a licensed insurance agent.

Which of the following idea is true as it pertains to Shagun’s plan of obtaining a life insurance on her life?

a. Shagun may apply for a life insurance because she intends to use her savings in the bank to pay her premiums.

b. Shagun should not apply for a life insurance to her father because it would be a conflict of interest.

c. Shagun’s parents could apply for a life insurance for her if they wish to as long as they will be the custodian.

d. Shagun’s parents should wait that Shagun would turn 16 years old before they apply an insurance for her.

QUESTION 31

Katrina and Alex Dugarova are married and owners of a Graphic Design shop. Alex’s suffered disability leaving him unable to run the business. Katrina sought their nephew’s help in managing the business, however Jonatas’ lack of experience lead their company to be exposed to creditors and the funds of the company started to diminish. Months after, Alex had to file for bankruptcy. Aside from his assets, Alex also purchased a life insurance policy years ago naming their nephew Jonatas as his beneficiary, the policy now have about twenty thousand as cash value.

Which of the following is true?

a. The funds held in life insurance will be subject to the creditor’s claims.

b. The funds held in life insurance will not be subject to the creditor’s claims.

c. Alex wont be compelled to surrender the life insurance to the creditors because it is an insurance product.

d. None of the above.

QUESTION 32

Which of the following is not a civil fault / tort?

a. A life agent lost control on the vehicle and ran over a yard of his client.

b. A life agent told one person about the client’s assets and liabilities.

c. A life agent accepting a very large lump sum cash deposit from a client for a purchase of Investments.

d. A life agent vandalizing the office of a competitor MGA.

QUESTION 33

Jorge owns a policy on his own life and one on the life of his common law spouse, Anahita. Jorge wants ownership of the policy on Anahita to pass to her if he dies first, and not to his children, so he appoints Anahita as the successor owner by an amendment to his policy.

Which of the following is true as it concerns Anahita as the successor policy holder?

a. Anahita may make changes to the policy during the lifetime of Jorge.

b. Anahita is not a party of the contract while during Jorge’s life and will only be able to acquire the rights and privileges when he dies.

c. Anahita would assume the ownership of the policy on Jorge’s estate after he passed away.

d. All of the above.

QUESTION 34

Snaider and Iesha separated and signed a Divorce Agreement which included a promise by Snaider to make and keep Iesha as beneficiary of his life insurance policy until he no longer had to pay her child support. Iesha’s lawyer asked Snaider to sign a change of beneficiary form making Iesha as irrevocable beneficiary of his policy.

Which of the following would be true in accordance to the situation?

a. Should Snaider declare bankruptcy, he would be compelled to surrender the contract

b. Obtaining a policy loan from the accumulated cash value would require Iesha’s consent

c. If Snaider and Iesha were common law partners, Snaider would not need to arrange for child support

d. All of the above.

QUESTION 35

The question on the life application form specifically asked: “Have you ever been treated for or had any known indication of disease or disorder of the brain or nervous system, such as” … and then listed separate symptoms, conditions, diseases, or problems. Larissa, the agent, wanting to save time, just asked the proposed life insured: “You don’t have any problems with your nerves, or brain tumours or anything, do you?”

What could be the result of this failure to perform her duties?

a. Nothing. Larissa believes there is nothing wrong with her paraphrasing the questions

b. The validity of the policy will be open to challenge

c. If anything goes wrong, Larissa would be involved in a law suit for failing to perform her duties

d. Both B&C

QUESTION 36

Which of the following is true about Temporary Insurance Agreement?

a. It will expire once the policy has been approved or declined

b. The amount of the TIA coverage varies between insurers, but typically set as greater than what they applied for

c. Can provide unlimited coverage for up to 90 days

d. All of the above

QUESTION 37

Muhammad applied for life insurance in December. In January, he went to his physician to get a routine flu shot. Other than that his health is in perfect shape. The policy was to be delivered in early January.

When asked by the agent about changes in insurability, what must Muhammad say?

a. None. Because Muhammad did not suffer any disability or sickness from the last time that he met with the agent.

b. Yes. Then disclose his appointment for flu shot since his applications typically ask about date of last visit to the doctor and any treatment prescribed or recommended.

c. None. Because he only elected himself to get a flu shot.

d. Ask the agent if he looks like he is in good shape.

QUESTION 38

On August 3rd, Cecina meets with her insurance agent, Gilbert, and decides to apply for a term life policy. On August 26th, Gilbert is advised by his head office that Cecina’s application has been approved. On September 5th, Gilbert delivers the policy to Cecina and she confirms her banking information with him so that she can begin her monthly premium payments as of September 10th.

When is Cecina’s new policy deemed to be in force?

a. Cecina’s policy is in force as of August 3rd, the date of her application.

b. Cecina’s policy is in force as of August 26th, the date she was approved for coverage.

c. Cecina’s policy is in force as of September 5th, the date it is delivered to her and she accepts it.

d. Cecina’s policy is in force as of September 10th, the date the first month’s premium is received.

QUESTION 39

On August 5th, Ajinder’s policy has been delivered to her, a whole life non participating policy. A week after that, she heard about Universal life and now thinking of changing her whole life policy into a universal life policy.

Which of the following is true?

a. Ajinder will not be able to change the type of insurance anymore because the policy has been issued to her already.

b. Ajinder will not be able to change the policy because the first premium has been collected already and the insurance is now effective.

c. Ajinder may be able to change the policy because of the 10-day Free Look provision in the contract.

d. Ajnder may be able to change the policy, she only needs to undergo another proof of medical.

QUESTION 40

The following reasons can be a ground for the termination of the policy by the insurer, except:

a. Fraud

b. Non payment of premium

c. Non forfeiture option

d. Omissions of information

QUESTION 41

Marco dies of colon cancer five years after buying a policy. A thorough review of his medical history in response to the claim for the death benefit reveals that Marco had a previous round of colon surgery for cancer four months before he applied for the insurance. But he stated on the application that he had never had any indication of, or treatment for, cancer. When Marco passed away, he is 2 days behind from paying his insurance premium.

When his family file the claim, how would the insurer deal with it?

a. The insurer will pay the claim because he passed the incontestability period already.

b. The insurer will deny the claim because he concealed the information from the insurer.

c. The insurer will not pay because he did not have active insurance coverage when he passed away.

d. The insurer will pay a claim after the missed premium has been paid already.

QUESTION 42

Diana is Jeff’s second wife. One day, he suffers a massive heart attack at work and dies. Diana remembers the insurance policies the couple took out when they were married three years ago. Jeff has a $500,000 whole life policy and Dianna is named as a revocable beneficiary in the contract. A short time after she begins the claim process, she receives notice that there are other claimants. Jeff had fallen behind in his child support payments to his first wife, to a total of $100,000. Furthermore, Diana finds out that Jeff had changed the beneficiaries to herself and his two children (equally) from his first marriage about a year ago, without her knowledge. Finally, a creditor has provided proof that Jeff pledged his policy against a debt he owed them, in the amount of $100,000.

How much of the death benefit will Diana be entitled to?

a. $100,000, because the debtor assignee and the child support payments need to be paid first, then the remaining benefit is distributed between the beneficiaries.

b. $166,667, because beneficiaries can only be individuals related to the insured, with an insurable interest.

c. $400,000, because the debtor assignee and child support payments need to be honoured; children, however, cannot be beneficiaries.

d. $500,000, because the policy was taken out while he was married to Diana

QUESTION 43

Billie Jean has a life insurance with an accumulated cash surrender value of $105,910. Billie is seeking to withdraw $50,000 that he would intend to put towards her catering business. However, Billie’s goal is to maintain her current marginal tax rate. She is deciding between policy loan and Collateral loan.

Which would be advisable for her?

a. If the policy holder will borrow a big amount from the policy loan, it can trigger policy gains taxable as income to the policyholder.

b. When a third party lender takes a collateral assignment of a policy as security, there is no limit on the size of the loan apart from those established by the lender’s loan underwriting criteria.

c. All of the above.

d. None of the above.

QUESTION 45

Walter has a life insurance with accidental death rider. One evening, he was pronounced dead at the scene of a severe motorcycle accident. Forensic and witness evidence gathered at the scene established that his vehicle had very gradually veered to the right, but travelled at the same speed until collision, with no evidence of braking or turning. The coroner ordered an autopsy because his death was unexplained and apparently by accident. After the examination of the claim, the insurer paid the death benefit but not including the accidental death rider.

Which could be the reason for this?

a. Walter was not wearing a helmet when he was driving the motorcycle

b. Walter has a heart attack and was already dead before the accident happened

c. Walter’s accident could have been avoided

d. All of the above

QUESTION 46

It was March 1st seven years ago when Jordan boarded a cruise ship. Two nights after the ship sailed they met a strong typhoon. Since then the ship went missing. On March 28th, Jordan’s premium for his life insurance has been due. Now, Jordan’s family is requesting to the court that Jordan should be declared dead to be able to claim the death benefits.

If the court will do so, will the insurer pay the claim?

a. No because his insurance premiums have lapsed already

b. Yes, because it was still under the grace period when he passed away

c. Yes, because it will be considered that he passed away on March 3rd and he still has the insurance coverage

d. No, because he was declared dead after 7 years

QUESTION 47

Stan and Gina have been married for two years when Stan decides to purchase life insurance on Gina’s life naming him as the beneficiary. After a bitter argument Stan runs over Gina with his truck and Gina dies on the scene.

How would the insurer deal with this?

a. A claim will be paid as long as the premiums have been paid

b. A claim will not be paid as this is considered as payment against public policy

c. A claim will be paid, because there was no evidence of non-disclosure

d. A claim will not be paid because Stan is the owner of the policy

QUESTION 48

Which Canada’s private sector privacy legislation, and to protect and promote the privacy rights of individuals?

a. Office of the Privacy Commissioner of Canada

b. Financial Transactions and report analysis Centre

c. OmbudService for Life and Health Insurance

d. Canadian Council of Insurance Regulators

QUESTION 49

Newly licensed life insurance agent Rae meets with Allen who wishes to secure life insurance. During the application process, Allen presents a credit card that expires next month, stating that it is the only identification he has on hand, along with a bank cheque for the first month’s premium.

To meet regulatory standards, what should Rae do?

a. Rae should not submit the application form because the credit card expires next month.

b. Rae should submit the application form using the bank account cheque information to verify and record Allen’ identity.

c. Rae should not submit the application form because neither a credit card nor a bank cheque are acceptable forms of identification.

d. Rae should submit the application form using the credit card to verify and record Allen’s identity as the card is from a reputable financial institution.

QUESTION 50

Lorie sues her life insurance agent, Amir, to recover a financial loss stemming from him having provided incorrect advice on her investments. Amir is not threatened because he knows that he has an Error and Omission insurance in place. However, Amir is not aware that his E&O will not cover this claim because?

a. His E&O only covers any practice related to his life insurance license

b. His E&O will only cover any mistake that he committed

c. His E&O will not cover misrepresentations

d. All of the above

QUESTION 51

Ali runs a busy business. He travels to Europe and Africa a lot. Ali has an adult son, Khumar. Ali would like have signed a power of attorney appointing Khumar to act in his behalf to make financial and legal for the company, including managing his investments while Ali is away. He stated that this is an enduring Power of attorney.

When will Khumar’s power of attorney cease?

a. When Ali gets back to town

b. When Ali becomes mentally incapable

c. Kumar’s Power of attorney will not cease

d. When Ali dies

QUESTION 52

Tony Spark is a multi-millionaire philanthropist. He doesn’t have any children and wishes to leave donation to his favourite charities, also he wants to make sure that the taxes will be properly take care off should he pass away. In connection to this He purchased an insurance on his life naming his lifetime partner Pepper Mills as his irrevocable beneficiary.

Which among the following would Tony able to do without consent after naming Pepper as an irrevocable beneficiary?

a. Accessing the cash surrender value as policy loan

b. Obtaining a collateral loan from a bank

c. Both of the above

d. None of the above

QUESTION 53

Colin and Shirley Matthews are your clients. Colin purchased a life insurance on their daughter Sandra. Naming Shirley as the beneficiary. He did not name a successor policy holder on this purchase, when Colin passed away, who will be the policy holder?

a. Sandra

b. Shirley

c. Colin’s estate

d. a & b

QUESTION 54

A week ago, you have delivered a policy to your client Justin Wilson. He called you today to inform you that he has lost his job and he estimates that, it will be at least six months until he is once again earning a steady income. What options does Justin have available to him?

a. Take advantage of the grace period and begin repaying his missed premiums in six months’ time

b. Exercise the non-forfeiture options built into the policy and maintain his current coverage

c. Exercise his right of rescission and have premiums returned to him in full

d. Exercise his right of rescission and have premiums returned to him less a market value adjustment

QUESTION 55

Your client was a previous resident of United States of America and he would like to invest in a Segregated fund thru you. However, when you were gathering the information from him, he is declining to give you his US Tax Identification Number and keep on suggesting that you just use his Social Insurance Number since he now lives in Canada.

If you will follow his suggestion, which organization Act are you violating?

a. Personal Information Protection Electronic Documents Act

b. Canadian Life and Health Insurance Association

c. Foreign Account Tax Compliance Act

d. Financial Transactions and Report Analysis Centre

QUESTION 56

Henry is 60 years old now. He has investments in GIC worth $150,000; $300,000 in Mutual Fund and His coverage in his life insurance is $150,000. He feels like he won’t be able to reach 65 years old, because of his health condition. He asked his agent, Bob if he knows someone who can buy his plan for $50,000 so Henry can use the money now. Bob knows someone who can afford to buy his plan and told Henry about it.

What did Bob commit in this situation?

a. Coercion

b. Churning

c. Trafficking

d. Undue Influence

QUESTION 57

John is an agent for life insurance only for ABC Co. His friend, Ben also works for life insurance and other varieties of insurance for XYZ Co.

What is John’s nature of work that looks like with his friend?

a. John is an independent agent for life insurance only with ABC Co.

b. Ben is a captive agent that works for life insurance and other varieties of insurance for XYZ Co only

c. John is a captive agent that works for life insurance and other varieties for ABC Co only

d. Ben is an independent agent that works for life insurance only for XYZ Co only

QUESTION 58

Louise and Pete are married, and has a child named Bryan. The couple had purchased a permanent insurance policy on Bryan when he was 1 year old, naming Pete the primary beneficiary. When Bryan was 20 years old, his parents decided to transfer the ownership of the policy to him as a college graduation gift. Unfortunately, 5 years after Bryan’s graduation, he had fallen into bad social influence, causing him to spend unwisely, and as a result, he is struggling financially.

Which of the following statements are TRUE?

a. Bryan may take a policy loan to get the cash value of the policy upon the consent of Pete, the primary beneficiary

b. Louise needs to make an arrangement with Bryan to assign the policy back to her if Bryan needs to take a policy loan

c. Should Bryan declare bankruptcy, creditors may not seize the policy he owns

d. Bryan may surrender the policy, but requires the signature of his agent

QUESTION 59

Louise and Pete are married, and has a child named Bryan. The couple had purchased a permanent insurance policy on Bryan when he was 1 year old, naming Pete the primary beneficiary. When Bryan was 20 years old, his parents decided to transfer the ownership of the policy to him as a college graduation gift. Unfortunately, 5 years after Bryan’s graduation, he had fallen into bad social influence, causing him to spend unwisely, and as a result, he is struggling financially.

Which is true regarding the policyholder prior to the assignment?

a. If Louise dies, Pete becomes the sole policyholder

b. If Louise is absent, Pete can make changes to the policy

c. There can only be one policyholder

d. Both a and b

QUESTION 60

Which of the following monitors the financial viability of federally incorporated insurers?

a. Canadian Council of Insurance Regulators (CCIR)

b. Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)

c. Canadian Insurance Services Regulatory Organizations (CISRO)

d. Office of the Superintendent of Financial Institutions (OSFI)

QUESTION 61

Claudia is a newly licensed life insurance agent who had just received her license. Yesterday, she met with her client, Angelo. With her “expert” advice, she had sold a term policy with $1,000,000, and urged him to cancel his universal life policy from another MGA, which has been in force for a year.

Which of the following is true regarding this replacement?

a. Replacement is recommended if the insurance face amount is more than the old policies

b. Claudia had commited churning

c. Replacement is always necessary if the plan you offer costs less than the current plan

d. Claudia’s action may be liable to twisting.

QUESTION

62

20 years ago, Mario had purchased a universal life insurance policy naming his 1 year old daughter, Lucy, the life insured. He named his wife, Peach, as the sole beneficiary of the policy. The policy now has grown a substantial cash value. When Lucy turned 18, Mario absolutely assigned the policy to Lucy. Now, Lucy is 21 years old, and has landed into financial trouble. Mario agreed that he would lend her money, on the condition she absolutely assigns the policy back to him. After the assignment, a few months later, Lucy died in a car accident.

Who of the following would receive the death benefit?

a. Mario, as he is the assignee

b. Lucy’s estate, as Lucy is the life insured

c. Peach, as she is the named beneficiary on the purchase of the contract

d. Lucy’s creditors, as Lucy had debts to pay

QUESTION 63

What is TRUE regarding a Managing General Agent (MGA)? It:

a. Can sell policies from a number of insurance companies

b. Only sells a single company’s products in return for commission.

c. Regulates licensing and qualification of agents by providing the exam, reviewing licensing applications and enforcing proper professionalism and industry standards

d. Facilitates business between agents, their clients, and insurers by providing services such as agent support and communication.

QUESTION 64

In the event of insurer insolvency, a policy whose face amount is $500,000 is guaranteed by:

a. Office of the Superintendent of Insurance for $425,000

b. Errors and Omissions insurance for $425,000

c. Assuris for $425,000

d. None of the above

QUESTION 65

Loki is a licensed life agent. He holds a position in his local community association. He has a good reputation for giving referral fees and “sign-up bonuses” to people with whom he networks with.

Which of the following is allowed?

a. Giving a thank you letter with a $500 cheque enclosed

b. Treating the client out for lunch at the local restaurant

c. Paying for the first 3 months’ premiums

d. None of the above

QUESTION 66

Normally, when a death occurred the claim form should be filled up by:

a. Agent

b. Beneficiary

c. Insurer

d. Insured

QUESTION 67

A person purchased an insurance policy more than 2 years ago. He failed to disclose unintentionally that he was treated for back injuries 3 years’ prior the application of insurance.

On his death, how would the insurance company react?

a. Deny the claim on non-disclosure

b. Pay out the claim

c. Pay out the claim, reduced benefit

d. Deny the claim but refund premiums

QUESTION 68

Recently, the executor found out that there is a life insurance benefit from her deceased grandfather. The named beneficiary is the wife the executor’s grandfather. But the grandmother has passed away before the grandfather (husband of the grandmother) died.

To whom would the life insurance benefit go?

a. Executor

b. Beneficiary

c. None of the above

d. All of the above

QUESTION 69

Husband and wife are named policyholders; son is the life insured. However, it is out of the husband’s account which payments are made.

Who is the policyholder?

a. Husband

b. Wife

c. Both husband and wife

d. Son

QUESTION 70

Which among the following conditions would likely be covered by the Errors and Omissions Insurance of a life insurance agent when sued by the client?

a. The agent intentionally locked the application in the drawer before going on holiday

b. Losing the delivery receipt when someone robbed his car

c. Telling the client to invest his funds based on historical figures

d. Delaying the delivery of policy

QUESTION 71

A new client is applying for UL and wants to make a huge deposit for the fund value of the UL. As the agent what must you do?

a. Do not submit application

b. Submit application to insurer and inform them about your suspicion that this could be a case for FINTRAC

c. Submit application to insurer, as there is no need to inform anyone

d. Submit application to insurer, and report it to the RCMP

QUESTION 72

In 1978, Levi married Sherraine then after 10 years they got divorced. The court ordered Levi to pay Sherraine $800 per month as child support. After a while, Levi started a relationship with Mindy. Not long after, Levi and Mindy had a son, and Levi stopped paying child support from the previous marriage. Mindy took a life insurance policy on Levi’s life in which she is the beneficiary and their son is the contingent beneficiary. In 2002, Levi died.

Mindy filed the life insurance claim, and she was paid the death benefit. Sherraine, upon learning of Levi’s death, is looking for ways to recover the unpaid child support payments she is owed. In this case, who should Sherraine sue?

a. Mindy personally

b. Levi’s estate

c. The insurer

d. Sherraine has no right to claim

QUESTION 73

Congratulations! You have sold your first accident and sickness insurance policy.

What are your responsibilities going forward with respect to this policy?

a. Visit the client once a year to add more coverage until they eventually have all the insurance they need

b. Assess claims before they are submitted to the insurer

c. All further service work on this policy will be done by the policy support department at head office

d. Visit the client regularly to reassess their need for insurance

QUESTION 74

Johnny, a new agent, has collected an individual life insurance application form and a cheque for the first premium. He issued a TIA to this new client, his brother-in law. His E&O insurance will likely not cover:

a. Recommending that a client purchase shares in an oil and gas company

b. Beneficiaries claiming the client was undersold

c. The client claiming he was oversold

d. Losing his briefcase (containing the application form and cheque) in a bar

QUESTION 75

Joan has a loan that she has borrowed against her CSV. She is able to borrow up to a maximum of 90% of her policy. She uses this loan to purchase shares in her family business.

What type of loan does she have?

a. Collateral loan

b. Insurance policy loan

c. Business loan

d. Bank loan

QUESTION 76

Which of the following organizations has generated a code of ethics for the insurance industry?

a. The Uniform Life Insurance Act

b. Canadian Life and Health Insurance Association

c. Provincial Insurance Regulators

d. Assuris

QUESTION 77

Your client Ian purchased an individual disability policy from you. The policy has been in force for three years. The insurer requested some medical information, including asking Ian about any periods of hospitalization. At that time, Ian forgets that he had been to the hospital three years earlier when he sprained his ankle skiing and failed to disclose this. Ian dislocates his knee playing softball and submits a claim to his insurer.

What will be the consequences of Ian’s failure to disclose his previous ankle injury?

a. The insurer will pay the claim

b. The insurer will void the policy and deny the claim based on fraud

c. The insurer will deny the claim

d. The insurer will pay the claim, but retroactively adjust the amount of benefit, based on the premiums he would have paid had the insurer known about his previous ankle injury.

QUESTION 78

Henry is 60 years old now. He has investments in GIC worth $150,000; $300,000 in Mutual Fund and His coverage in his universal life insurance is $150,000. His agent, Bob, convinces Henry to replace his policy with a brand new $150,000 whole life policy.

What did Bob commit in this situation?

a. Coercion

b. Churning

c. Trafficking

d. Undue Influence

QUESTION 79

Malkov has purchased a segregated fund contract on Monday, October 15, 2018. Before what date can he change his mind and exercise his right of rescission?

a. October 17

b. October 20

c. October 25

d. November 15

QUESTION 80

Malkov has purchased a segregated fund contract on Saturday, October 13, 2018. Up to what date can he change his mind and exercise his right of rescission?

a. October 15

b. October 16

c. October 23

d. October 27

QUESTION 81

Greg applied for life insurance at age 54. In error, the year of birth was entered to indicate the he was 45. The policy was whole life with a $500,000 face value. The premium he quoted was $9.40 per year per $1,000 coverage. At his correct age, the premium would have been $17.20 per $1,000 coverage.

The misstatement of age was noticed after Greg died and the claim was being assessed. What would happen now?

a. The death benefit of $273,256 would be paid.

b. If the policy was issued less than two years ago, the insurer could deny the claim on the basis of material misrepresentation. If the policy was issued more than two years ago, the insurer can deny the claim only if they can prove fraud.

c. The death benefit would be denied on the basis of material misrepresentation.

d. A death benefit of $416,666 would be paid.

QUESTION 82

Greg applied for life insurance at age 54. In error, the year of birth was entered to indicate the he was 50. The policy was whole life with a $500,000 face value. The premium he quoted was $14.33 per year per $1,000 coverage. At his correct age, the premium would have been $17.20 per $1,000 coverage.

The misstatement of age was noticed after Greg died and the claim was being assessed. What would happen now?

a. The death benefit of $273,256 would be paid.

b. If the policy was issued less than two years ago, the insurer could deny the claim on the basis of material misrepresentation. If the policy was issued more than two years ago, the insurer can deny the claim only if they can prove fraud.

c. The death benefit would be denied on the basis of material misrepresentation.

d. A death benefit of $416,666 would be paid.

QUESTION 83

Mike and Ana have 5 children; Cassandra, Alex, Mina, Solemn, and Nica. Mike purchased a life insurance policy when the children were still young. Mike just died and on the night of the funeral, twins Ramon and Ramona came by and introduced themselves as Mike’s children from his past relationship. They were older than Mike and Ana’s children.

Who will receive the death benefit if Mike named the beneficiary as “my children”?

a. The insurance company will give the benefit to court.

b. All 7 children must show proof that they are Mike’s children. They can provide a birth certificate proving who are their parents. If the policy was issued more than two years ago, the insurer can deny the claim only if they can prove fraud.

c. Only Cassandra, Alex, Mina, Solemn, and Nica will receive the death benefit since the intention of the policy was benefits for children born during the marriage of Mike and Ana.

d. Mike’s executor will receive the benefit and distribute it according to the Last Will which defines who he considers “my children.”

QUESTION 84

Sonia bought a life insurance, she named her 3 yrs. old son, Alex, the beneficiary. In her will, she assigned her best friend, Jonatas, as the guardian of Alex. Sonia died when Alex turned 13 yrs. old.

Who can claim the death benefit?

a. Mother estate

b. Alex

c. Jonatas

d. Sonia’s older brother George, who is 40 yrs old

QUESTION 85

You met Claire for the first time and she would like to deposit $15,000 in and Individual Variable Insurance Contract. What FINTRAC reporting requirement applies?

a. Report as suspicious transaction

b. Ascertain client’s identity

c. Inform the client, there is a limitations of $10,000 deposits only

d. Deposits into a IVIC is never reported to FINTRAC because it is an insurance product

QUESTION 86

Rachel and Basti are married and they have one child, Chad. The couple a T-20 joint-first-to-die renewable and convertible policy with a child rider. Basil named Rachel as the beneficiary and Rachel named Chad as her beneficiary.

After 30 years from the date the policy was purchased, Rachel died, who will receive the death benefit?

a. Chad

b. Basti

c. Chad and Basti

d. There is no death benefit as the policy has lapsed.

QUESTION 87

Greta is a fully life licenced agent practicing in the province of Manitoba and Alberta. She is currently in the Philippines stranded due to the travel restrictions due to COVID-19. She was contacted by one of her clients who wanted to buy a critical illness coverage. Greta contacted Vicky who is another life insurance agent based in Manitoba. Greta provided all the information to Vicky about the client and Vicky sent the application. Greta and Vicky split the commission.

This practice is:

a. Acceptable since both are licenced in the province of Manitoba.

b. Not acceptable, only Vicky should receive the commission.

c. Not acceptable. This is an example of fronting.

d. Not acceptable. This is an example of churning.

QUESTION 88

Ali just received a $200,000 death benefit from his grandmother’s life insurer. Ali took $100,000 of his inheritance and bought a Tesla Model S and he is thinking of investing the rest. He is meeting with Yeti, his agent who tells him about investing in an annuity. Ali wants to invest $15,0000 of the inheritance into a prescribed annuity.

Will Yeti have to report to FINTRAC?

a. Yes, because the deposit is more than $10000

b. No, because the money is from a death benefit which is tax free

c. No, because a prescribed annuity is exempted from FINTRAC reporting

d. Yes, because Ali is a PEFP

QUESTION 89

Jerome and Melia bought life insurance on each of their lives with a face amount of $500,000 about a year ago and name each other as beneficiaries. A year later, they gave birth to their only son Zack and assigned his aunt Susan as his guardian should something happen to them. They updated their will and named Zack as contingent beneficiary to their life insurance policy and inheritor of all their assets.

Five years later, both Jerome and Melia died, who will receive the death benefit from the life insurance contract?

a. Susan

b. Zack

c. Jerome and Melia’s estate

d. Jerome

QUESTION 90

Cain and Elis have been married for 20years. Even though they have been very unhappy in the marriage, they have jointly been able to accumulate a sizable asset. Cain is meeting with his lawyer next week and wants to know if they decided to divorce what will happen to their joint assets because he will not like Elis to receive any share from joint property.

What is true?

a. Cain will receive all the joint properties

b. All the conjugal properties will be divided between Cain and Elis

c. Elis will receive all the joint properties

d. Cain can only receive all joint properties if he sues Elis

QUESTION 91

Jannelle is part of her community club and wants to sell life insurance to members of the club. Since most of the members are Gen Z’s, she decided to send a WhatsApp message to advertise her product.

Is Jannelle allowed to do so?

a. Yes, she is a member of the community club

b. No, because she will be contravening PIPEDA

c. No, she can only send email messages

d. No, she will be contravening the Anti-spam legislation if she does

QUESTION 92

Karen has been employed with Khani Enterprises for 5 years now. Last week, she decided to purchase life insurance with a face amount of $250,000. Unfortunately, she was just terminated from work today and she is meeting with her agent Jamila for the policy delivery. She informed Jamila that even though she has lost her job she has about 6 months income saved up and believes she will be able to secure a job in a few weeks.

What should Jamila do?

a. Deliver the policy because she has enough savings

b. Do not deliver the policy and inform the insurer of the change

c. Deliver the policy as the change is only in employment and not health

d. Do not deliver the policy because he is no longer insurable

QUESTION 93

Mutt invited Jeff for lunch. When it was time to pay, Mutt realized he forgot his wallet. Jeff willingly paid for the lunch. To make up, Mutt told Jeff that he will give his successful presentation that morning to Jeff so Jeff could be servicing agent and receive commission to be reimbursed for the lunch he paid for.

What is the agent misconduct?

a. Fronting

b. Gifting

c. Coercion

d. Unauthorized sale by unlicensed agent

QUESTION 94

Arnie and Winnie are business partners of a successful mom and pop store but they are worried about not having health coverage for themselves and their children.

What will you offer?

a. Employee health trust (EHT)

b. HWT

c. Private Health Services Plan (PHSP)

d. Group plan

QUESTION 95

Vincenzo applied for life insurance three years ago. He failed to disclose a material fact that he had been diagnosed with cancer on the application. While driving on his way home, he drove over an ice patch and slammed on a tree and died apparently from the accident.

How will his life insurance pay?

a. His life insurance will pay because he died from an accident which is not related to cancer

b. It will pay even if he has no AD&D coverage

c. It will not pay because he did not disclose a material fact during the application

d. It will not pay because he does not have AD&D coverage

QUESTION 96

Vincenzo applied for life insurance with Accidental Death & Dismemberment rider three years ago. While driving on his way home, he crossed the median and slammed head-on with a truck and died instantly. Investigators found a suicide note and ruled this as a suicide.

How will the insurer react?

a. His life insurance will pay out, but not the Accidental Death coverage

b. His life insurance and Accidental Death coverage will both be paid out

c. Only the Accidental Death coverage would be paid out

d. Both the life insurance and Accidental Death coverage would not pay out

QUESTION

97

Evelyn and Mark had been married for 15 years. They had 2 children named Julie and Marie who are 10 and 6 years old respectively. The couple had a lovely relationship for 15 years. Mark was promoted as a Manager of a very prestigious company and had an illicit relationship with his Executive Secretary Leona. After a few months, Mark filed for a divorced. It took about more than 1 year to finalize the divorce because of the issue of spousal and child support. Just after the divorce, Mark and Leona lived together as a common law. One day, Mark met with an independent insurance broker and applied for a life insurance naming Leona as a revocable beneficiary. Since Mark is still healthy, the life insurance application was approved. Mark and Leona love to travel across Canada driving. One summertime while driving to Vancouver, they had an accident at Coquihalla Mountain where Mark died. Leona being the beneficiary of the life insurance filed a claim. Evelyn learned about the death of Mark and needed to pursue the claim for owed legal spousal and child support obligations.

If Evelyn will pursue to claim the owed duty to support, to whom will Evelyn sue?

a. The Insurance Company

b. The Common Law Partner Leona

c. Mark’s Estate

d. None of the above

QUESTION 98

Susan is 17 years old from NWT. The legal age in NWT is 19 years old. She moved to Alberta to finish her university education. Her best friend Ellise whose age the same as hers shared the story about her parents getting an insurance for her for her life protection. Susan realized that she needs life insurance too for life protection especially she is living away from her families. The following morning, Susan called her parents in NWT informing them her intention to get a life insurance. Susan was so disappointed because her parents are against the idea of getting life insurance. Susan would still like to get life insurance policy.

If he does, can she apply and sign the insurance application without the parent’s consent?

a. She can sign up and name her parents as beneficiary

b. She can sign up, however she needs her parents consent to be the beneficiary

c. She cannot sign up because her age does not belong to the age of majority in NWT

d. She cannot sign up because it is mandatory that the one who will sign are the parents

QUESTION

99

When the life insured dies, a claimant must satisfy certain requirements for the insurer to pay the benefit. The claimant must:

a. Provide satisfactory evidence that the life insured has died

b. Have an existing life insurance

c. Provide their entitlement to claim the benefit

d. a & c

QUESTION 100

A business owner is applying for non-registered segregated fund with cash deposit of $85,000. He is rushing you to finish the transaction as he has an upcoming international trip relating to his other investments.

As the agent, how would you react to this situation?

a. Process the application but do not report to FINTRAC because is it less than $100,000

b. Process the application and report to Canadian Security Intelligence Service

c. Process the application and report to RCMP

d. Process the application and report to FINTRAC since this is a large cash transaction

QUESTION 101

Rising Star Mask Inc is renewing their group insurance plan. The employer insists that the agent, Luisa, give false information so that the premiums will not be increased.

Which will be the best defense of Luisa?

a. Documents & files

b. Updated E&O

c. The witness during application

d. Hire a lawyer

QUESTION 102

Vincenzo applied for AD&D insurance policy three years ago. He did not disclose on the application that he had been diagnosed with cancer. While driving on his way home, he drove over an ice patch and slammed on a tree and died from the accident.

How will his AD&D insurance pay?

a. His AD&D insurance will pay because he died from an accident

b. His AD&D insurance will pay because the death is not related to the cancer

c. It will not pay because he did not disclose a material fact during the application

d. It will not pay because he does not have life insurance coverage

QUESTION 103

Becky wants to invest a lump sum today for her son’s education that will cost $95,000 in 20 years. Assuming a 3% investment return, how much will she need to invest?

a. $38,000

b. $59,377

c. $51,660.46

d. $52,599.20

QUESTION 104

Becky wants to borrow $32875.50 today from her policy. Assuming a 3% interest rate, how much will her policy loan balance be in 20 years?

a. $18,202

b. $59,377

c. $51,660.46

d. $52,599.20

QUESTION 105

Ronald is expecting that he would be the beneficiary of his common law spouse Bevy’s life insurance policy purchased ten years ago. Bevy dies and Ronald learned it was Bevy’s estate and not him as the named beneficiary.

What is his next logical step?

a. Contest the Insurer

b. Determine the common-law rights

c. Review the Last Will and Testament

d. Fill out a new beneficiary form

QUESTION 106

What law governs email marketing and electronic newsletters?

a. Anti-spam legislation

b. DNCL

c. CCIR

d. CHLIA

QUESTION 107

Anne owns three insurance policies. One names her estate as beneficiary, another has her niece as beneficiary and the third names her grandson as the beneficiary. Anne passed away last week leaving behind a huge debt.

Her estate declared bankruptcy. How will this affect her insurance policies?

a. No policy can be seized by creditors because life insurance is creditor proof

b. Only the policy naming grandson as beneficiary is protected from creditors

c. The policies naming grandson and niece as beneficiary will be creditor-proof as these are not part of the estate

d. None is creditor protected and may be used to pay all of Anne’s debts.

QUESTION 108

Briana hired her son Bion to help in her insurance agency. Both of them are licensed. Both go together to every client. Bion reviews all application forms and tells his mom when they are ready for her signature. One day, Briana was out of town and could not sign, so instructs Bion to go ahead and sign on her behalf.

What is the consequence of this?

a. Nothing. Bion can go ahead and sign because mother is requesting and it is a family business

b. Bion is licensed and has been present in all presentation with Briana, therefore, he can sign without a problem

c. Bion should not sign because it is forgery

d. Briana’s license will be revoked for engaging in forgery

QUESTION 109

Gino is an insurance broker while his friend Franz is a mortgage broker. Franz agreed with Gino to give referrals to each other. Gino is to provide Franz with application forms so Franz can talk to his mortgage clients about life insurance products, fill out the forms and send it back to Gino for processing.

If they agree to this, what are they guilty of?

a. Tied-selling

b. Forgery

c. Fronting

d. Trafficking

QUESTION 110

Gina is a life insurance agent while Francis is a mortgage broker. They agreed to give referrals to each other and give a fixed referral fee. They both disclose the deal to their clients and get their consent to refer clients to each other.

Is there any agent misconduct committed?

a. No. The life insurance agent and mortgage broker are allowed to refer clients if clients consent, and referral fee arrangement is disclosed

b. Yes. they violate privacy of the client

c. Yes. Gina is committing twisting

d. Yes. Francis is not a licensed agent and is not authorized to receive any compensation.

QUESTION 111

Vincenzo applied for life insurance three years ago. He failed to disclose a material fact that he had been diagnosed with cancer on the application. While driving on his way home, he drove over an ice patch and slammed on a tree and died apparently from the accident.

How will his life insurance pay?

a. His insurance will pay because he died from an accident which is not related to cancer

b. It will pay even if he has no AD&D coverage

c. It will not pay because he did not disclose a material fact during the application

d. It will not pay because he does not have AD&D coverage

Answer Key

Provincial Reviewer: Ethics & Professional Practice

V5.0.0

1 C Risk-based regulation means that companies that do not follow compliance are deemed to be more at risk, thus is looked on more by regulators.

2 C Marie received a structured settlement annuity and are deemed to be tax free.

3 B Seg Fund minimum guarantee is 75%

4 A John originally started his work in BC, thus the contract remain governed by that province where he originally started.

5 D The following are exclusions common on AD&D policies:

- Death from sickness, illness, or disease.

- Self-inflicted or you did it to yourself on purpose

- Acts of War

- Participating in a riot

- Events involving in the commission of a crime.

- Events involving drugs, alcohol or poison

- Extreme sports

- Certain surgical mishaps.

Refer to A&S module, Accidental Death and Dismemberment

6 B Collateral loans do not create tax liabilities. Policy loans only lend a portion of the cash value (not the death benefit, which is different)

7 D Civil fault are civil wrongs (outside of contracts) leading to civil liability / damages

8 A Being a POA can be relieved from duty, but being a trustee cannot 9 B Life insurance has a 2 year exclusion period for suicide

10 A Enduring POA extends even beyond mental incapacitation, where a regular POA expires at that point. A will is used to govern assets (estate) on the death of a person.

11 B The original POA is not needed, just a certified copy from a legal professional/lawyer

12 D Group insurers base the premiums on EXPERIENCE: the number of claims an insurer receives from members of a group plan

13 B Unilateral literally means “one sided”. This means only the insurer has to abide by the conditions of the contracts and cannot cancel, whereas the client can cancel the contract (by writing or non-payment).

14 B If the primary beneficiary passed away after the life insured (but before benefits were paid), the benefits are payable to the estate of the beneficiary.

15 B Minimum age to become a policyholder is 16 y.o.

16 D None. Both individuals are licensed, which means they can both do insurance business and split commissions. An agent can pay referral fee to a non-licensed person.

17 A Tied selling is making a product conditionally available upon purchase of another product, or forcing a person to buy another product to get what they want.

19 D

Coordination of benefits is where a spouse/partners group plan share the cost of a medical claim, but only to the extent of the medical bill.

20 D All of these are taxable

21 D

22 A

Separation of married partners has no effect on a will. Signing a separation agreement may release claims against the individual’s estate, but it would not overturn voluntary gifts made by a will or by the naming of a beneficiary in a product such as a life insurance policy. (Divorce revokes the spouse from the will)

The following assets can bypass estate (and probate): Life insurance benefits (with named beneficiaries), Registered investments (with named beneficiaries), properties held as joint tenants

23 A Trust companies can be contracted to act as guardians, but they will only make financial decisions. A trust company will not manage personal care preferences such as health care decisions.

24 C

25 A

A, B, D are false - CPP contributions are mandatory for employer and employee, you cannot opt out of contributions. If you are self-employed, you pay the contributions of both employee and employer. C is true – contribution starts at age 18. There is a Yearly Basic Exemption – essentially income below this level is not counted for contributions to CPP

Family property generally means: property that was acquired while married, or is used by the family of married spouses, or makes income that supports the family. Thus, the business (income generating for the family) is deemed family property. The others were brought in the marriage and was solely enjoyed by Alfonso.

26 A Common-law partners grants partners no rights over property on separation, but may still require spousal and child support to be paid

27 A Dependents Relief Legislation – dependents would have to be given priority before any distribution noted on the will may be made. Thus, if a person puts the mistress as recipient of assets, this legislation overrides the will and requires family dependents to be given the assets first.

28 B Executor (executrix – female) is in charge of the estate

29 C The power of attorney does not have the power to draft and sign a last will and testament on behalf of the donor.

30 C

31 A

The minimum age to be a policyholder is 16 years old. Her parents can be policyholders for the meanwhile being the custodians, and may absolutely assign the policy later on.

To protect the insurance policy from creditor seizure on bankruptcy, the beneficiaries must be irrevocable or preferred revocable. In this scenario, the beneficiary is Jonatas (nephew, not a preferred beneficiary), and is not indicated irrevocable, therefore no protection on bankruptcy.

32 C This is not a tort. A tort is a wrongdoing against others.

33 B Successor policyholder will take over the ownership if the current policyholder dies

A is false: Naming irrevocable beneficiary would protect the contract from creditor seizure.

34 B

B is true: If there is an irrevocable beneficiary, that beneficiary must give consent in order to withdraw policy cash, pledge or assign the policy, take policy loans, or surrender the policy

C is false: Common-law partners grants partners no rights over property on separation, but may still require spousal and child support to be paid

35 D An advisor should not paraphrase or shortcut the underwriting questions.

36 A The TIA expires upon reaching an underwriting decision (approved or declined), or 90 days, whichever comes first. It provides limited coverage, at an amount typically lesser than the coverage applied for.

37 B Changes in insurability (even pending diagnostics) must be disclosed if the policy has not yet been delivered. Changes after delivery does not have to be reported.

38 D A policy cannot be deemed in-force until payment has been provided

39 C Within the 10 day right of rescission (free look), the policy may be returned for full refund or exchanged.

40 C Non-forfeiture means using the cash value of the policy to maintain coverage. This does not terminate the policy, rather, extends it.

41 B Intentional misrepresentation leads to the policy being void (regardless of 2 year incontestability period).

42 A Debtor (collateral) assignments would have to be paid from the policy proceeds, as well as outstanding child support payments.

43 B There is no taxable consequence from using a collateral loan, and has no restrictions aside from the lender’s requirements

44 D On death of life insured (or maturity of contract) the claimant must provide:

• Proof of Life insured’s death

• Proof of life insured age

• Proof of claim entitlement (usually policy document)

• Claimant’s identity

45 B He died of the sickness first, thus it is deemed not accidental

46 C Presumed dead – after 7 years and body is not found, a person can be declared presumed dead and date of death would be the date the person is assumed to have met his/her fate.

47 B No benefit to the beneficiary who murders the life insured

48 A Office of the Privacy Commissioner of Canada governs Canada’s private sector privacy legislation, and aims to protect and promote the privacy rights of individuals through the Personal Information Protection and Electronic Documents Act (PIPEDA)

49 C Identification must be valid Government issued ID acceptable within the province. Examples of valid ID’s are: Passport, Driver’s License, Provincial ID, Birth Certificate, Indian Status Certificate, Certificate of Landing. Health Card may or may not be acceptable depending on province

50 D Errors & Omissions Insurance, while it covers lawsuits due to mistakes, does not cover certain things such as: Criminal Activity, Intentional / Serious Misconduct, Acting outside of authority

51 D Enduring POA expires on death

52 D Naming irrevocable beneficiary - beneficiary’s consent needed to access cash value

53 C In the absence of a successor policyholder, ownership of a policy goes to the estate of deceased policyholder

54 C Right of rescission – you have 10 days for to return for full refund / exchange policy

55 C This act requires reporting of identity when dealing with residents (and ex-residents) of the USA

56 C Trafficking – selling an already in-forced policy to another person in exchange for money

57 B Both of these are captive agents working under one insurer. Ben is licensed for Life and A&S, John only holds a Life license

58 C Pete the father is the beneficiary (preferred beneficiary), thus protects the policy from bankruptcy

59 A You can have co-owners of a policy

60 D Office of the Superintendent of Financial Institutions (OSFI) monitors the financial viability of federally incorporated insurers by setting strict guidelines and reporting requirements

61 D Twisting is replacing a policy of a different, competing company, with one which is not beneficial to the client, or without correct explanation and disclosure which could harm the client.

62 C Peach is still the beneficiary of the contract.

63 D A Managing General Agent (MGA) provides support to independent agents/brokers such as communication, compliance and training

64 C Assuris provides consumer protection in case of insurer insovency / bankruptcy. In this scenario, Assuris coverage for death benefits is 100% up to $200,000, or 85%, whichever is higher.

65 B Gifting/Enticing may be avoided if the amount of gift is not in cheque/cash, amount not excessive, and not intending to bribe the client into signing up.

66 B By default it the beneficiaries who claim for death benefit from life insurance. There could be other claimants in some specific situations

67 B After 2 years incontestability, claims would be denied in fraudulent misrepresentation, not unintentional mistakes

68 C In the event that there are no living beneficiaries and the policyholder is the life insured who passed away, benefits would be payable to the policyholder’s estate. The executor just manages the estate

69 C The payor does not necessarily have to be the policyholder, although commonly it would be.

70 B

E&O does not cover: intentional misconduct and criminal acts. A, C and D were intentionally done by the agent, while B is not intended by the agent.

71 B FINTRAC is in charge of investigating money laundering/terrorist financing/politically exposed people which are usually indicated by huge deposits.

72 B

“Dependant’s relief legislation” could apply in case the deceased person failed to make adequate provision for those who are owed a duty of support (for example, spouse and children). In such cases, the deceased’s estate may be sued for support because the deceased did not provide for the dependents. For this question, Levi failed to pay child support, so Sherraine may sue Levi’s estate for the unpaid amounts.

73 D Servicing a client entails the agent visiting the client regularly to re-assess their needs for insurance, in accordance with their current situation, due to changes that may happen in their personal life and finances

74 A

E&O does not cover: intentional misconduct and criminal acts and activities outside of what is licensed. Recommending purchasing shares is not an activity within the jurisdiction of Life insurance and A&S License. Other choices (claims of being undersold and oversold) are covered, and losing the briefcase is an unintended event, which may be covered.

75 B

This question is discussed in the Life insurance module.

Policy Loan is where the insured borrows up to 90% against the CSV. Upon death / surrender, the policy loan is deducted from the benefit or cash value.

Collateral Loan is where the insured assigns the policy as a “security” from a third party lender for a loan. Upon death / surrender, the lender has first right to claim from the benefit / cash value

76 B Canadian Life and Health Insurance Association (CLHIA) is the organization which outlines the code of ethics of the insurance industry

77 A After 2 years incontestability, claims would be denied in fraudulent misrepresentation, not unintentional mistakes

78 B

79 A

80 B

Churning is when an agent replaces his/her own client’s policy, without a particularly reasonable purpose except for earning more commission

For Seg funds and annuities, right of rescission is 2 business days (not including weekends)

For life insurance, A&S and disability policies, right of rescission is 10 days

For Seg funds and annuities, right of rescission is 2 business days (not including weekends)

Since Oct 13 and 14 are weekends, count only Oct 15 to 16

For life insurance, A&S and disability policies, right of rescission is 10 days

Adjustment of benefit due to discrepancy with age or sex

New rate ÷ Old rate = N

Old benefit ÷ N = New benefit

81 A

82 D

$17.20 ÷ $9.40 = 1.83

$500,000 ÷ 1.83 = $273,256

Adjustment of benefit due to discrepancy with age or sex

New rate ÷ Old rate = N

Old benefit ÷ N = New benefit

$17.20 ÷ $14.33 = 1.2

$500,000 ÷ 1.2 = $416,666

83 B By putting “my children” on the will, it makes all children (both legitimate and illegitimate) eligible for benefits in the will

84 C If a death benefit is payable to a minor, the guardian may accept the payment.

With deposits $10,000 or more in cash to a non-registered fund, the agent must report the client’s identity to FINTRAC

85 B

Exception is if the deposit is to a Registered plan (RRSP, RESP, RRIF, TFSA, etc)

A large cash transaction might qualify as suspicious transaction, however, the more immediate need (and thus more accurate answer) would be to ascertain / report client’s identity

86 A Chad is the named beneficiary. A term insurance automatically renews unless the policy is terminated.

87 C

88 A

89 A

Fronting is defined as situations in which an agent holds a license but chooses to have another agent who did not actually complete the transaction sign as the agent of record, or where an unlicensed person arranges the business and has a licensed person sign on their behalf.

A life insurance agent is required to ascertain the identity of a client purchasing an immediate or deferred annuity, or a life insurance policy that is not an exempt policy, and toward which the client is able to pay $10,000 or more over the duration of the annuity or policy, regardless of the method of payment.

The policyholder may change a beneficiary using a beneficiary designation or change form issued by the insurer, unless the existing designation is irrevocable. Since beneficiary designations must be in writing, they may also be found in other written documents such as a will, or other documents prepared and signed by the policyholder.

90 B

91 D

92 B

93 A

94 C

95 C

96 A

97 C

Ownership of family property is presumed subject to equal division when the married spousal relationship breaks down, but subject to a judge’s discretion.

Canadian Anti-Spam Legislation prohibits the sending of commercial electronic messages (CEM) i f the sender does not first have the recipient’s consent.

Losing a job signifies a change of insurability. If there is a change of insurability before the policy delivery, agent must not deliver the policy and must inform the insurer and await for further instructions.

Fronting is defined as situations in which an agent holds a license but chooses to have another agent who did not actually complete the transaction sign as the agent of record, or where an unlicensed person arranges the business and has a licensed person sign on their behalf.

Please refer to the A&S module for the discussion on this topic. The Private Health Services Plan (PHSP) is health fund for sole proprietors or partnerships and their families with a maximum limit of $1,500 contribution per owner and spouse and $750 for their children. They have a 2-year limitation to use the fund.

After 2 years incontestability, claims would be denied in fraudulent misrepresentation (omission of material information). Even if he has AD&D coverage, the AD&D coverage would not pay due to fraud.

After 2 years, suicide may be covered by life insurance. However, AD&D does not cover suicide and suicide attempts

“Dependant’s relief legislation” may apply if the deceased, who owes a duty of support to the dependents, fails to make sufficient provision. The dependents may include surviving spouse or children, and may sue the deceased person’s

98 A

99 D

The minimum age to purchase life insurance (to become a policyholder) is 16 years old. Therefore Susan, age 17, may become policyholder (at least 16 years old), and Susan has the right to name her parents as beneficiary.

Note: If beneficiaries are not yet of legal age, there must be a trustee for the beneficiary.

On death of life insured (or maturity of contract), the claimant must provide:

• Proof of Life insured’s death

• Proof of life insured age

• Proof of claim entitlement

• Claimant’s identity

With deposits $10,000 or more in cash to a non-registered fund, the agent must report the client’s identity to FINTRAC

Exception is if the deposit is to a Registered plan (RRSP, RESP, RRIF, TFSA, etc)

Learning notes:

Report to FINTRAC: In non-registered plans:

$10,000+ in cash transaction, report client’s identity

100 D

101 A

$100,000+ in planned deposit, report if Politically Exposed Foreign Person Third Party Deposits

In both non-registered and registered plans:

Suspicious Activities

Purpose of product

RCMP would be in charge to deal with criminal acts such as theft and fraud

It is important that the agent keep documentation of business dealings to protect him/herself in the case of lawsuit. In this scenario, the agent, Luisa, should document this showing that she has carried out her business correctly.

This is a standalone AD&D policy, no medical underwriting is needed, thus the cancer will not have anything to do with AD&D insurance. No medical underwriting is necessary for Personal Accident, Accidental Death / Dismemberment insurance.

102 A

If the AD&D coverage is a rider to a life insurance policy then medical underwriting may be needed due to the life insurance coverage.

103 D

104 B

This topic is found and discussed in the Segregated Funds & Annuities Module

Looking for Principal, use Present Value formula

Present Value Formula

FV ÷ (1+rate)years = PV

$95,000 ÷ (1+0.03)20 = PV

$95,000 ÷ 1.03 20 = PV = $52,599.20

This topic is found and discussed in the Segregated Funds & Annuities Module

Looking for Future Value, use Future Value formula

Future Value Formula

PV x (1+rate)years = FV

$32,875.50 x (1+0.03)20 = FV

$32,875.50 x 1.03 20 = FV = $59,377

105 C It is still the policy owner’s right to name a beneficiary. The will is where Ronald might see any asset bequeathed to him.

106 A Email marketing distribution is covered by anti-spam legislation. “Spam” refers to unsolicited email marketing.

107 C

108 B

Death benefit with named beneficiaries will be creditor proof. The policy that goes to the estate will be subject to creditors.

The two policies with named beneficiaries will pay out to the beneficiaries directly, bypassing the estate.

A is incorrect - the mother requests for it in a family business does not comply with industry requirements against fronting.

C and D are incorrect – the son is signing in his name not in Briana’s name because he is licensed. Therefore it cannot be forgery.

A is incorrect. Tied selling is making purchase of one product conditional on the purchase of another B is incorrect. Forgery is copying signature, falsifying documents

109 C

110 A

111 C

C is correct. Fronting is when other people (licensed or not ) transact for an agent. Franz took the application forms for the licensed agent Gino to sign. This is not allowed. Gino must be present and take the applications. D is incorrect. Trafficking is being an agent in selling an in-force policy for cash

Life insurance and mortgage are related industries and may refer clients to each other with client’s consent. Referral fee is allowed but must be disclosed to client.

The new policy issued because of the conversion is usually treated as an extension of the original policy for contractual purposes. This means that the clock is not reset for the purposes of applying important legal provisions, such as the incontestability limitation and suicide limitation

Chapter 01

Introduction to Life Insurance

• Key Concepts:

º Risk of Death

º Potential financial impact of death

º Risk management strategies

Question 01

Lucas owns a property that he uses as his principal residence. He resides in the property with his 20 yr old son Jake. The property has $250,000 mortgage registered against it. Upon his death, Lucas would like to gift the property to his son provided his son takes over the mortgage.

Lucas is retired and collect OAS and CPP but not enough to cover his monthly expenses. Jake earns $100,000 a year but has a bad credit history. However, Jake is able to pay the mortgage. Which of the following financial impacts of death should be of the most concern?

a. Loss of Lucas’ income

b. Debt repayment

c. Capital gains tax on residence

d. None of the above

Risk of Death

Two ways of looking at the risk of death:

• Life Expectancy

º The average number of years a person of a group & age can expect to live from that age

• Probability of death (Mortality)

º The chance of which a person of a group & age could die within that age

• Life Insurance deals with Mortality

• Mortality Factors

º Age (Older is riskier, but infants are high risk)

º Gender (Males are riskier than females)

º Health (Including family medical history)

º Lifestyle (Smoking, habits, hobbies, travel)

º Occupation

º Income level (may impact risk but not premiums)

Financial Impact of Death

• Final expenses: Funeral, probate, taxes

• Estate protection: Debt repayment and income taxes

• Estate creation: Education, legacy or charitable giving

• Loss of income: Supporting the family expenses

• Loss of caregiver: Taking care of the dependents

• Business protection: Key person insurance, buy sell agreements

Situations when life insurance is not that important:

• If there are sufficient funds/coverage to cover needs upon death

• If there are no obligations/responsibilities (like debt, taxes, family)

Question 02

Belinda recently bought a brand-new vehicle. She purchased automobile coverage that will either repair at or guarantee full replacement value if the vehicle is damaged in an accident. Which risk management strategy is she employing?

a. Risk reduction

b. Risk transfer

c. Risk avoidance

d. Risk retention

• Risk Transfer – Insure Risk Management

• Risk Avoidance – Don’t do it

• Risk Retention – Take risk

• Risk Reduction – Take safety

Question 03

Karen is excited to spend her summer vacation and has listed her to do things such as camping, fishing, and swimming at the man-made beaches in Winnipeg. She is concerned of having to deal with sunburn and buys an ultra sunblock lotion 30 SPF. Which risk management strategy is she employing?

a. Risk reduction

b. Risk transfer

c. Risk avoidance

d. Risk retention

Question 04

Which of the following is NOT an example of risk retention?

a. Saving up funds in case of emergency

b. Smoking

c. Having life insurance

d. Having no life insurance

Chapter 02

Term Life Insurance

What ‘Term’ means

• A period of time of fixed coverage and premiums, as long as the premiums are paid.

• Common Terms: 5 years (T-5), 10 years (T-10) or 20 years (T-30), or to a specific age (e.g., Term to age 65).

• Generally insurers have a maximum age limit to cover (like 70, 85, 90) because the risk is too great.

• Temporary

• Inexpensive

• Pure insurance

• No cash value

• Level Premium for the term

• (OPTION) RENEWABLE

• (OPTION) CONVERTIBLE

Joint First to Die

• Payout benefit on first death, terminates after payout.

• Use for Family – if surviving spouse needs benefit, or to pay off a shared debt like mortgage.

• Use for Business– for buy-sell agreements (see Insurance for businesses notes/video)

Joint Last to Die

• Sometimes, Joint second to die

• Payout benefit on last death, terminates after payout

• Usually used to cover tax on death or to give benefit to children

Uses of Term Insurance

• Short term risk

• Decreasing risks (such as mortgage, children)

• Limited cash flow

Modal Factor

• Added cost for shorter installments vs Annually

Common modal factors:

• Monthly premium = 0.087 to 0.09

• Quarterly premium = 0.26 to 0.30

• Semi-annual premium = 0.51 to 0.53

Formulas regarding modal factor:

• Modal factor = installment premium ÷ annual premium

• Installment premium = Annual premium x modal factor

Example: $240 annual premium x 0.09 modal factor = $21.60 monthly premium

Question 05

A life insurance coverage has an annual premium of $200 with a .09 modal factor if paid monthly. How much will the client save if the client pays the annual premium?

a. $1.50

b. $4.00

c. $16.00

d. $18.00

Term Insurance Monthly Premiums

• T-10: Cost increases every 10 years.

• T-20: Cost increases every 20 years.

• T-30: Cost increases every 30 years.

• The longer the term, initially cost is higher, but cost would not increase for longer

Renewable and Convertible Options

Renewable

• Policyholder has the guaranteed right to renew the policy until a specific age for the same face amount, no medical needed

• Higher Cost

• Renewal is automatic if not cancelled at end of term

• Rates for renewal could be guaranteed rates, or re-entry with adjustable rate (depending on health on renewal, could become more expensive if health has deteriorated)

Convertible

• Option to convert the policy from term to any permanent insurance

• Up to same amount of coverage, no medical needed

Question 06

Regarding Term Life Insurance, which of the following is true?

a. Term insurance policies retain the same cost if converted to a permanent policy before the end of the term

b. Term insurance policies retain the same cost if renewed at the end of the term

c. Term policies require medical insurability to exercise the renewable and convertible features

d. T-30 policies are initially more expensive than T-10 policies

Death benefit options

• Level death benefit

• Decreasing death benefit

º For mortgage insurance

• Increasing death benefit

º Usually annually or every five years

º Can be a fixed dollar or fixed percentage

Amount

$ Time Level Death Benefit Increasing Death Benefit

Decreasing Death Benefit

Question 07

Curtis, who is 34 years old, has a 10 year renewable and convertible-to-age-65 term insurance policy. Premium payments are automatically deducted from his bank account on a monthly basis. Knowing he had ample money in his bank account, Curtis didn’t think to tell the insurer that he would be on vacation to the Philippines for the next two months during the winter. Curtis wants to completely forget about life for a while, so he did not bring a cell phone and has no intentions of being connected. Curtis did not realize that, while he was away, his policy would expire and as a result would need to be renewed for another term.

What will likely happen to his policy?

a. The policy will automatically renew and remain in force

b. The policy will lapse after 31 days from the end of the current term. The policy could be reinstated over the next two years and, as an exception, would not require evidence of insurability

c. The policy will lapse after 31 days from the end of the current term and cannot be reinstated

d. The policy converts to T-20

Chapter 03

Whole Life and Term-100 Insurance

Whole Life Premiums

Mortality Cost

• Age (older is riskier, but infants are high risk)

• Gender (males are riskier than females)

• Health (including family medical history)

• Lifestyle (smoking, habits, hobbies, travel)

• Occupation

• Income (may impact risk, but usually does not impact premiums)

Admin Expenses

• Policy Fees (Depends on the Insurance Company)

• Insurance Tax (Depends on the province)

Question 08

Investment

• Lower rate of return/interest rate would result in increased premiums

Modal Factor

• Added cost for shorter installments vs Annually

Limited Pay (Example: 30 years) Lump Sump

Ongoing Pay (Lifetime payment)

Kara and Sara are twin daughters who did and have things almost alike. Aside from looking alike, they both have whole life insurance policies with the same face amount, but with a small difference – Kara’s policy was participating while Sara’s policy was non-participating. When they died at the same time, which of the following could be true pertaining to their policies?

a. Sara’s policy would have a bigger payout due to the smaller cost than Kara’s policy

b. Kara’s policy would have a bigger payout due to the flexibility offered by dividend options

c. Bobsled is considered an extreme sport and is excluded from coverage

d. Both would have equal death benefits due to the fact their both whole life and death benefit is level

• Participating

º Dividend options (insurer shares surplus)

– To be selected at policy application

º Cash out

º Pay Premiums (Premium offset)

º Reinvest with interest

º Add Permanent Coverage (PUA – paid up additions)

º Term Insurance Addition

º More cost

• Non-Participating

º No dividend options

º Less cost

Question 09

Which of the following statements best describes the change in the probability of death as one ages?

a. The probability of death remains level given the odds of dying in an accident is the same regardless of one’s health of age

b. With the exception of the few years in life, the probability of death starts low and then increases slowly until the age 40. At age 40, it increases dramatically

c. The probability of death starts low and increases incrementally each year at about the same rate

d. The probability of death starts low and increases incrementally each year at about the same rate until 40. At age 40, the probability of death still increases at a slower pace

Question 10

Regarding the frequency of premium payments for most policies, which is true?

a. Paying monthly premiums end up being more expensive than annual premiums

b. Premiums can only be paid monthly

c. Paying annual premiums end up being more expensive than monthly premiums

d. Paying monthly premiums has the same cost as paying annually

Non Forfeiture Options for Whole Life

Using cash value to maintain coverage

Automatic Premium Loan (APL)

• Have a loan based on CSV to pay premiums and maintaining policy until cash value runs out. Interest would incur

• If insured needs to continue coverage but not able to pay at the moment

Reduced Paid-up Insurance

• Reducing coverage to a specified amount on policy, policy is paid-up (insured does not have to pay premiums)

• If liability is reduced (usually for older clients) and insured cannot afford / does not want to pay the insurance premiums

Extended Term Insurance

• Stop paying premiums, coverage remains the same but policy will not cover for life.

• If insured cannot pay premiums but wants to keep coverage for as long as possible

Types of Life Insurance

• Temporary

• Inexpensive

• Pure insurance

• No cash value

• Level Premium during the term

Options:

• Renewable – Renew at end of term

• Convertible – Could be converted to permanent

• USE: if budget is limited, temporary responsibility (i.e. mortgage, children)

• Guaranteed cash value

• Premiums to age 100, or limited payment like 20 years, or single premium

• Death benefit could be Guaranteed (less risk) or Adjustable (more risk)

• USE: permanent protection and conservative investor

Term-100

• Permanent without cash value

• Coverage for life (sometimes paid out at age 100)

• Level premiums paid to age 100 (or limited payment like 20 years)

• At age 100, premiums stop but coverage continues until death

Question 11

Regarding T-100 life insurance policies, which is true?

a. Term-100 is classified as a term insurance policy

b. Term-100 is classified as a permanent insurance policy

c. Term-100 is cheaper than Term insurance initially

d. Term-100 policies hold cash value

Question 12

Regarding T-100 life insurance, who of the following would use this best?

a. Johnny, a 60 year old retiring executive looking to cover his final expenses and leave some money to charity

b. Jill, a 35 year old single mother working two full-time jobs taking care of two children under the age of 10, looking for insurance to provide survivor support

c. Jamil, a 40 year old accountant, married and recently purchased a condo in Vancouver, looking to cover the mortgage

d. Jackie, a 45 year old marketing consultant looking to find a tax-sheltered investment opportunity

Use for Term-100

• Need permanent protection

• Not interested in cashing out

• Old people (no time to invest)

Types of Life Insurance

• Temporary

• Inexpensive

• Pure insurance

• No cash value

• Level Premium during the term

Options:

• Renewable – Renew at end of term

• Convertible – Could be converted to permanent

• USE: if budget is limited, temporary responsibility (i.e. mortgage, children)

Question 13

• Permanent without cash value

• Coverage for life (sometimes paid out at age 100)

• Level premiums paid to age 100 (or limited payment like 20 years)

• Guaranteed cash value

• Premiums to age 100, or limited payment like 20 years, or single premium

• Death benefit could be Guaranteed (less risk) or Adjustable (more risk)

• USE: No cash out, for older people who want permanent coverage

• USE: permanent protection and conservative investor

What is NOT a characteristic of Whole life policies?

a. Insured determines the premium and investment option

b. Guaranteed coverage

c. Has non-forfeiture options

d. May offer dividends if participating

Question 14

Karim, age 45, is a conservative investor. He wants to be certain that he never loses money. He has a business and is very particular about the details about his estate plan. Karim has approached you to inquire about life insurance to cover his capital gains tax on death. He wants to be certain that his policy will not lapse if he is unable to pay premiums. Which type of policy would you suggest?

a. Universal Life

b. Whole Life

c. T-100

d. Term 20 years

Universal Life

• Key Concepts:

º Transparency through unbundling

º Flexibility for policyholder

º Insurance component pricing (Cost of insurance types)

º Death benefit options

º Accumulating funds

Question 15

Linda, a female non-smoker aged 25, and Edilberto, a male smoker aged 45 and have both purchased universal life insurance policies, which they both pay the same monthly premium, and have the same face amount. Which of the following would be false with respect to their policies?

a. Edilberto’s policy would have a smaller fund value than Linda’s policy after some time

b. Edilberto’s policy would have a smaller cost of insurance than Linda’s policy

c. Edilberto may pay more premiums if he wants to have the same fund value as Linda’s policy

d. Edilberto’s policy would have the same death benefit as Linda’s policy

Flexibility for the Policyholder

Timing and amount of Premiums

• How much to pay and when to pay

Face amount

• Increase of decrease coverage

Life/Lives insured

• Single life or joint life basis

Investment Choice

• Daily Interest account

• Guaranteed investment account

• Index funds investments

• Mutual fund investment

Question 16

Maja is looking to purchase a universal life policy. You find out that aside from being young, she has a good risk tolerance towards investing. She has a good amount of disposable income and wants to have maximum growth on her funds. Which of the following Universal Life cost and investment option would be suitable for her?

a. Level cost of insurance, with deposits going to Balanced Funds

b. Level cost of insurance, with deposits going to Far East Funds

c. Yearly renewable term mortality costing, with deposits going to Equity Funds

d. Yearly renewable term mortality costing, with deposits going to Income Funds

Universal Life Cost Types

Yearly Renewable Term (YRT)

• Low initial cost, increasing cost over time

• Aggressive

• Investment opportunity

Level (T-100)

• Higher initial cost, fixed cost over time

• Conservative

• Stability Net amount at risk (NAAR)

Universal Life Cost

• NAAR = death benefit – investment account value

Guaranteed vs adjustable mortality deductions

• Guaranteed mortality cost is fixed, as stated on the policy

• Adjustable mortality cost means rates could fluctuate depending on number of claims (experience)

Level Death Benefit

• The Death Benefit is the Face amount (or Fund Value, whichever is higher)

• NAAR = Death Benefit – Account Value

• NAAR decreases as the Fund Value increases

Level + Account Value

• Face Amount + Investment Value

• NAAR is fixed

Level + Cumulative Premiums

• Face amount + Total deposits

• Refund of premiums, NAAR decreases as the investment fund generates returns

Accumulating

Fund could be used by:

Surrendering the policy

• Termination of policy, cash value less surrender charges, taxable if there is policy gain

Policy withdrawals (partial surrender)

• Taxable if there is policy gain, cash value is reduced

Premium offsets

• Use fund for paying premiums

Indexed Death Benefit

• Increasing due to inflation

• The rate of increase may be a fixed or adjustable amount

• NAAR varies according to Fund Value

Policy loans

• Could borrow up to 90% of cash value, taxable if Policy Loan exceeds ACB Collateral loan

• Via third party lender, tax free loan Leveraging

• Borrowing to invest, interest is tax deductible

Distribution upon death

Question 17

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

Types of Life Insurance Summary

• Temporary

• Inexpensive

• Pure insurance

• No cash value

• Level Premium during the term

Options:

• Renewable – Renew at end of term

• Convertible – Could be converted to permanent

• USE: if budget is limited, temporary responsibility (i.e. mortgage, children)

• Permanent without cash value

• Coverage for life (sometimes paid out at age 100)

• Level premiums paid to age 100 (or limited payment like 20 years)

• Guaranteed cash value

• Premiums to age 100, or limited payment like 20 years, or single premium

• Death benefit could be Guaranteed (less risk) or Adjustable (more risk)

• Flexible investment and premiums

• Has risk factor, depending on structure/ investment

• Flexible premium, no modal factor

• Unbundled insurance & investment

• Cost could be LEVEL (T-100) or Yearly Renewable Term

• Tax Rules Apply

• USE: No cash out, for older people who want permanent coverage

Death Benefit Options Summary

• USE: permanent protection and conservative investor

benefit remains the same, basic type, least expensive in general

• USE: permanent protection and aggressive investor, wants flexibility

Question 18

Mandy purchased a UL 10 years ago. The policy provides a death benefit equal to the face value plus cumulative premiums. The original coverage was $500,000. Mandy made a lump sum payment of $72,000. The policy has $45,000 within the investment component. How much can her beneficiaries expect to receive?

a. A Tax-free death benefit of $617,000

b. A taxable death benefit of $572,000

c. A Taxable death benefit of $617,000

d. A tax-free death benefit of $572,000

Types of Coverage Setups

Joint Coverage

Joint First to Die

• Payout benefit on first death, terminates after payout

• Use for family – if surviving spouse needs benefit or to pay off a shared debit like mortgage

• Use for business – for buy-sell agreements (see insurance for business notes)

Joint Last to Die

• Sometimes, Joint Second to Die

• Payout benefit on last death, terminates after payout

• Usually used to cover tax on death or to give benefit to children

Question 19

Al and Duby Santos have been married for 25 years. They are both self-employed and have no children. Al is a highly recommended surgeon, and Duby owns her own high-end salon. Duby is the primary caregiver of her sister, who has some disability and unable of ever becoming self-sufficient.

The couple would like to leave all their assets to Duby’s sister should they pre-decease her. Since they own a cottage that has appreciated in value, the couple would like to purchase a policy to cover the capital gains tax at death.

The couple are very busy and would like to own a low-maintenance policy. Which of the following would be the least appropriate?

a. Universal Life

b. Participating Whole Life Insurance

c. Term to 100 Life Insurance

d. Non-Participating Whole Life Insurance

Question 20

Belinda, age 21, bought a cottage for $100,000 and had a $25,000 down payment. The remaining $75,000 was financed through a bank mortgage. The amortization period on her mortgage was 10 yrs. with a five-year term. Over the next five years, the mortgage rate will be locked in at 5%. She would like to buy a life insurance policy that will pay out the mortgage upon her death. She has no other use for insurance and would therefore like to keep the premium to a minimum. What policy would you recommend to address Belinda’s stated needs?

a. Term to 100

b. 10 year decreasing term insurance

c. 10 year renewable term insurance, renewable to age 40

d. 5 year renewable level term insurance, renewable to age 35

Question 21

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 log 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

Question 22

Which of the following would be the best use of a joint-first-to-die T-20 Life insurance policy?

a. Gifting inheritance to the surviving spouse upon death

b. Future use of CSV through a policy loan

c. Pay capital gains taxes on a cottage owned jointly

d. Pay off their mortgage upon death

Question 23

Jill owns and operate her own farm which she inherited from her deceased spouse, Jack. The chicken farm has been in operations for 45 years since this business was also inherited by Jack. It employs two chicken breeders who are vital to the farm’s success. The death of these employees would greatly impact the business and Jill would like to purchase a 200,000 in permanent key person life insurance on each of the breeders. Jill disclosed that one of the employees appears a little disgruntled and Jill may have to train a replacement should this employee leave.

If Jill’s concern is having to hire another chicken breeder, what policy would you recommend?

a. Limited pay Whole Life policy

b. An adjustable Whole Life policy

c. Universal Life policy

d. Convertible Term insurance policy

Chapter 05

Riders & Supplementary Benefits

• Key Concepts:

º Riders that provide additional benefits upon

º Supplementary benefits (in addition to death benefit)

Riders That Provide Additional Benefits Upon Death

• Paid up Addition (PUA) Rider

• Term Insurance Riders

• Accidental Death Rider

• Guaranteed Insurability Benefit (GIB)

Question 24

• Child Term Rider

• Family Coverage Rider

• Term Rider

What is true about the Guaranteed Insurability Benefit (GIB) rider?

a. With a lump sum payment, policy coverage would increase

b. The policy coverage may be increased regardless of the insureds current health status

c. The GIB rider could be exercised any time with increases to any amount desired

d. All of the above

Riders That Allow Additional Coverage Later Without Medical

Paid Up Addition (PUA) Rider

• Can buy additional permanent coverage at certain times and amounts with lump sum payment, no medical required

Guaranteed Insurability Benefit (GIB) Rider

• Can add coverage at certain times & amounts with added premium, no medical required

Question 25

Charlie would like to purchase a policy from you. He would like to have a policy which has an investment component, however he is concerned about the cost of the policy. He also has a mortgage to pay. What would you recommend to Charlie?

a. A 20 year Term policy with a GIB rider

b. A Term-100 policy with a 20 year term rider

c. A Whole Life policy with a 20 year term rider

d. A Universal Life policy with a GIB rider

Question 26

How old must a child be to have his/her life insured?

a. 1 Day

b. 15 Days

c. 1 Month

d. 3 Months

Question 27

Janice and John both need life insurance but they have a very tight budget and they want to insure their children also. What rider do they need?

a. Spousal Rider

b. GIB

c. Child Rider

d. Family Rider

Riders to Add Family Members

• Children Rider

• Family Coverage Rider

Term Insurance Rider

Term Rider

• For temporary needs or for affordable coverage

Compare the Cost

• $500,000 UL

• $200,000 UL + $300,000 T-20 Rider

Accidental Death (AD) Rider

• Extra benefit payout if cause of death of insured is an accident

• May be a certain face amount, or multiply the original death benefit

• Example: $25,000 Coverage or x2 the face amount of $300,00

Question 28

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 & Guaranteed Insurability Benefit (GIB)

d. Term Insurance & Waiver of Premium Supplementary Benefits

Accidental Dismemberment

• Benefit if limb or body function is lost in accident

• Within 1 year of accident

Critical Illness Rider

• Dread Disease Benefit

• Benefit if life insured survives 30 days of critical illness (see A&S module)

Terminal Illness Rider

• Policyholder can advance a part of the death benefit if the life insured is diagnosed of an illness not survive for one or two years

Waiver of Premium

• On total disability, premiums are waived after waiting period (90 days)

Parent/Payor Waiver

• Waiver of premium if policyholder is different from life insured

• Parent waiver: also covers parent’s death, waives until child reaches a certain

Chapter 06

Group Life Insurance

Example of Groups

• Employer sponsored plans offered to employees, or managers/executive

• Alumni Association of College/University

• Occupational Association (ex. Unions like AUE, BCNU)

• Business Association (ex. Calgary Chamber of Commerce)

• Retail Association (Ex. Costco, Co-op)

Group Membership

• Actively at work requirement

Tax Treatment

• Tax deductible expense for employer

• Premiums are taxable benefit to employee

• Death benefit will remain tax free

Additional Coverage

• Dependent life coverage (spouse & kids)

Benefit Schedule

• Earnings multiple

• Flat rate

• Length of Service

• Combination

Conversion Privilege

• May convert into individual coverage, for the same amount, no medical needed

• Conversion should be done within 31 days of leaving group

Chapter 07

Taxation of Life Insurance & Tax Strategies

• Key Concepts:

º Life Insurance Taxation

º Grouping of Life Insurance Policies

º Calculation of Adjusted Cost Base in Life Insurance

º Taxation of Policy Dividends

º Taxation of Full Surrender

º Taxation of Partial Surrender

º Taxation of Policy Loan

º Taxation of Collateral Loan

º Taxation of Exempt vs Non-Exempt Policies

º Absolute Assignment

º Taxation of Life Insurance Strategies

Question 29

Carmelo had purchased a $100,000 life insurance policy on his own life. Recently, he had passed away and his beneficiaries made a claim. How much is the taxable income on the death benefit?

a. $100,000

b. $50,000

c. $25,000

d. $0

Question 30

Alex had purchased a $200,000 universal life insurance policy on her son’s life. The policy had a level plus account value death benefit. Tragically both Alex and her son died and there was no beneficiary. At the time of death, the accumulated cash value is at $35,000. How much would be taxable to the estate of Alex?

a. $235,000

b. $200,000

c. $35,000

d. $0

• Death benefit is tax-free, even if it includes in investment portion

• Cash value (investment) while alive is tax exempt, but taxes may apply depending on how it used

• Group Insurance: Premium paid by employer is taxable income for employee

G1 vs G2 vs G3

Group 1 (G1) Policies

• Acquired prior to December 02, 1982 & not modified or ownership transferred ever since

• ACB calculation is simpler and there are less tax restrictions

Group 2 (G2) Policies

• Acquired between December 02, 1982 & Jan. 01, 2016

• Compared to G3 policies, ACB is higher initially but grows slower

Group 3 (G3) Policies

• Acquired 2016 onwards

• Compared to G2 policies, ACB starts low initially but grows quickly

Question 31

Adjusted Cost Base (ACB)

• The principal for taxation purposes

• Always start with premium because that is what you paid into the policy

• G1 (Before Dec 02 1982): ACB = Premiums – Dividends

• G2 & G3 (Dec 02 1982 Onward):

ACB Full Formula

ACB = Premiums & Payments – Net Cost of Pure Insurance (NCPI) – Dividends (Taken – Reinvested) –Policy Loans (Loans – Interest)

ACB Simplified Formula

ACB = Money in – Money Out

In 2001, Carla purchased an existing participating whole life insurance policy on her mother’s life through an absolute assignment for $3,000. The policy was initially purchased by her mother’s employer prior to Dec. 1, 1982. Carla has paid a further $13,000 in premiums since purchasing the policy, $7,000 of those premiums can be directly attributed to the net cost of pure insurance (NCPI.) Over the years, the policy paid out $1,200 in dividends. Carla took $500 of the dividends in cash and used the rest to buy PUAs. Last year, she took out a $200 policy loan via the APL non-forfeiture option. The interest paid on the loan was $20. Carla is now surrendering the policy. The cash surrender value (CSV) is $12,000.

What would be the adjusted cost basis (ACB) be?

a. The ACB would be $16,020, resulting in a negative policy gain and therefore not taxes owed.

b. The ACB would be $9,020, resulting in a policy gain of $2,980, of which half is subject to tax.

c. The ACB would be $16,020, resulting in $4,020 policy gain, which is fully taxed.

d. The ACB would be $9,020, resulting in a policy gain of $2,980, of which is fully taxed

Policy Dividends Taxation

• Dividends are earned from Participating Policies

• A policy gain is made (taxable) if dividends cashed out exceeded the ACB

• Dividends cashed out is money out, thus reduces the ACB

• Dividends used to purchase extra coverage (PUA/Term Addition) or reinvested or pay back policy loans increase ACB (Money In)

Question 32

Cash Value Taxation (Withdrawal)

• Full surrender: there will be policy gain

• Policy Gain = CSV – ACB

Larry had purchased a $150,000 universal life insurance policy on his own life. 20 years later, he had accumulated $30,000 in his cash value. The adjusted cost base of the policy is $12,000. How much will be taxable if Larry decides to surrender his policy?

a. $30,000

b. $18,000

c. $9,000

d. $0

Cash Value Taxation (Withdrawal)

• For G1 Policies: Withdrawals/reduction of coverage are only taxable if ACB is exceeded

• For G2 & G3 Policies: If the policy holder reduces the coverage, it is considered a disposition. There will be policy gain (taxable)

Cash Value Taxation Formula

Policy Gain (Taxable) on Withdrawal = (CSV – ACB) x (withdrawn ÷ CSV)

Cash Value Taxation Simplified Formula

Policy Gain (Taxable) on Withdrawal = (CSB – ACB) x %withdrawn

Question 33

Barry had purchased a universal life insurance policy on his own life. Some time later he had accumulated $20,000 in his cash value. The adjusted cost base of the policy is $10,000.

How much will be taxable if Barry decides to withdraw $2,000 his policy?

a. $10,000

b. $8,000

c. $2,000

d. $1,000

Reduction of Coverage

• For G1 Policies: Withdrawals/reduction of coverage are only taxable if ACB is exceeded

• For G2 & G3 Policies: If the policy holder reduces the coverage, it is considered a disposition. There will be policy gain (taxable)

Reduction of Coverage Formula

(Current coverage – new coverage) ÷ current coverage = % of disposed (or reduced) Policy Gain (Taxable) on reduction of coverage = (CSV – ACB) x % disposed

ACB & CSV will also be reduced by the percentage disposed/reduced

Question 34

William owns a $350,000 universal life insurance policy on his own life. 20 years later, he had accumulated $30,000 in his cash value. The adjusted cost base of the policy is $12,000. He decided to reduce his coverage to $250,000.

What is new Cash Value of William’s policy after the reduction is applied?

a. $21,429

b. $18,000

c. $8,571

d. $5,143

Cash Value Taxation (Policy Loan)

• Borrowing from the insurance policy (from the insurer)

• Can borrow up to 90%

• Tax-free up to ACB

• Policy gain (policy loan) = policy loan excess of ACB

Question 35

Larry had purchased a $150,000 universal life insurance policy on his own life. 20 years later, he had accumulated $30,000 in his cash value. The adjusted cost base of the policy is $12,000.

How much will be taxable if Larry decides to borrow $8,000 policy loan on his policy?

a. $30,000

b. $18,000

c. $8,000

d. $0

Question 36

Barry had purchased a universal life insurance policy on his own life. Some time later he had accumulated $20,000 in his cash value. The adjusted cost base of the policy is $10,000.

How much will be taxable if Barry decides to take a $12,000 policy loan his policy?

a. $10,000

b. $8,000

c. $2,000

d. $400

Cash Value Taxation (Collateral Loan)

Collateral

• Pledged something as a security for a loan

• Similar to pawning something for money

• Not taxable income

• Different from policy loan, uses a third party lender with the policy as security

• May claim interest for tax deduction if loan is used for business (leveraging)

Question 37

Garry had purchased a $250,000 universal life insurance policy on his own life. Some time later he had accumulated $50,000 in his cash value. The adjusted cost base of the policy is $30,000.

How much will be taxable if Garry decides to take a $40,000 collateral loan his policy?

a. $20,000

b. $16,000

c. $10,000

d. $0

Question 38

Harry had purchased a $250,000 universal life insurance policy on his own life. He had pledged his policy as collateral on a loan. When Harry died, $40,000 was the outstanding balance.

How much would be paid out to the beneficiary?

a. $250,000

b. $210,000

c. $40,000

d. 0

Question 39

Darna is surrendering her life insurance policy. She was please to learn that her policy is subject to the new rules, which result in a lower ACB. What is Darna probably not understanding?

a. A lower ACB results in a lower CSV

b. A lower ACB reduces access to the APL non-forfeiture option

c. A lower ACB will not impact CSV, but will increase the policy gain resulting in more tax if surrendered

d. A higher ACB results in a lower death benefit

Universal Life Tax Rules

Tax exemption test on life insurance

• Subject to Income Tax Act to make sure that the life insurance purchased is being used as a life insurance & not as investment

• All life insurance issued before Dec 02, 1982 (G1) are tax exempt

• Maximum Tax Actuarial Reserve (MTAR)

– Tax exempt limit

• 250% Anti-Dump In Rule

– Penalizes dumping money in old policies

Question 40

Which is FALSE regarding the Maximum Tax Actuarial Reserve (MTAR) rule?

a. The MTAR is the distinguishing boundary between insurance and investment

b. A Universal Life (UL) Policy may increase its face amount up to 8% to keep the policy tax-exempt

c. The policy owner can deposit as much as he/she wants into a universal life policy tax-exempt

d. Funds above the MTAR are put into a side-account where it is subject to taxation

MTAR

The tax exemption limit rule – exceeding the limit is not good

• Uses a hypothetic policy called the Exempt Test Policy

• Year 0 to 95, cash value from $0 to the face amount

• Cash value must not exceed the annual maximum

Remedies

To avoid the policy failing the exempt test, there are some remedies:

• Excess investment put into taxable side account

• Increase face amount up to 8% per year

• Withdraw some funds (could have tax)

250% Anti-Dump In Rule

• Affects old policies – Starts at year 10, multiply the fund value 3 years ago by 2.5 (or 250%)

• Example: On year 10, look back 3 years. Year 7 fund value is $15K. $15K x 2.5 = $37,500

• Penalty if 250% is reached – MTAR will roll back 3 years earlier, making the tax exempt limit smaller

Question 41

Which statement is false regarding the anti-dump in rule?

a. The anti-dump-in rule will apply on the policy’s first year

b. The policy’s cash value is compared with the usual lower MTAR of the newly updated ETP which makes it more prone to failing the exempt test

c. The anti-dumping provision resets the date of the exempt test policy (ETP) to the third preceding year anniversary

d. Remedial measures to avoid effect of anti-dumping provision is to withdraw cash from the accumulating fund, or moving it to a taxable side account.

Question 42

Which of the following UL policies would be affected by the anti dump in rule?

a. A policy purchased 3 years ago, and the policyholder paid a lump sum $250,000

b. A policy whose fund value at year 15 is $86,000, and at year 18 is $106,000

c. A policy whose fund value at year 20 is $59,000 and at year 23 is $150,000

d. A policy purchased 10 years ago, fund value is currently $15,000, but 3 years ago was $7,000

Life Insurance Taxation Strategies

Use Policy as Collateral

• Leveraging: Borrow to invest, interest is tax-deductible

• Part of premium may be deducted from income

Annuitizing the CSV

• For disabled persons: Surrender part of the CSV to buy an annuity that will provide income support

• Some tax relief given to disabled: Allowed to spread the taxable gain over the life of the annuity

Leveraging a Policy

• Insured Retirement Plan: Using CSV as collateral for tax-free loan

• Interest may be paid or capitalized (not paid until death)

• Upon death, life insurance pays the loan balance & remainder goes to beneficiaries

Charitable Giving

• Assigning new or existing policies to charity: Further premiums would become charitable donations tax credit

• If there is existing CSV, it is disposition (taxable) but a considered corresponding donation for tax credit

• Naming charity as beneficiary: Only the benefit on death is considered charitable donation for tax credit. Estate may use this to reduce final tax

Chapter 08

Business Life Insurance

Potential Impacts of Death on a Business

• Loss of skills

• Creditor demands

• Family interference

• Equality for family members

• Capital gains tax

Business Types

• Sole Proprietorship

• Partnerships

• Corporations

º Public vs Private Corporations

Capital Gains Exemption on Canadian-Controlled Private Corporations

• It is not listed on a public stock exchange

• It is resident in Canada

• It is not controlled, directly or indirectly, by one or more non-president persons

• It is not controlled, directly or indirectly, by one or more public corporations

• Key Concepts:

º Potential Impacts of Death on a Business

º Business Types

º “Key Person” Life Insurance

º Buy-Sell Agreements

º Capital Gain and Capital Gains Exemption

Capital Gains Taxation Formula

Fair Market Value – ACB = Capital Gains

Capital Gains x 50% x MTR = Capital Gains Taxes Owing 50% = Inclusion Rate to Taxes

Capital Gains Exemptions Formula

Lifetime Capital Gains Exemption (LCGE)

• Can be used to reduce capital gains when CCPC qualified shares a family farm or fishing business disposed

Capital Gains Exemptions Formula

Fair Market Value – ACB = Capital Gains (Capital Gains – LCGE) x 50% x MTR = Capital Gains Taxes Owing

“Key Person” Life Insurance

• Insuring the company’s vital employee

• Death benefit will be tax free and could use the benefit to help the business survive

• Split dollar arrangement

º Employee owns the cash value; employer owns the death benefit or vice versa

Buy-Sell Agreements

Cross-Purchase Agreements

• The other owners agree to buy the interest of the deceased owner (total number of shares)

• Why buy sell agreements are important:

º Guaranteed Buyer

º Guaranteed Value

º Mandatory Sale

º Guaranteed funding through life insurance

For more detailed information, see the “Insurance for Businesses” study guide/video

Chapter 09 Application & Underwriting

• Key Concepts:

º Process Overview

º Application

º Temporary Insurance Agreement (TIA)

º Underwriting by the Insurance Company

º Risk Classes & their Impact on Premiums

— Factors that May Affect Premium

º Reinsurance

º Issuing the Policy

Process Overview

1. Agent helps collect information the insurer requires for underwriting (assessing risk)

2. Completing the application

• To start underwriting, application must be made. The agent works with the applicant to complete the application form (and other supplementary forms) for insurance.

The agent must:

• Ensure complete and accurate information is provided on the forms

• Explain the consequences of non-disclosure (misrepresentation)

• Verify identities of applicant life insured & policyholder with valid ID (passport, DL)

• Witness applicant’s signature/s (sign on application)

3. Underwriting – Risk Assessment

4. Issuing & Delivering the Policy

• Client situation did not change – delivery policy

• Client situation changed – do not deliver, gather details, return the policy to the insurer

Application

• Policy Details

• Applicant/Policy Holder

• Life Insured:

º Personal/Single Life – Insuring Self

º Join – For Couple

º Third Party – Insuring Someone else’s life

º Insurable Interest – Will you suffer a loss on the death or disability of this person?

• Successor/Contingent Owner – must be present in a third-party contract; to prevent the deceased’s estate in owning the life insurance

• Beneficiary Policy Details:

• Type of Policy

• Riders

• Premium Option

• Dividend Options

About the Applicant:

• Financial ability

• Justification of coverage amount

• Insurance application history

• Insurable Interest

About the Life Insured:

• Personal Information

• Medical Information

Incomplete or Erroneous Information

• Mistake, fraudulent misrepresentation, incomplete information

Agent’s comments

Temporary Insurance Agreement (TIA)

Will provide coverage to the insured while waiting for the underwriter’s decision:

• Person must be insurable & with no extraordinary risk

• Coverage limit is lesser/same as face amount, subject to a maximum

• Coverage duration (30, 60 or 90 days)

• First premium paid

• Not automatic/guaranteed

• Still subject to underwriting

º Yes – TIA issued

º No – Premium refund, no TIA

Underwriting

• Underwriting Guidelines

• Attending Physician’s Statement (APS)

• Medical Exam

• Medical Information Bureau (MIB)

º Previous insurance application history

º Inconsistencies with applicant’s details?

• Motor Vehicle Record (MVR)

• Inspection Report

• Financial Underwriting

• Avocations

Risk Classes & Their

Impact on Premiums

• Standard – Normal risk; represents the risk of an average person

• Preferred – Low risk

• Rated – Above average risk

• Exclusions – Particular conditions/causes not covered

• Declined – Uninsurable risk

Question 43

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 & 4

b. 2, 3 & 4

c. 1, 3 & 4

d. 2 & 4

Client Factors That May Affect Premiums

• Age

• Gender

• Hazardous Occupation

• Health Status or Risk Class

• Hazardous Lifestyle

Question 44

Which of the following variable would impact an individual’s risk of death in a given year?

a. Gender

b. Age

c. Occupation

d. All of the above

Question 45

Who would most likely pay more for life insurance?

a. A 30-year old female

b. A 50-year old female

c. A 40-year old male

d. A 50-year old male

Company Factors That May Affect Premiums

• Mortality Cost

• Admin Cost & Expenses

• Investment Returns Reinsurance

• Insurers may accept to provide policies with huge coverage

• However insurers generally also have a “retention limit” –maximum amount an insurer will take risk

• If the coverage applied for is above the retention limit, the insurer contracts reinsurance company/-ies to cover the excess coverage.

• The primary insurer collects premiums and passes some of the premium to the reinsurer

• In a nutshell, the insurer has another insurer t o cover the excess of the retention limit

Issuing the Policy

Delivery:

• Agent should explain the details of the contract with the client and confirm the coverage is what the client wanted

• Major points on the contract must be explained:

º Grace period

º Incontestability

º Suicide exclusion

Chapter 10

Recommending an Insurance Policy

• Key Concepts:

º Evaluate the probability, severity & duration of risks

º Calculation of Insurance Needs

— Capitalization of Loss Income (ARA Method)

— Capitalization of Needs (LANI method)

— Capital Draw Down Method (LANI, x years)

— Capitalization of Income (LA-I)

Evaluating the Probability, Severity & Duration of Risks.

No one can avoid the risk of death.

Question 46

Why is risk retention not usually an appropriate risk management strategy for dealing with the financial consequences at death?

a. Not everyone can afford a policy by which the insurer will accept the risk

b. It is impossible to retain the risk of death because the deceased individual will no longer be around to deal with the consequences

c. Death is a high-severity risk

d. Death is a low-severity risk, but the probability is high

Life insurance agents are expected to analyze the life insurance needs of their respective clients.

How much life insurance is needed, 2 approaches:

A. Income Replacement approach B. Capital Needs Approach

A. INCOME REPLACEMENT APPROACH

This approach is used to replace lost income or replace cost to replace essential service.This assumes if the income is replaced, the survivor will enjoy the same standardof living after death of the life insured.This approach is simple, but is not the most accurate – does not consider estate preservation and the needs upon death. In Income replacement approach we calculate for the Capitalized value of lost income.

Capitalized value = annual income need ÷ rate of return

Capitalized Value:

• Capitalized value is the lump sum amount of money that will be invested by the beneficiary once the life insured dies.

• The intention is to keep the capital invested and only the profits will be used to provide the monetary needs to the survivors.

• As long as the capital is invested, the earnings/profit can provide income to the beneficiary/ies.

Question 47

Jerry would like to buy insurance. His plan is if he would die, the benefit would be invested, and the investment returns would cover his income of $40,000. If the rate of return is 4%, how much is the capital required?

a. $800,000

b. $1,000,000

c. $160,000

d. $1,600

Question 48

How much needs to be invested at 2% to earn $4,000 per month?

a. $80

b. $960

c. $200,000

d. $2,400,000

If the lost income is expressed in after-tax dollars, the capitalization of lost income will also be calculated with after-tax dollars.

Capitalized value = annual income ÷ After-tax rate of return where

After tax- return = Rate of Return × (1 – tax rate)

Example

Anthony is looking to purchase a life insurance. He earns after-tax income of $10,000/m or $120,000/a. How much life insurance coverage will you suggest, assuming a rate of return of 5% and average tax rate is 32%?

1st step: Calculate for After-tax rate: [.05 x (1-.32)]= 0.034 or 3.4%

2nd step: Calculate for capitalized value ($120,000) ÷ 3.4%or .034= $3,529,411

Real Rate of Return

In reality, income should be increasing to keep up with the increased cost of living (inflation).

Inflation adjusted (Real) rate of return = [(1 + rate of return)/(1 + inflation rate)] – 1 or (1 + rate of return) (1 + inflation rate) -1 = Real Rate of return

If inflation is mentioned in the question, solve for Inflation adjusted (Real) rate of return first before finding Capitalized value.

*note: for Seg Funds & Annuities Module, it uses a shorthand formula. Use the longhand formula above for Life insurance module.

Question 49

If nominal rate of return is 8%, but inflation is 3%, how much is the real rate of return (taking inflation into account)?

a. 5%

b. 11%

c. 4.85%

d. 2.67%

Question 50

Frisk had heard that but inflation is 2%. She has a GIC which had earned 3% annually. With this, how much is the real rate of return?

a. 1%

b. -0.97%

c. 0.98%

d. 0.97%

In the real world, inflation and taxes affect the capital needed to replace an income. To account for both, we use this formula:

Capitalized value = annual income ÷ after tax, after inflation rate of return

Where after tax, after Inflation adjusted rate of return is

After tax, after inflation ajusted rate of return =

(1 + after-tax return) (1 + inflation rate) -1

Where after tax-return is,

After tax - return = rate of return × (1 – tax rate)

And inflation rate or inflation adjusted rate of return is

(1 + rate of return) (1 + inflation rate) -1 inflation ajusted rate of return =

Example

Anthony is looking to purchase a life insurance. He earns after-tax income of $4,500/m or $54,000/a which increases 2% every year. How much life insurance coverage will you suggest, assuming a rate of return of 5% and average tax rate is 32%?

We will use the after tax, inflation adjusted Capitalized value formula, which is:

Capitalized value = annual income ÷ after tax, after inflation rate of return

1st step: Calculate for After-tax rate: [.05 x (1-.32)]= 0.034 or 3.4%

2nd step: Calculate for inflation adjusted rate (1.05 ÷ 1.02) -1= 0.0294

3rd step: Calculate for after tax, after inflation rate (1.034 ÷ 1.0294) -1= 0.0045

4th step: Calculate for capitalized value $54,000÷ 0.0045= $12,000,000

Again, this approach is simple. However, it does not account for actual need arising as the result of death and does not address estate preservation.

B. CAPITAL NEEDS APPROACH

This approach is more beneficial since it identifies all the income and capital needs arising as a result of death and converts them to a capitalized amount at death.

This means the approach does not only address replacing the lost income but also factors in other components affecting the beneficiary/ies and the life insured’s estate.

Tip: When solving for life insurance coverage, we always use the capital needs approach, unless it was specified in the exam that you need to use the replacement of lost income approach or capitalization of LOST income.

In Capital Needs Approach, there are FOUR MAJOR steps:

Step 1 - Determine if there is income shortfall. If there is income shortfall, calculate for the capitalized value/income if income needs to be replaced infinitely, or use capital drawdown if income needs to be replaced for just a number of years.

Step 2 - Determine the lump sum needs or immediate needs upon death.

Step 3 - Determine available assets upon death.

Step 4 - Solve for the Capital shortfall

Capital Needs Approach is also known as the LANI method:

Lump sum expenses needed to be paid upon death

Assets and Existing insurance

for Expenses of survivors

Annual expenses of survivors

First step: determine if there is an income shortfall. If Needs > Income, then there is a shortfall

Examples of Yearly expenses after death of life insured

• Increase (childcare)

• Decrease (food)

• Be unaffected (heating cost)

• Be eliminated entirely (mortgage) if covered by insurance

Examples of Yearly expenses after death of life insured

• Employment income

• Pension

• Investment income

• Government benefits

If there is an income shortfall and the intention is to preserve the capital (or capital retention method), we use this formula:

Capitalization of (income) shortfall = annual shortfall ÷ investment return

**in real-life, it is ideal to use the after tax, after inflation rate as the investment return**

If there is an income shortfall but has a limited duration or only needed temporarily, we use the more practical formula:

Capital drawdown method = annual shortfall x no. of years needed

**The capital drawdown approach may also be applied to other ongoing expenses, such as support obligations to a previous family**

Example

Anthony is looking to purchase a life insurance. He earns after-tax income of $4,500/m or $54,000/a. He has a wife, Maria, who is not working, and they have 3 children who are 2, 4, and 6 years old. If he dies, Maria will receive $650 per month, and all 3 of the children would be eligible for a CPP benefit of about $200perchild. They have figured out that the family’s monthly expenses after Anthony’s death is $3,500.

The investment return is 5%, and the average tax rate is 25%.

The after-tax, after-inflation rate of return is 1.71%. Using the capital retention method, what is the capitalized value of Anthony’s family’s income shortfall?

Step 1: Check if there is a shortfall.

Step 2: Calculate how much capital is needed for the survivors to meet their needs. Since the after-tax, inflation rate is provided, we will use 1.71%.

Capital retention method or capitalized value = $27,000 ÷ .0171

$27,000 ÷ 0.0171 = $1,578,947

There are no lump sum liabilities or assets mentioned. We do not need to go further. The answer is $1,578,947.

Example

Anthony is looking to purchase a life insurance. He earns after-tax income of $4,500/m or $54,000/a. He has a wife, Maria, who is not working, and they have 3 children who are 2, 4, and 6 years old. Maria is planning to re-enter the workforce when the youngest child turns 18.

If Anthony dies, Maria will receive $650 per month, and all 3 of the children would be eligible for a CPP benefit of about $200 per child. They have figured out that the family’s monthly expenses after Anthony’s death is $3,500. How much life insurance would you suggest Anthony purchase?

Since there will be income after Anthony’s death, we will use the capital needs approach and find out the income shortfall. However, we are not going to use capital retention method since Maria will work when the youngest child turns 18. We will use the capital drawdown method.

Step 1: Check if there is (income) shortfall

Annual Income shortfall =

[$3,500 expenses – (200 + 200+ 200 + 650) income] x 12

$27,000= ($3,500 -$1,250) x 12 → The yearly expense is greater than the income.

Step 2: Calculate for Capital needed for 16 years (18 –2)

$27,000x 16= $432,000

Same Scenario Shown in LANI Method

Shortfall is $15,000 (income) - $42,000 (expenses) = $27,000

Step 2: Calculate for Capital needed for 16 years (18 –2)

$27,000x 16 = $432,000

There are no lump sum liabilities or assets mentioned. We do not need to go further. The answer is $432,000.

The Second Step

Second Step: Determine lump sum needs that may arise as a result of death. These are LIABILITIES. We need to make sure the estate has enough to meet this need.

Lump sum needs are expenses that need to be settled IMMEDIATELY upon death.

Lump Sum Need Examples

Final Expenses

Tax Liabilites

Cost of providing burial, cremation, funeral or remembrance services

Deemed disposition of capital assets; deregistration of registered assets (unless rollover)

Debt Elimination Pay off all debts such as mortgage or credit card

Estate Expense

Probate, executor’s fee, legal fees

Emergency Fund Three to six months of regular expenses

Education Fund

Total funds needed for dependent’s education

Estate Equalization Equal inheritance to children

Charitable Bequests & Legacies

Example:

Example: Life insured wants to leave $100,000 to favorite charity upon death

Anthony and Maria have determined the income shortfall upon Anthony’s death is $432,000. However, Anthony is also concerned that there should be funds for the funeral expense that may cost $20,000 and house mortgage is at $200,000. He also owns a cottage he wants to leave in trust for the children with an ACB of $200,000 and FMV of $500,000.

What is the total capital need required by Anthony if his marginal tax rate is at 32%?

SAME SCENARIO shown in LANI method

Step 1: DONE

Step 2: Calculate LIABILITIES.

Mortgage: $200,000 Funeral cost: $20,000

Tax liability on cottage: FMV- ACB x 50% capital gains inclusion rate x marginal tax rate

$48,000 = ($500,000 -$200,000) x .50 x .32

Total: $268,000

Add the income shortfall and the lump sum need Total capital need = $432,000 + $268,000

$432,000 + $268,000 = $700,000. We do not need to go further since there are no assets or insurance coverage mentioned.

0 The scenario already provided the shortfall of $432,000

Life Insurance Coverage:

The Third Step

Third Step: determine after-tax value of assets in the form of cash or cash equivalents or properties willing to be sold upon death AND existing life insurance.

To get the after-tax value of assets,

1. Identify first which are considered assets upon death of the life insured. It also means what assets can be used to pay the liabilities and used by the survivors to meet the needs.

2. Solve for the after-tax value of the assets.

In LANI method, the after-tax value of Assets will be under Assets

Cash/Savings

Example:

Anthony and Maria’s assets are in the table. Anthony would like to leave the cottage to the children, and he believes his RRSP and pension should be preserved for Maria’s retirement. Maria and the children will continue to live in the house and will only use the van and sell the vintage car. What are the assets that can be used or liquidated in case Anthony passes away?

$600,000 ACB is $350,000 No. The family will continue to live in it.

$500,000 ACB is $200,000 No. Anthony wants this kept by the children. Maria’s Van

No. Maria will continue to use it.

— Example Cont.

We then need to calculate for the after-tax value of the assets available upon Anthony’s death. We will assume Anthony’s marginal tax rate is 32%.

The total value of the assets available upon death is $107,000. If Anthony had an existing life insurance, then we will add that to the available assets.

$107,000

— with existing life insurance

Calculate for the after-tax value of the assets available upon Anthony’s death. We will assume Anthony’s marginal tax rate is 32%.

The total value of the assets available upon death is $182,000 since Anthony has two existing life insurance.

If Anthony has a $50,000 whole life insurance and a $25,000 group life insurance, the total ASSETS available for the estate is: $107,000 + $50,000 + $25,000 = $182,000

Insurance Coverage: The Fourth Step

Fourth Step: calculate for capital shortfall. Capital shortfall is the amount of insurance needed by the

If needs is higher than income, there is an income shortfall

Liabilities + Income shortfall = Total capital needs at death If there are assets and existing life insurance, the needed amount of insurance is reduced.

Example:

Anthony and Maria have determined the income shortfall upon Anthony’s death is $432,000. The Funeral expense is $20,000. Anthony wants the $200,000 mortgage paid off, and cottage to be held in trust for the children which has an estimate tax liability of $48,000. The available asset upon death is $107,000. Anthony has a $50,000 whole life insurance and a $25,000 group life insurance.

How much life insurance should Anthony acquire?

Step 1 and 2: Determine total capital needs at death

Capital needs at death = Capitalized Income shortfall + lump sum need

$432,000 + $20,000 + $200,000 + $48,000= $700,000

Step 3: Determine total available assets upon death

Total Available assets = assets upon death + existing life insurance

$107,000 + $50,000 + $25,000= $182,000

Step 4: Calculate the Capital shortfall

Capital shortfall = total capital needs at deathTotal Available assets

$700,000 - $182,000= $518,000

— Example Cont. in LANI Method

1. List the dollar values in the appropriate column (L, A, N, I) and add the dollar values in the columns

2. Add the shortfall and Liabilities to get the Capital need

3. Deduct the Assets including the existing coverage to get the capital shortfall or insurance coverage.

Funeral expense: $20,000

Mortgage: $200,000 Tax liability: $48,000

Assets Existing insurance: WL: $50,000 Group Life insurance: $25,000

$182,000 Total Liabilities: $268,000 $182,000 Total Assets: $182,000 Shortfall is given: $432,000

Capital needs = Shortfall + Liabilities

$432,000 + $268,000 = $700,000

Capital shortfall/insurance = Capital needs - Assets

$700,000 - $182,000 = $518,000

Capitalization of (income) Shortfall

Summary

• List down the items under LANI

• N vs I: Calculate Annual Income Shortfall. If income is higher than need, disregard.

• Capitalize: divide by (real) rate of return, or use

Drawdown method: Multiply by number of years needed

• Get the Sum of Liabilities, and add to Income Shortfall

• Get the Sum of assets, and subtract from the Shortfall to get the Life Insurance Coverage needed

Question 51

Misty and Ash are married. Misty earns $50,000 per year, Ash earns $70,000 per year. They each have their own group life insurance of 1.5x their salary. If either person dies, they want their debt of $150,000 to be cleared. Funeral costs are now $50,000. They need $60,000 per year for their family expenses.

How much life insurance does Ash need? Assume interest rate at 5%.

a. $400,000

b. $325,000

c. $295,000

d. $60,000

Question 52

Julienne and Jeric are married, Julienne’s income is $30,000 per year while Jeric earns $50,000 per year. They have a mortgage of $350,000 and other debt of $50,000. They have some investments that can be liquidated for $100,000. If interest rate is 5% and inflation rate is 3%, and they need $50,000 for final expenses and need $5,000 per month for their living expenses.

How much insurance is needed by Julienne?

a. $866,000

b. $850,000

c. $1,350,000

d. $1,800,000

Question 53

You are meeting with Carol and James to determine their insurance needs. They would like to plan for Carol’s premature death. They have an outstanding mortgage of $216,000. They estimate the final expense to be $34,000. James’ annual income needs in the event of Carol’s death would be $73,000 but he will still earn $48,000 per year. Carol has a group life insurance policy with a $50,000 death benefit.

Using the capital drawdown method, how much insurance is required by Carol, if James needed the required income for 25 years?

a. $200,000

b. $625,000

c. $750,000

d. $825,000

Question 54

Homer and Marge have 3 children. Homer is a nuclear plant controller who earns $64,000 per year. Marge stays at home, does not work. They have a mortgage-free house worth $326,000. They estimate final expenses of $50,000 to be due when either person dies. They have emergency cash reserve of $40,000. Interest rate is 5%. How much insurance is needed by Homer?

a. $90,000

b. $884,000

c. $1,290,000

d. $1,540,000

Capital Gains Tax

Tax on Capital Gain

this?

Capital Gain = Gain on Capital Property

Half Taxable

Losses can be claimed against gain

Example:

Bought investment property for $420,000 - sold for $560,000. Gain is $140,000

50% Taxable = $70,000

If tax rate is 30% = $70,000 x 30% = $21,000 Tax

Question 55

Which Properties Apply?

Generally, these are considered capital properties/assets:

• Real estate (except principal residence/home)

• Businesses

• Stocks, Mutual Funds, Seg Funds (non-registered)

• Collectibles, antiques, vintage items, artwork, precious metals & jewelry

When does this Apply?

Disposition (as if sold)

• Sale

• Transfer

• Death

Could be transferred (rolled-over) tax deferred to spouse

Not children or grandchildren or anyone else

Nicolas and Karen has been married for 20 years. Both have identified that if one of them dies, they are short of $3,000 a month. They have a $500,000 home which is free and clear. The home was purchased for $300,000. They have a cottage they purchased for $180,000 which is now $250,000.

They want to keep the cottage in the family and want to cover the tax liability upon death (assume 30% tax bracket) and they expect to earn a 4% investment return on invested insurance proceeds. How much life insurance do they need?

a. $900,000

b. $910,000

c. $975,000

d. $720,500

Question 56

Karim owns a number of assets. He owns a home worth $450,000 which was purchased for $350,000, he owns a cottage worth $260,000 which was purchased for $210,000. He also has a RRSP which is holds $30,000. Which of the following is subject to capital gains tax on death?

a. The home

b. The cottage

c. The RRSP

d. All of the above What is

Chapter 11

Ongoing Service

Monitoring Changing Needs

• New dependants

• Marriage

• Divorce

• Employment

• New Mortgage

• Acquiring a Business

• Leaving Canada

• Updated Needs Analysis & Appropriate Recommendations

• Amending Policies

• Administrative Changes

• Changes Requiring Underwriting

• Renewing a Policy

• Replacing a Policy

º Churning & Twisting

• Cancelling a Policy

• Surrendering the Policy

• Policy Assignments

• Claims Process

• Key Concepts:

º Monitoring Client’s Changing Needs

º Policy Assignment

º Factors that could vary the payment upon death

Question 57

Hannah holds a 10-year renewable term insurance policy that up for renewal. She will be 45 years old and the policy is renewable until 65. Assuming Hannah still needs temporary coverage, what would you advise?

a. The policy can only be renewed if Hannah is in excellent health and therefore still considered an insurable risk

b. If Hannah is in excellent health, then she should renew the existing policy

c. It does not make sense to replace an existing policy since the incontestability policy would recommence

d. If Hannah is in excellent health, then she should consider applying for a new term 10 renewable policy till age 65

Renew/Convert or Replace?

Replace if:

• Still healthy

• Risk is still okay

• Comparatively cheaper vs renewing/converting

Renew/Convert if:

• Not healthy

• Risk is higher

• Comparatively more cost, due to “Adverse Selection”: people who are higher risk are more likely to use the renewal or conversion option due to absence of medical insurability requirement.

Policy Assignment

Absolute policy assignment

• Transferring the ownership of life insurance policy to another party.

• The new owner will gain the ownership rights to the policy and will be able to make changes to that policy.

• With some exceptions, there are tax consequences on absolute assignment, the person getting rid of the policy must pay the taxes first before the assignment.

• Can be absolutely assigned to:

º Spouse – due to a tax-free spousal roll over, the policy may be absolutely assigned to the surviving spouse, no tax consequence at all

º Child – Must be insured in that policy

º Non-Arm’s length – Taxable

Question 57

Which of the following would be the best type of life insurance?

a. Term Insurance

b. T-100

c. Permanent, Cash Value Insurance

d. It depends on the factor

Factors that Could Vary the Payment Upon Death

• Type of Policy

º Participating has dividends that could increase benefit

º Policy could have an indexed or “level +” benefit

• Misstatement of Age/Sex

º If not fraudulent, the death benefit will be adjusted

• Policy Assigned as Collateral

• Outstanding Policy Loan

• Unpaid Premium

º For whole life policies, if automatic premium loan was used, benefit is reduced by the loan balance

• Settlement Options

º Lump sum or annuity?

• Time Requirements

º No time limit for claim to be filed (example: family discovers the insured had a policy 10 years after death)

º Insurer has to pay within 30 days of receiving all the required documents

• Tax Treatment of Death Benefits

º Tax Free death benefit, even if the death benefit included the investment component

Practice Bubble Answer Sheet

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Practice Reviewer

Life Insurance

DISCLAIMER:

Do not memorize the answers. Understand the rationale (why that’s the answer). The questions in the exam may be different from the questions here, worded differently, or different situation. Refer to the the answer key in the subfolder for the explanations.

QUESTION 1

Rodrigo and Miriam have been married for 30 years. They have 3 children, all grown up and professionals in healthcare and law. Rodrigo owns an oil exploration company in which he started with a capital funding of $50,000, and now it had maintained a business value of $2,000,000. Rodrigo already has a buy-sell agreement with the corporation. Miriam, on the other hand, runs a video channel online which generates $8,000 a month in ad revenues.

Which of the following objective would be the primary need for insurance of Rodrigo?

a. Funeral Expenses

b. Debt Repayment

c. Income Taxes

d. They don’t need life insurance, they need critical illness insurance.

QUESTION 2

Grace is your client and earns $6,000 per month as a registered nurse. She is offered group insurance plan in her workplace, and is inquiring how different a group policy is from her policy she purchased from you.

Which of the following is a valid explanation?

a. Group plans would require her coverage to be the same as everyone else in the company

b. Group insurance coverage would cease immediately on termination

c. Grace would not be the owner of her group contract if she elects to join the group coverage

d. If Grace resigns from her employer, she may convert the group plan to an individual plan only if she is still insurable

QUESTION 3

George is your neighbor who earns $6,000 per month as a registered nurse. You meet him one day and he explains that he has already purchased an association coverage through his work.

Which of the following can be true?

a. If George resigns, his premiums for his group coverage would remain the same

b. It is likely that his premiums for his group coverage would be more costly than getting an individual policy now

c. If he purchases additional coverage through the association, the additional premium would be shared between the employer and employee

d. The employee would have to pay tax on the portion of the life insurance premium paid by the employer

QUESTION 4

Alden and Maine, both married, are parents to 2 year old twins. Although their discretionary incomes are limited, they manage to survive by making wise purchasing decisions. They have saved enough to purchase a decent condominium in Winnipeg worth $210,000. However, this leaves them without any emergency savings. Other than that, they are concerned that if either spouse dies, they need to have funds to cover the mortgage and support the children.

Which policy among the choices would you recommend?

a. Joint First to Die Term-20 years, with a waiver of premium rider

b. Joint First to Die Whole Life insurance, with Guaranteed Insurability Benefit

c. T-100 on each of their lives, with Guaranteed Insurability Benefit

d. Universal Life Insurance on each Alden and Maine, with Level cost of insurance and Level Death Benefit

QUESTION 5

Alden and Maine, both married, are parents to 2 year old twins. Although their discretionary incomes are limited, they manage to survive by making wise purchasing decisions. They have saved enough to purchase a decent condominium in Winnipeg worth $210,000. However, this leaves them without any savings. Other than that, they are concerned that if either spouse dies, they need to have funds to cover the mortgage and support the children.

In getting insurance on Alden and Maine, which would be the best beneficiary designation for this family?

a. Name each other as irrevocable beneficiaries, children as contingent beneficiaries

b. Name each other as revocable beneficiaries, children as contingent beneficiaries

c. Name each other as revocable beneficiaries, their estate as contingent beneficiaries

d. Name each other and children as irrevocable beneficiaries

QUESTION 6

Maja has recently been divorced with her ex-husband, Gerald. They both had purchased life insurance together naming each other irrevocable beneficiaries. Unable to change the beneficiary designation, she decided to get a new policy for herself.

Which possible source would insurers find out about non-disclosed risks?

a. Attending Physician Statement (APS)

b. Provincial Insurance Council

c. Inspection Report

d. Medical Information Bureau (MIB)

QUESTION 7

Maja is looking to purchase a universal life policy. You find out that aside from being young, she has a good risk tolerance towards investing. She has a good amount of disposable income and wants to have maximum growth on her funds.

Which of the following Universal Life cost and investment option would be suitable for her?

a. Level cost of insurance, with deposits going to Balanced Funds

b. Level cost of insurance, with deposits going to Far East Funds

c. Yearly renewable term mortality costing, with deposits going to Equity Funds

d. Yearly renewable term mortality costing, with deposits going to Income Funds

QUESTION 8

Amor and Eduardo are a couple who were separated from each other before but managed to settle their misunderstandings and finally recently got married. Amor and Eduardo have 2 children – their biological child, Ina and Angelo who are aged 16 and 17 respectively. Amor owns Powercorp, which invests in real estate development. In her will, she indicated that the business ownership will transfer to Eduardo but they intend that the children will inherit the business on their death. Both Amor and Eduardo have both maximized their TFSA contribution rooms and contributed to RESP for their children.

Which of the following best describes the need of insurance for the couple?

a. Asset Creation

b. Capital Gains Taxes

c. Funeral Expenses

d. Income Replacement

QUESTION 9

Eduardo has had $100,000 coverage in his Renewable and Convertible Term-10 years insurance with a waiver of premium rider.

Which of the following is most correct regarding this plan?

a. The policy can be converted to a $500,000 T-100 coverage without providing evidence of insurability

b. It is more advisable for Eduardo to renew the term if Eduardo is still healthy

c. A term plan coverage can be reduced during the term

d. If Eduardo becomes unemployed, waiver of premium rider would allow the policy to remain in-force

QUESTION 10

Amor is the owner of Powercorp, a company which invests in real estate development. In one of your meetings, she has expressed gratitude to 3 staff members who, without them, may cause the company into a setback with major project delays and may affect the company’s profits. You recommend Powercorp purchases key person insurance on the staff members.

Which of the following are true regarding key person insurance?

a. The key employee would be the life insured and the beneficiary of the insurance policy

b. Powercorp can claim the premiums it has paid as tax deduction

c. The taxable insurance proceeds can cover overhead expenses should there be a setback if in case the key person dies

d. Powercorp can make a split-dollar arrangement in which both Powercorp owns the face amount and the key employee owns the accumulated policy value

QUESTION 11

Peter and Paul are equal partners in a granite cutting company. The company is now worth $8,000,000 and has a mortgage balance on the office-warehouse of $2,000,000 with 15 years remaining on the amortization. They both have spouses which are not active in the business. Peter and Paul’s concern is that they would like to protect the business if either person dies.

Which of the following is the most recommended insurance policy for each partner?

a. A $10,000,000 non-Par Whole life insurance key person insurance

b. A $8,000,000 15 yr R&C Term Insurance with buy-sell agreement

c. A $4,000,000 Universal life policy with buy sell agreement & $2,000,000 15 Year Reducing Term Rider

d. A $2,000,000 T-100 Policy with a Guaranteed Insurability Rider key person insurance

QUESTION 12

Which of the following is not a factor in calculating premiums for life insurance?

a. Morbidity cost

b. Mortality cost

c. Investment Returns

d. Administration Expenses

QUESTION 13

All of the following describe the Maximum Tax Actuarial Reserve (MTAR) rule, except:

a. The MTAR is the distinguishing boundary between insurance and investment

b. A Universal Life (UL) Policy may increase its face amount up to 8% to keep the policy tax-exempt

c. The policy owner can deposit as much as he/she wants into a universal life policy tax-exempt

d. Funds above the MTAR are put into a side-account where it is subject to taxation

QUESTION 14

Alice is an advisor who has had great experience in dealing with client’s situations. One of her clients, Mercedes, wanted to have a policy which she can build fund value to use later on, and not to pay premiums for life.

Which of the following is true regarding Universal life?

a. Alice does not need to disclose the worst case scenario if Mercedes current portfolio already contains guaranteed investments

b. If Mercedes was a smoker, she may end up with a greater fund value than expected.

c. Mercedes can absolutely assign her policy to her spouse, but may incur tax.

d. Alice should recommend Yearly Renewable Term costing if the client wants to build up cash accumulation as soon as possible.

QUESTION 15

Coco is the insurance advisor of Julia, who has recently graduated from college and with the purchase of the home and starting out in life, purchased a $575,000 Renewable and Convertible Term-20 year policy from Coco. In that time, Julia was stuggling in her photography venture and was barely making $30,000 a year. 17 years later, Julia is now married to her college boyfriend and has 3 children, and her business is doing very well, and her husband is the executive chef in a fine dining restaurant. Together, they earn $300,000. They met with Coco and expressed their plan to fund their children’s education, give to charity, and to leave a financial legacy.

Which of the following could Coco best advise to the couple?

a. They can convert the Term-20 policy into a Universal Life, adding children as insured, and build investment value which they can use for the children’s education.

b. They could surrender the Term-20 policy and use the cash surrender value to buy a paid up Universal Life policy, and use tax free collateral bank loans to access the fund value.

c. Julia must wait for 3 more years (end of the term) before she can convert the policy to a permanent plan.

d. Julia can convert her plan T-20 into a Participating Whole Life and make the children the beneficiaries to avoid probate fees.

QUESTION 16

Kara and Sara are twin daughters who did and have things almost alike. Aside from looking alike, they both have whole life insurance policies with the same face amount, but with a small difference – Kara’s policy was participating while Sara’s policy was non-participating.

When they died at the same time, which of the following could be true pertaining to their policies?

a. Sara’s policy would have a bigger payout due to the smaller cost than Kara’s policy

b. Kara’s policy would have a bigger payout due to the flexibility offered by dividend options

c. Bobsled is considered an extreme sport and is excluded from coverage

d. Both would have equal death benefits due to the fact their both whole life and death benefit is level

QUESTION 17

Geraline is a widowed mother who earns $75,000 per year and is supporting 2 children aged 8 and 10. Her husband passed away without life linsurance and left Geraline to support herself and the children by herself. Final expenses including mortgage balance is $240,000. Geraline’s income is just enough to support her needs. She has insurance from her employer equivalent to her salary, but she says it is not enough. The children would need at least $50,000 each child for post-secondary education.

Assuming an interest rate of 4%, how much life insurance is required for Geraline?

a. $2,140,000

b. $268,000

c. $2,215,000

d. $209,000

QUESTION 18

Misty and Ash are married. Misty earns $50,000 per year, Ash earns $70,000 per year. They each have their own group life insurance of 1.5x their salary. If either person dies, they want their debt of $150,000 to be cleared. Funeral costs are now $50,000. They need $60,000 per year for their family expenses.

How much life insurance does Ash need? Assume interest rate at 5%.

a. $400,000

b. $325,000

c. $295,000

d. $60,000

QUESTION 19

Keanu and Laida have divorced. Part of their divorce agreement is Keanu should give Laida half of his income for 20 years. Keanu’s income is $72,000 and Laida’s income is $35,000 per year. Final expenses will be $30,000, and Keanu has life insurance of $100,000. Interest rate is 5%, and inflation is 3%.

Using the capital drawdown method, how much life insurance does Keanu need?

a. $3,530,000

b. $1,780,000

c. $1,680,000

d. $650,000

QUESTION 20

You are meeting with Carol and James to determine their insurance needs. They would like to plan for Carol’s premature death. They have an outstanding mortgage of $216,000. They estimate the final expense to be $34,000. James’ annual income needs in the event of Carol’s death would be $73,000 but he will still earn $48,000 per year. Carol has a group life insurance policy with a $50,000 death benefit.

Using the capital drawdown method, how much insurance is required by Carol, if James needed the required income for 25 years?

a. $200,000

b. $625,000

c. $750,000

d. $825,000

QUESTION 21

Homer and Marge have 3 children. Homer is a nuclear plant controller who earns $64,000 per year. Marge stays at home, does not work. They have a mortgage-free house worth $326,000. They estimate final expenses of $50,000 to be due when either person dies. They have emergency cash reserve of $40,000. Interest rate is 5%.

How much insurance is needed by Homer?

a. $90,000

b. $884,000

c. $1,290,000

d. $1,540,000

QUESTION 22

Julienne and Jeric are married, Julienne’s income is $30,000 per year while Jeric earns $50,000 per year. They have a mortgage of $350,000 and other debt of $50,000. They have some investments that can be liquidated for $100,000.

If interest rate is 5% and inflation rate is 3%, and they need $50,000 for final expenses and need $5,000 per month for their living expenses, How much insurance is needed by Julienne?

a. $866,000

b. $850,000

c. $1,350,000

d. $1,800,000

QUESTION 23

Jake works for a accounting company and earns $82,000 per year. He also gets $12,000 per year from capital gains in stock trading. Upon interviewing him, you find out that he has insurance from his employer of 1.5x his salary. His family would require $60,000 per year which includes living expenses, lifestyle and education financing. Should he die, interest rates for investments would be 4%, while inflation rate is projected to be 1.5%.

Using capitalization of income, how much additional life insurance is needed by Jake?

a. $1,797,000

b. $3,211,000

c. $3,637,000

d. $3,157,000

QUESTION 24

Marion is a plumber who earns $54,000 each year. He currently has an insurance from an association plan with a coverage of $175,000. Each month, the family spends $4,000. Projecting an interest rate of 3% and inflation rate of 1.2%, how much additional life insurance is needed if he capitalized his income?

a. $2,859,000

b. $3,000,000

c. $3,198,333

d. $158,333

QUESTION 25

Kerry had purchased a $100,000 participating whole life policy back in July 1, 1983. However, he forgot to make a payment around 2 years later and on November 15, 1985, the policy lapsed. He quickly reinstated the policy in January 3, 1986. In 2010, the policy’s cash value is $41,250 and the ACB is $24,240.

On that year, he needed money to repair his fishing boat and was thinking about partially surrendering his policy. What is the tax consquence on Kerry’s partial surrender of $4,000?

a. $1,250 taxable

b. $1,649 taxable

c. $824 taxable

d. $0 taxable

QUESTION 26

Kerry had purchased a $100,000 participating whole life policy back in July 1, 1983. However, he forgot to make a payment around 2 years later and on November 15, 1985, the policy lapsed. He quickly reinstated the policy in January 3, 1986. In 2010, the policy’s cash value is $41,250 and the ACB is $24,240. Kerry required to take a policy loan of $4,000 for car repairs.

How much would be taxable if he does this?

a. $1,250

b. $1,649

c. $824

d. $0

QUESTION 27

Kerry had purchased a $100,000 participating whole life policy back in July 1, 1983. However, he forgot to make a payment around 2 years later and on November 15, 1985, the policy lapsed. He quickly reinstated the policy in January 3, 1986. Right now, the policy’s cash value is $65,250 and he had paid a total of $95,200 in premiums to date. Of the total premiums, the net cost of pure insurance is $56,250 and dividends received total $18,310.

What is the ACB of Kerry’s policy?

a. $58,750

b. $42,490

c. $24,240

d. $20,640

QUESTION 28

Which of the following statements best describes the change in the probability of death as one ages?

a. The probability of death remains level given the odds of dying in an accident is the same regardless of one’s health of age.

b. With the exception of the few years in life, the probability of death starts low and then increases slowly until the age 40. At age 40, it increases dramatically.

c. The probability of death starts low and increases incrementally each year at about the same rate.

d. The probability of death starts low and increases incrementally each year at about the same rate until 40. At age 40, the probability of death still increases at a slower pace.

QUESTION 29

Who would most likely pay more for life insurance?

a. A 30-year-old female

b. A 50-year-old female

c. A 40-year-old male

d. A 50-year-old male

QUESTION 30

Justin’s objective is to provide a gift to his children upon his death, $500,000 each so that they can either start a business or purchase a home or a car, whichever they desire.

Which of the following best describes his estate objective?

a. Estate preservation

b. Loss of income

c. Charitable giving

d. Leaving a legacy

QUESTION 31

Nadia is a 28 year old widow who also lost her father at a young age. She is now raising a two year old child and worries about who will take her of the child when she dies. In her will, the named legal guardian is her sister. However, her sister is financially wanting. Nadia has no health concerns but her mother died at 40 due to heart attack and wonders if that will prevent her from buying life insurance.

In dealing with the financial risks associated with death, which strategy is definitely not available to Nadia?

a. Risk Transfer

b. Risk retention

c. Risk avoidance

d. Risk reduction

QUESTION 32

Nicolas and Karen has been married for 20 years. Both have identified that if one of them dies, they are short of $3,000 a month. They have a $500,000 home which is free and clear. The home was purchased for $300,000. They have a cottage they purchased for $180,000 which is now $250,000.

They want to keep the cottage in the family and want to cover the tax liability upon death (assume 30% tax bracket) and they expect to earn a 4% investment return on invested insurance proceeds.

How much life insurance do they need?

a. $900,000

b. $910,500

c. $975,000

d. $720,500

QUESTION 33

All else being equal, which of the following statement is true?

a. The probability of death in a given year is exactly the same for males and females until age 40, which is referred to as the crossover age. At age 40, the probability of death is higher for males.

b. A 40 year old male would have a higher probability of death in a given year as compared to a 40 year old female

c. Gender impacts the risk of disability. However, it has been proven that gender has very little impact on the life expectancy or probability of death

d. A male would have a higher life expectancy as compared to a female of the same age

QUESTION 34

Nicole has a 500,000 whole life policy. Her monthly premium of 500 was due two weeks ago and has not been paid since. Nicole died of an accident yesterday. Her husband is worried as the insurance benefit is supposed to assist him in caring for their two children.

How will the insurance company handle Nicole’s husband’s claim?

a. Deny the claim since the policy has lapsed

b. The benefit will be paid, provided the death did not occur within the incontestability period

c. Since he is within the grace period, the death benefit will be payable

d. Although the policy did not lapse, the death benefit is not payable if the death occurred during the grace period

QUESTION 35

Manny was the policy holder and the life insured on a 1 Million UL policy. His wife, Ara, was named the beneficiary, and Leila, his sister as the named contingent beneficiary. Manny died of a fatal wound after campaigning for a local position from the town where he lives. Unable to deal with the situation, Ara committed suicide last night. The insurer is yet to finish the claims process.

To whom would the benefit be paid?

a. Ara

b. Leila

c. Ara’s estate

d. The claim would be denied as it would go against the public policy

QUESTION 36

Which of the following facts can be learned by analyzing a life table?

a. As the probability of death increases, the individual’s life expectancy also increases

b. As the probability of death increases, the individual’s life expectancy also decreases

c. Life expectancy and probability of death essentially refer to the same thing

d. There is no correlation between the probability of death and life expectancy

QUESTION 37

Lucas owns a property that he uses as his principal residence. He resides in the property with his 20 yr old son Jake. The property has $250,000 mortgage registered against it. Upon his death, Lucas would like to gift the property to his son provided his son takes over the mortgage. Lucas is retired and collect OAS and CPP but not enough to cover his monthly expenses. Jake earns $100,000 a year but has a bad credit history. However, Jake is able to pay the mortgage.

Which of the following financial impacts of death should be of the most concern?

a. Loss of Lucas’ income

b. Debt repayment

c. Capital gains tax on residence

d. None of the above

QUESTION 38

After looking at a life table, Susie determined that the probability of her dying by her birthday was 1.26%. What term is used to describe the probability of dying at a specific age?

a. Mortality

b. Morbidity

c. Catastrophic loss

d. Life expectancy

QUESTION 39

What is another term for a life table?

a. Mortality table

b. Premium Factor table

c. Andex Chart

d. Morbidity table

QUESTION 40

Why is risk retention not usually an appropriate risk management strategy for dealing with the financial consequences at death?

a. Not everyone can afford a policy by which the insurer will accept the risk

b. It is impossible to retain the risk of death because the deceased individual will no longer be around to deal with the consequences

c. Death is a high-severity risk

d. Death is a low-severity risk, but the probability is high

QUESTION 41

Rustica earns 200,000 per year, which she uses to support herself, her husband, and their young child. She teaches robotics at a well-respected university. In the summer, she spends much of her spare time scuba diving. Last year, she took a two-month sabbatical to dive among some famous historical shipwrecks. She recently applied for 1 M in life insurance. The insurer approved but dive-related deaths as an exclusion. Rustica accepted the policy and promised to be very careful when selecting the locations of her future dives.

What risk management strategy did Rustica employ?

a. Risk retention

b. Risk transfer

c. Risk reduction

d. All of the above

QUESTION 42

Which of the following variable would impact an individual’s risk of death in a given year?

a. Gender

b. Income level

c. Occupation

d. All of the above

QUESTION 43

Jane likes to jog every morning before going to work. This is her way of keeping fit. However she had the choice of 3 routes: going by the highway, through the park, or around her neighborhood. Jane chose the route through the park. What risk management did she employ?

a. Risk avoidance

b. Risk retention

c. Risk reduction

d. Risk transfer

QUESTION 44

Bella is meeting with her client to discuss term insurance. In what way can Bella use a policy illustration?

a. To demonstrate what premiums are payable and the coverage in each policy year would be

b. To demonstrate what premiums payable along with the accrued cash value in each policy year would be

c. Policy illustrations are never used with term insurance

d. Policies illustrations are only used with participating policies

QUESTION 45

There are 2 ways to quantify the risk of death. Which method does the following method describe the likelihood that an individual in a certain group/age will die before his or her next birthday?

a. Longevity risk

b. Probability of death

c. Life expectancy

d. Morbidity risk

QUESTION 46

Manny and Ara had their first child. Both are in their early 20’s and has limited income. They are concerned as who will take care of their child should one of them passes away. In their will, they have identified, Tapia, Ara’s mom as the legal guardian in the event of both of their deaths and purchased a first-to-die life insurance.

Which of the following best describes the financial impact of death they are addressing?

a. Charitable giving

b. Estate creation

c. Education funds

d. Loss of a caregiver

QUESTION 47

Belinda recently bought a brand-new vehicle. She purchased automobile coverage that will either repair at or guarantee full replacement value if the vehicle is damaged in an accident.

Which risk management strategy is she employing?

a. Risk reduction

b. Risk transfer

c. Risk avoidance

d. Risk retention

QUESTION 48

Karen is excited to spend her summer vacation and has listed her to do things such as camping, fishing, and swimming at the man-made beaches in Winnipeg. She is concerned of having to deal with sunburn and buys an ultra sunblock lotion 30 SPF.

Which risk management strategy is she employing?

a. Risk reduction

b. Risk transfer

c. Risk avoidance

d. Risk retention

QUESTION 49

Emmanuel owns a 30 yr limited-pay term-to-100 policy. He is unsure what the word “limited” refers to. What should you tell him?

a. She is required to pay premiums for 30 years, after which the policy would be paid-up and she would retain the coverage

b. The coverage will only be in place for 30 yrs

c. She will only be required to pay premiums for 30 years after which the policy would mature and she would have no more coverage

d. She will be required to pay for a maximum of 30 years. After that she must convert her policy to a permanent plan or else it will terminate.

QUESTION 50

Jill owns and operate her own farm which she inherited from her deceased spouse, Jack. The chicken farm has been in operations for 45 years since this business was also inherited by Jack. It employs two chicken breeders who are vital to the farm’s success. The death of these employees would greatly impact the business and Jill would like to purchase a 200,000 in permanent key person life insurance on each of the breeders. Jill disclosed that one of the employees appears a little disgruntled and Jill may have to train a replacement should this employee leave.

If Jill’s concern is having to hire another chicken breeder, what policy would you recommend?

a. Limited pay whole life policy

b. An adjustable whole life policy

c. Universal Life policy

d. Convertible term insurance policy

QUESTION 51

What payments into a UL policy is called?

a. Contributions

b. Deposits

c. Maximum Funding

d. Premiums

QUESTION 52

Lourdes is a part of a group plan that offers all member life insurance equal to five times their annual salary, to a max salary of $200,000. She earns $100,000 per year. How much would she have in life insurance coverage?

a. $100,000

b. $200,000

c. $500,000

d. $1,000,0000

QUESTION 53

Megan has a very good income. She paid 35% of her income last year in tax. She has a 16 yr.old daughter who is disabled and will never be financially dependent. Megan would like to purchase enough insurance to provide a lump sum benefit that could generate an annual income of 75,000 in perpetuity for her daughter. Her daughter received the death benefit and used it to generate investment income. The estimated wither average tax rate would be 32% and her marginal tax rate would be 45%

Which tax rate would be used for the purposes of determining after tax return in the capitalization of income (capital retention) method?

a. 35%

b. 32%

c. 45%

d. 37%

QUESTION 54

Which of the following would be the best use of a joint-first-to-die T-100 Life insurance policy?

a. Gifting inheritance to the surviving spouse upon death

b. Future use of CSV through a policy loan

c. Pay capital gains taxes on a cottage owned jointly

d. Pay off their mortgage upon death

QUESTION 55

With group insurance, what form the contract between the insurer and the plan member?

a. The master contract

b. The policy

c. There is no contract between the insurer and the plan member

d. The plan certificate

QUESTION 56

ABC Inc. purchased a group insurance with BIG Co. Insurer. Maria works for ABC INc and is entitled to the benefits under the plan. ABC Inc.s’ human resource manager, Archie, is the plan’s administrator. The agent who sold the policy to ABC Inc. is Polly McDonald. Who is the plan sponsor?

a. ABC Inc.

b. Archie

c. Polly McDonald

d. Big Co. Insurer

QUESTION 57

Al and Duby Santos have been married for 25 years. They are both self-employed and have no children. Al is a highly recommended surgeon, and Duby owns her own high-end salon. Duby is the primary caregiver of her sister, who has some disability and unable of ever becoming self-sufficient. The couple would like to leave all their assets to Duby’s sister should they pre-decease her. Since they own a cottage that has appreciated in value, the couple would like to purchase a policy to cover the capital gains tax at death. The couple are very busy and would like to own a low-maintenance policy.

Which of the following would be the least appropriate?

a. Universal Life

b. Participating Whole life insurance

c. Term-to-100 life insurance

d. Non-participating whole life insurance

QUESTION 58

Mandy purchased a UL 10 years ago. The policy provides a death benefit equal to the face value plus cumulative premiums. The original coverage was $500,000. Mandy made a lump sum payment of $72,000. The policy has $45,000 within the investment component.

How much can her beneficiaries expect to receive?

a. A Tax-free death benefit of $617,000

b. A taxable death benefit of $572,000

c. A Taxable death benefit of $617,000

d. A tax-free death benefit of $572,000

QUESTION 59

Hope applied for 1M in life insurance and answered all the questions in such as way that she led the insurer to believe she had no known health concern. The insurer is a member of the MIB. When underwriting the application, the insurer learned from the MIB that Hope had been declined in the previous month by another insurer due to heart condition.

Which of the following is true of the Medical Information Bureau (MIB)?

a. The MIB contains coded information about the applicant’s medical related underwriting issues, excluding non-medical issues (like hazardous activities and bad driving records)

b. The insurer can deny the application based on the information found in the MIB

c. The information found in the MIB can be used to rate a policy but not to decline it

d. The insurer cannot rely solely on the information found in the MIB as the basis for declining an application

QUESTION 60

Darna is surrendering her life insurance policy. She was please to learn that her policy is subject to the new rules, which result in a lower ACB.

What is Darna probably not understanding?

a. A lower ACB results a lower CSV

b. A lower ACB reduces access to the APL non-forfeiture option

c. A lower ACB will not impact CSV, but will increase the policy gain, resulting in more tax if surrendered

d. A higher ACB results in lower death benefit.

QUESTION 61

Darna owns three different policies. She understands that when the insurer sets the premium on a policy, they consider estimated investment returns, expenses of running the policy, and mortality rates. Darna mentions to you that she continually hears about the Bank of Canada lowering interest rates. She is concerned that the decline in interest rates will result in the insurer increasing the premium on one or more of her policies.

Which policy would be impacted by the change in interest rates?

a. Adjustable whole life

b. Whole life insurance

c. Guaranteed whole life insurance

d. Non participating whole life insurance

QUESTION 62

Carla purchased an existing participating whole life insurance policy on her mother’s life through an absolute assignment for $3,000. The policy was initially purchased by her mother’s employer prior to Dec. 1, 1982.Carla has paid a further $13,000 in premiums since purchasing the policy, $7,000 of those premiums can be directly attributed to the net cost of pure insurance (NCPI.)

Over the years, the policy paid out $1,200 in dividends. Carla took $500 of the dividends in cash and used the rest to buy PUAs. Last year, she took out a $200 policy loan via the APL non-forfeiture option. The interest paid on the loan was $20. Carla is now surrendering the policy. The cash surrender value (CSV) is $12,000.

What would be the adjusted cost basis(ACB) be?

a. The ACB would be $16,020, resulting in a negative policy gain and therefore not taxes owed

b. The ACB would be $9,020, resulting in a policy gain of $2,980, of which half is subject to tax

c. The ACB would be $16,020, resulting in $4,020 policy gain, which is fully taxed

d. The ACB would be $9,020, resulting in a policy gain of $2,980, of which is fully taxed

QUESTION 63

Mina applied for life insurance and an income replacement plan. The underwriter has completed the medical underwriting and has now turned his attention to a financial underwriting.

What does a financial underwriting involve?

a. Assessing the insurer’s current exposure to similar risks and whether is a capacity to take on more

b. Establishing whether the amount of coverage is reasonable and that the applicant can afford the required premium

c. The pricing of the contract

d. Assessing the risk/reward from the insurer’s perspective

QUESTION 64

Belinda, age 21, bought a cottage for $100,000 and had a $25,000 down payment. The remaining $75,000 was financed through a bank mortgage. The amortization period on her mortgage was 10 yrs. with a five-year term. Over the next five years, the mortgage rate will be locked in at 5%. She would like to buy a life insurance policy that will pay out the mortgage upon her death. She has no other use for insurance and would therefore like to keep the premium to a minimum.

What policy would you recommend to address Belinda’s stated needs?

a. Term to 100

b. 10 year decreasing term insurance

c. 10 year renewable term insurance, renewable to age 40

d. 5 year renewable level term insurance, renewable to age 35

QUESTION 65

Imelda owned a UL policy that would pay out the face value plus the account value upon death. When she died from a car accident, the insurer paid out the $500,000 face value plus $80,000 that had accumulated in the investment component of the policy. As a result, the $580,000 paid to her son, who was the named beneficiary. How will this amount be taxed?

a. The $500,000 will be received by her son tax free. The $80,000 portion will be taxable in his son’s hands

b. The $500,000 will be received by her son tax free. Her son will receive the $80,00 which may or may not be taxed depending if the policy was exempt or non-exempt

c. The $500,000 will be received by her son tax free. The $80,000 portion will be taxable on Imelda’s tax return

d. The entire amount is tax free

QUESTION 66

Emma owned a 1M whole life policy. She obtained a $20,000 policy loan three years ago. The interest on the loan was 4%, compounded annually. Emma died today, exactly three years. What is the outstanding loan amount?

a. 24,000

b. 21,632

c. 22,497

d. 20,080

QUESTION 67

Which of the following best describes “twisting”?

a. Encouraging a client to cancel a policy in order to buy a new one with the same insurer for the purpose of earning a commission

b. Encouraging a client to cancel a policy in order to buy a new one and collecting a second commission as a result

c. Encouraging a client to cancel a policy in order to buy a new one with a different insurer and collecting a second commission as a result

d. Encouraging a client to cancel a policy in order to buy a new one with a different insurer for the sole purpose of earning a commission

QUESTION 68

Abraham applied for $350,000 whole life policy 19 months ago. The policy was approved as applied for. On the application form, Abraham’s date of birth was transposed resulting to an age 9 years less than his true age. Abraham’s premium is $245/month. However, if the insurer knew his age, he would be paying $320. Abraham died when the policy had a $255 cash value.

How much will his beneficiaries receive?

a. 267,968

b. 130,612

c. 221,428.57

d. 0

QUESTION 69

Mary and Popo were married for 10 years and resided in Winnipeg. They had no children. During their married Popo named Mary as a revocable beneficiary of his life insurance in the policy itself. After they divorced, he forgot to update his will or change the beneficiary in the life insurance policy. Popo passed away last week.

What entitlement would his former wife have on his estate?

a. Divorce does not nullify an ex-spouse’s entitlement under an existing will or life insurance policy. She would have the same entitlement since Popo made no changes.

b. Popo’s wife would have no entitlement under an existing will. She would also have no entitlement to the life insurance proceeds because she was named as a revocable beneficiary.

c. Divorce would revoke his former wife’s entitlement under an existing will; however, the beneficiary in the policy will likely stand.

d. Divorce automatically revoked his wife’s entitlement to any of his estate, including assets bequeathed in a last will and testament or a beneficiary designation in the policy itself.

QUESTION 70

Curtis, who is 34 years old, has a 10 year renewable and convertible-to-age-65 term insurance policy. Premium payments are automatically deducted from his bank account on a monthly basis. Knowing he had ample money in his bank account, Curtis didn’t think to tell the insurer that he would be on vacation to the Philippines for the next two months during the winter. Curtis wants to completely forget about life for a while, so he did not bring a cell phone and has no intentions of being connected. Curtis did not realize that, while he was away, his policy would expire and as a result would need to be renewed for another term.

What will likely happen to his policy?

a. The policy will automatically renew and remain in force.

b. The policy will lapse after 31 days from the end of the current term. The policy could be reinstated over the next two years and, as an exception, would not require evidence of insurability.

c. The policy will lapse after 31 days from the end of the current term and cannot be reinstated.

d. The policy will lapse after 31 days from the end of the current term. Once lapsed, it cannot be reinstated given the insured had the option to renew, and his lack of action is akin to his cancelling the policy.

QUESTION 71

Your client Jermino recently passed away. He owned a whole life insurance policy which his wife, Alexandria, was named as the beneficiary. Yesterday, you received a call from Jermino’s brother advising you that he is the executor of Jermino’s estate.

What action should you take in the claims process?

a. You are required to obtain a probated copy of the will from Jermino’s executor

b. You cannot discuss the policy with anyone other than the executor

c. You can contact Alexandria, provide her with the claims form, and assist her with the completion forms

d. You are not allowed to contact anyone with reference to the claim; instead, you must take a reactive approach if and when a claim is filed

QUESTION 72

Which of the following best describes “churning”?

a. Encouraging a client to cancel a policy in order to buy a new one with the same insurer for the purpose of earning a commission

b. Encouraging a client to cancel a policy in order to buy a new one and collecting a second commission as a result

c. Encouraging a client to cancel a policy in order to buy a new one with a different insurer and collecting a second commission as a result

d. Encouraging a client to cancel a policy in order to buy a new one with a different insurer for the sole purpose of earning a commission.

QUESTION 73

Hannah holds a 10-year renewable term insurance policy that up for renewal. She will be 45 years old and the policy is renewable until 65. Assuming Hannah still needs temporary coverage, what would you advise?

a. The policy can only be renewed if Hannah is in excellent health and therefore still considered an insurable risk

b. If Hannah is in excellent health, then she should renew the existing policy

c. It does not make sense to replace an existing policy since the incontestability policy would recommence

d. If Hannah is in excellent health, then she should consider applying for a new term 10 renewable policy till age 65

QUESTION 74

Under which of the following situations would the policyholder not required to receive a life insurance replacement declaration (LIRD)?

a. Alana, who was advised to surrender her existing policy for cash after her application for insurance with a new insurer has been approved.

b. Mimi, who was advised to buy a new policy with a new insurer. Once the policy is issued, he will cancel his existing policy.

c. Carmi, who was advised by her agent to take out a policy loan against her whole life policy because the interest rate is cheaper than what the bank is offering her on a new car loan.

d. Fred, who was advised by his agent to take a policy loan against his existing whole life policy. He plans on using the funds to buy term coverage.

QUESTION 75

Greg applied for life insurance at age 54. In error, the year of birth was entered to indicate the he was 45. The policy was whole life with a $500,000 face value. The premium he quoted was $9.40 per year per $1,000 coverage. At his correct age, the premium would have been $17.20 per $1,000 coverage. The misstatement of age was noticed after Greg died and the claim was being assessed.

What would happen now?

a. The death benefit of $273,256 would be paid.

b. If the policy was issued less than two years ago, the insurer could deny the claim on the basis of material misrepresentation. If the policy was issued more than two years ago, the insurer can deny the claim only if they can prove fraud.

c. The death benefit would be denied on the basis of material misrepresentation.

d. A death benefit of $416,666 would be paid.

QUESTION

76

Jasper and Jade are brothers, both shareholders of a corporation. Both are married and their wives have no interest in the company. The company has a buy-sell cross-purchase agreement.

How should they structure the life insurance?

a. Jasper buys a personal life insurance having Jade as his beneficiary.

b. Jade buys a personal life insurance having Jasper as his beneficiary.

c. The corporation should buy life insurance for both shareholders buying each other’s shares and having the corporation as beneficiary.

d. The corporation should buy life insurance for both shareholders having each other’s estate as beneficiary.

QUESTION 77

Robert is Yuri’s financial advisor. He is asking about his parents. Why should the advisor do this?

a. He wants to offer them insurance

b. He wants to know if the parents have existing insurance

c. He wants to know if Yuri has financial or physical obligations to his parents

d. He wants to get referrals

QUESTION 78

Janice and John both need life insurance but they have a very tight budget and they want to insure their children also. What rider do they need?

a. PUA

b. GIB

c. Child rider

d. Family rider

QUESTION 79

Mikko is the sole earner in the family. His income covers all the monthly household expenses. Yssa has no work and takes care of their child. Who needs more insurance and why?

a. Mikko, who is the primary earner

b. Mikko, whose income covers their monthly expenses

c. Yssa, who looks after their child

d. Mikko and Yssa require equal amounts of insurance

QUESTION

80

Miller is a business owner who travels frequently between Canada and USA. He wants to purchase $1,000,000 coverage of life insurance. He is asking you to issue $500,000 of TIA. What should you do?

a. Issue him a TIA of $100,000 to protect the insurers risk

b. Issue him a TIA of $500,000 because that is what he ask for

c. Issue him a TIA of $1,000,000, coverage must be equal to the applied face amount

d. Do not issue TIA, as he travels frequently

QUESTION 81

Carlo purchased a universal life policy 20 years ago. Now, its accumulated value is $100,000. Its ACB is $18,000. He is considering taking a collateral loan of $50,000. If there is a gain, how much is the policy gain on the collateral?

a. There is no policy gain

b. $18,000

c. $50,000

d. $82,000

QUESTION 82

Ronald had purchased universal life insurance 10 years ago. He was initially depositing $75 per month. Recently, his salary was increased significantly and has proceeded to deposit $20,000 per year. This resulted in his current fund value being $25,000, which is $20,600 more than 3 years ago.

What is the tax rule that was violated?

a. Minimum funding rule

b. Annual accrual rule

c. Anti dump-in rule

d. MTAR rule

QUESTION 83

Roland is asking you to give him a quote for T-10 and T-20 life insurance. His annual income is $175,000.

How will his agent respond?

a. Give him a quote of T10 and T20 because that is what he asks for.

b. Set up a meeting to discuss family dynamics. Without it you can’t give him a quote.

c. Give the client T10 quote as it is less expensive.

d. Present universal life insurance as a better insurance policy.

QUESTION 84

Annie has a $500K UL policy for which she deposits $200/mo for the past 6 years. On the 7th year her boss releases her on loan to a distant foreign company for a 5 to 10-year consultancy contract. Fearing that she will not be able to put money into her PAC Bank account she writes a large lump sum deposit to cover 10 years of her absence so the policy won’t lapse.

Which statement is true?

a. She should write the amount for $24,000 deposit to make up for 10 years

b. The 250% rule or anti-dump in rule, prevents her from making a large sum-deposit to her policy after the 7th year

c. She may authorize the insurer to increase the debit amount from her PAC where she will put in the money for the next 5 years

d. All of the above.

QUESTION 85

Which statement is false regarding the anti-dump in rule?

a. The anti-dump-in rule will apply on the policy’s first year

b. The policy’s cash value is compared with the usual lower MTAR of the newly updated ETP which makes it more prone to failing the exempt test

c. The anti-dumping provision resets the date of the exempt test policy (ETP) to the third preceding year anniversary

d. Remedial measures to avoid effect of anti-dumping provision is to withdraw cash from the accumulating fund, or moving it to a taxable side account.

QUESTION 86

How old must a child be to have his/her life insured?

a. 1 day

b. 15 days

c. 1 month

d. 3 months

QUESTION 87

Serena had purchased a UL policy some time ago. On the 15th anniversary, she received a notice that her fund value has exceeded the exempt test policy amount in that year.

How many days does a policyholder have to remedy this, and what will happen after?

a. 30 days, then the policy becomes non-exempt. This could be still be remedied and the policy would gain exempt status again.

b. 30 days, then the policy becomes non-exempt forever.

c. 60 days, then the policy becomes non-exempt. This could be still be remedied and the policy would gain exempt status again.

d. 60 days, then the policy becomes non-exempt forever.

QUESTION 88

In case of MTAR rule violation, what are possible options that could remedy this?

a. Increasing face amount

b. Taking a policy loan

c. Taking a collateral loan

d. Increasing deposit amount

QUESTION 89

How does an insurer reduce Adverse Selection?

a. Decreasing premiums for renewal premiums

b. Require medical insurability for applications

c. Increasing the term length for life insurance

d. Denying life insurance benefit claims

QUESTION 90

Destiny is applying for a term life insurance policy. If she paid annual premiums, it would cost $240. If she paid monthly premiums, it would cost $21.60.

What is the modal factor for this policy?

a. 0.9

b. 0.08

c. 0.05

d. 0.09

QUESTION 91

Lolita is applying for a whole life insurance policy. If she paid quarterly premiums, it would be $721.44. If she paid annual premiums, it would cost $2,672.

What is the modal factor for this policy, and how much more would Lolita be paying if she paid quarterly?

a. Modal factor is 0.25, her annualized premium is the same as the quoted annual premium

b. Modal factor is 0.27, her annualized premium is 8% higher than the quoted annual premium

c. Modal factor is 0.037, her annualized premium is $395.36 more than the quoted annual premium

d. Modal factor is 0.08, her annualized premium is $213.76 more than the quoted annual premium

QUESTION 92

A life insurance coverage has an annual premium of $200 with a .09 modal factor if paid monthly. How much will the client save if the client pays the annual premium?

a. $1.50

b. $4.00

c. $16.00

d. $18.00

QUESTION 93

Which of the following is the best illustrates adverse selection?

a. Unhealthy people are more likely to purchase life and health insurance

b. All travelers are required to purchase travel insurance

c. People of varying degrees of health purchase life insurance

d. More experienced drivers tend to buy auto insurance

QUESTION 94

Mr. Tesla and Mr. Westinghouse each own 50% of the 300 shares of Tesla-Westinghouse Inc., a battery supply company.

To protect the business, they entered into a buy-sell agreement and decided to fund it with a joint-first-to-die Term-to-age 65 crisscross insurance. Tesla and Westinghouse pay for the life insurance premiums. After many years of success, Tesla, at the age of 60, died due to untreated iron deficiency-anemia which led to health complications.

To whom will the insurance company pay the insurance benefit?

a. The insurer will pay the tax-free death benefit to Tesla’s estate. The 150 shares will be transferred to Westinghouse. Westinghouse now owns 100% of the 300 shares.

b. The insurer will pay the tax-free death benefit to Tesla-Westinghouse Inc., which will be credited to the CDA. Tesla-Westinghouse redeems the shares from Tesla’s estate, cancelling and reducing the shares to 150.

c. The insurer will pay the tax-free death benefit to Westinghouse. Westinghouse pays Tesla’s estate to buy back the 150 shares. Westinghouse now owns 300 shares and is now 100% owner of the company.

d. The insurer will pay the tax-free death benefit to Tesla-Westinghouse Inc., which will be credited to the CDA. Tesla-Westinghouse Inc. redeems 150 shares from Tesla’s estate using the funds from the CDA. The 150 shares are cancelled, and shares are reduced to 150. Mr. Westinghouse still owns 150 shares with 100% ownership of the company.

QUESTION 95

Mr. Tesla and Mr. Westinghouse each own 50% of the 300 shares of Tesla-Westinghouse Inc., a battery supply company. To protect the business, they entered into a cross-purchase buy-sell agreement funded by a business-owned insurance. After many years of success, Tesla, at the age of 60, died due to untreated iron deficiency-anemia which led to health complications.

To whom will the insurance company pay the insurance benefit?

a. The insurer will pay the tax-free death benefit to Tesla’s estate. The 150 shares will be transferred to Mr. Westinghouse. Mr. Westinghouse now owns 100% of the 300 shares.

b. The insurer will pay the tax-free death benefit to Tesla-Westinghouse Inc., which will be credited to the CDA. Westinghouse redeems 150 shares from Tesla’s estate with a promissory note and instructs the company to pay him a tax- free capital dividend. Westinghouse uses the fund to pay the promissory note. Mr. Westinghouse owns 300 shares and is 100% owner of the company.

c. The insurer will pay the tax-free death benefit to Westinghouse. Westinghouse pays Tesla’s estate to buy back the 150 shares. Westinghouse now owns 300 shares and is now 100% owner of the company.

d. The insurer will pay the tax-free death benefit to Tesla-Westinghouse Inc., which will be credited to the CDA. TeslaWestinghouse Inc. redeems 150 shares from Tesla’s estate using the funds from the CDA. The 150 shares are cancelled, and shares are reduced to 150. Mr. Westinghouse still owns 150 shares with 100% ownership of the company.

QUESTION 96

Mr. Tesla and Mr. Westinghouse each own 50% of the 300 shares of Tesla-Westinghouse Inc., a battery supply company. Mr. Tesla, Mr. Westinghouse, and Tesla-Westinghouse Inc. entered into a buy-sell agreement structured as a share-redemption plan, funded by a business-owned insurance. After many years of success, Tesla, at the age of 60, died due to untreated iron deficiency-anemia which led to health complications.

To whom will the insurance company pay the insurance benefit?

a. The insurer will pay the tax-free death benefit to Tesla’s estate. The 150 shares will be transferred to Mr. Westinghouse. Mr. Westinghouse now owns 100% of the 300 shares.

b. The insurer will pay the tax-free death benefit to Tesla-Westinghouse Inc., which will be credited to the CDA. Westinghouse redeems 150 shares from Tesla’s estate with a promissory note and instructs the company to pay him a tax- free capital dividend. Westinghouse uses the fund to pay the promissory note. Mr. Westinghouse owns 300 shares.

c. The insurer will pay the tax-free death benefit to Westinghouse. Westinghouse pays Tesla’s estate to buy out the 150 shares. Westinghouse now owns 300 shares and 100% owner of the company.

d. The insurer will pay the tax-free death benefit to Tesla-Westinghouse Inc., which will be credited to the CDA. TeslaWestinghouse Inc. redeems 150 shares from Tesla’s estate using the funds from the CDA. The 150 shares are cancelled, and shares are reduced to 150. Mr. Westinghouse still owns 150 shares with 100% ownership of the company.

QUESTION 97

Emmanuel is a city engineer employed with Deveraux incorporated. He has been with the company for 3 years and was recently promoted with a salary of $65,000. His wife came to Canada 3 months ago and is currently enrolled in a 2-years course program. Emmanuel is the co-signor for the personal loan incurred by his wife and is also paying off his own student loan. Emmanuel’s cousin, a life insurance advisor, discussed the importance of having life insurance and discussed with them several options. The couple would like to take out a life insurance policy but is concerned about the cost.

Which of the following plans suits them best?

a. Single term life on Emmanuel only

b. Single term life on the wife only

c. Joint-First-to-die on both lives

d. Joint last to die both lives

QUESTION 98

Masha has a $400,000 T-20 Life insurance policy which she bought 15 years ago in the 2nd day of the month of January. In the month of March this year, Masha called her life insurance agent, Laarni, to inform her that she could no longer afford the premium, which she pays on annual basis, now that her 3 children are all in the University and she needs to do some budget re-allocation to support the other needs of the children. Laarni learned from Masha that the mortgage on the house has been fully paid off using the inheritance money Masha received from her uncle who recently passed away. The purpose of the term insurance purchased 15 years ago was to secure the family’s home in case Masha prematurely dies before it is totally paid off. Masha expressed she no longer sees the need for life insurance and has set aside enough funds for retirement and owns a fully paid memorial plan.

What is the most correct advice Laarni could provide to Masha?

a. Masha should continue her life insurance coverage since premium for the year has been paid. Next year, she can switch from paying the premiums annually to monthly so it will be more affordable.

b. Masha can cancel the policy by not paying the premiums starting next year.

c. Masha could surrender the plan and use the funds to set-up an RESP for the children.

d. Masha can cancel the policy in writing by sending couriered letter to the insurance company stating the policy information and date of when she wants the coverage to stop.

QUESTION 99

How many days does a policyholder have to remedy a situation where the cash value exceeds the Maximum Tax Actuarial Reserve (MTAR) line?

a. 60 days

b. 120 days

c. 365 days

d. 14 days

QUESTION 100

How would an insurance company handle policies above their retention limit?

a. The insurer would decline because the risk is too high

b. They would reinsure with a reinsurer if the risk is valid

c. The insurer divides the policy in half between another insurer

d. They would only insure up to their retention limit and not above

QUESTION 101

A couple just had their first baby. During a visit to see the newborn, a friend recommended that they get a whole life policy for the child. Why would this recommendation be advantageous?

a. Very low premiums payments

b. Option for limited payment

c. Young newborns have weaker immune system

d. First child syndrome

QUESTION 102

Requiring applicants for life insurance to undergo a physical examination is an effective way to:

a. Reduce moral hazard

b. Increase information asymmetry

c. Reduce adverse selection

d. Increase sales

QUESTION 103

Merlie is a bank manager who accumulated huge amount of assets. She has $10,000 cash on hand, $20,000 chequing account and $5,000 savings account. She also has investments in RRSP with a total amount of $100,000, $10,000 Canada Savings Bond, $8,000 money market funds, $5,000 five (5) year term deposit and $15,000 GIC.

How much is the liquid assets of Merlie?

a. $43,000

b. $35,000

c. $10,000

d. None of the above

QUESTION 104

Guaranteed Insurability Benefit is a rider that gives the policy holder the option to buy additional life insurance coverage in the future without providing proof of insurability but there are number of restrictions.

Which of the following is NOT a restriction of GIB?

a. The total increase maybe limited to a specific dollar or percentage of original face amount

b. The total increase will be limited to the maximum of $100,000

c. The number of times the option can be exercised may be limited, such as fives times over the duration of the contract

d. The amount of each increase may be limited to a specific dollar amount or percentage of the original face amount

QUESTION 105

Terminal Illness benefit allows the policy holder to apply for an advance on the death benefit if the life insured has been diagnosed with a terminal illness that is expected to result in death with a fixed period of time.

Which of the following is FALSE?

a. The fixed period of time of expected death is between 1-24 months

b. The request must be supported with diagnosis made by a qualified physician

c. The benefit is usually restricted to a maximum amount

d. The benefit is payable to the life insurance beneficiary/ies

QUESTION 106

Some group insurance allow members to purchase additional insurance. This will allow plan members to customize their coverage that suits their needs. However, the member must be enrolled in the base group plan before the member can buy additional coverage with the requirement of proof of insurability to prevent the creation of potential adverse selection or anti selection.

What do you mean by adverse selection or anti selection?

a. It is a phenomenon where someone who is at greater risk will get more coverage and is more likely to make a claim than the average member

b. It is a situation when the plan member cannot select the amount of coverage

c. It is the employer who will customize the plan based on company’s budget

d. All of the above

QUESTION 107

Mary has a life insurance with $500,000 face amount and $150,000 investments. The death benefit type is face amount plus fund value. Mary is a single mother with only one son, Jaired who is 16 years old. Mary wants that her sister Josie will be managing the investments and even the death benefit proceeds for the benefit of the son if something happens to her.

If you are the advisor, what would you recommend as beneficiary designation?

a. Naming the sister as irrevocable beneficiary

b. Naming the son as irrevocable beneficiary

c. Naming the son as revocable beneficiary with the sister as trustee

d. Naming the son as revocable without a trustee

QUESTION 108

Ali’s just received $200,000 death benefit from his Grandmother’s life insurer. Ali took $100,000 of his inheritance and bought a Tesla model S and he is thinking of investing the rest. He is meeting with Yeti his agent who tells him about investing in an annuity. Ali wants to invest $15,0000 of the inheritance into a prescribed annuity.

Will Yeti have to report to FINTRAC?

a. Yes, because the deposit is more than $10,000

b. No, because the money is from a death benefit which is tax free

c. No, because a prescribed annuity is exempted from FINTRAC reporting

d. Yes, because Ali is a PEFP

QUESTION 109

Grace has a universal life policy whose face amount is $500,000. Over the years, the policy has a cash value of $45,000 and ACB of $12,000. If Grace decided to surrender the policy today, how much will she pay as taxes assuming her marginal tax rate is 30%?

a. $33,000

b. $30,000

c. $9,900

d. $5,450

QUESTION 110

Melvin has a universal life policy for 10 years now. If the cash value at year 7 is $64,000, how much should be the cash value at year 10 in order not to fail the anti-dumping test?

a. $160,000

b. $250,000

c. $100,000

d. $120,000

QUESTION 111

Mary purchased a life insurance policy and named her little daughter Jenny as beneficiary. Jenny got married at 25 and had her name changed. A year later, Mary died. What other document should Jenny submit when she makes a claim?

a. Change of name document

b. Birth certificate

c. Death certificate

d. Marriage certificate

QUESTION 112

Joseph and Mary are married. Joseph has life insurance policy for $1,000,000 with Mary as beneficiary. They got divorced. Joseph married Magda. Magda managed to convince Joseph to partially assign $100,000 of the policy to her father Zachary. She also got Joseph to make for her a collateral loan of $450,000. Joseph died five years later.

How much death benefit will Mary receive?

a. $1,000,000

b. $900,000

c. $600,000

d. $450,000

QUESTION 113

Jerry is applying for Life Insurance coverage. He reveals that a couple of years ago his brand-new sports car was hit from behind and he became disabled. He has completely recovered. He says he is a non-smoker although he mentioned trying a cigar two months ago.

1. Smoking status

2. Medical history

3. Driving record

4. Drinking history

What factors would affect his application?

a. 1,2

b. 1,2,3,4

c. 2,3,4

d. 2,4

QUESTION 114

Digna’s father died of heart attack at the age of 30. Digna is 25 and widowed with two young children aged 3 and 5. She has limited disposable income. She is healthy but her family has a history of stroke as well. She wants coverage for her children’s education lest she dies prematurely.

She asks you for advice. What life insurance policy would you recommend?

a. Participating Whole Life insurance policy with PUA Rider

b. UL YRT and child coverage rider for protection of the whole family

c. UL, YRT for tax free cash accumulation

d. A term 10 policy with GIB rider and child rider, so coverage can increase in the future and her kids’ education in case Digna succumbs to heart attack

QUESTION 115

Junbong bought three life insurance policies 18 years ago. He named his estate as beneficiary of the first policy, his nephew is beneficiary for the second and his grandchild is beneficiary for the third. He died yesterday and his estate declared bankruptcy.

Which of the following is correct?

a. Nephew and grandchild will have to pay the debts in his estate because they are adults now

b. Nephew and grandchild will receive life insurance death benefits discreetly

c. Estate will receive life insurance death benefit and pay for his debts

d. b and c

QUESTION 116

Jo and Marie are married. Jo bought a $1,000,000 policy and named Marie as beneficiary. Years later they divorce. Jo marries Magda. Magda was able to convince Jo to assign $100,000 of his policy to her father Zachy naming her as beneficiary. She also asked Jo to allow her a $500,000 collateral loan from the same policy. Jo died after a year.

How much death benefit will Marie receive?

a. $400,000

b. $500,000

c. $900,000

d. $1,000,000

QUESTION 117

A 67 year old disabled man has life insurance with fund value. He does not need income right now. Which of the following annuities would you recommend?

a. Accumulation Annuity

b. Prescribed Annuity

c. Deferred Life Annuity

d. Term Certain Annuity

QUESTION 118

Jane is an entrepreneur with irregular income from her 3-year old business. She wants to buy life insurance from you. What document will you need to know her average income?

a. Individual tax return

b. Bank statements

c. Notice of Assessment (NOA)

d. Net worth

QUESTION 119

Andrea’s group life insurance coverage is $65,000. Her annual premium is $785 of which 80% is paid by her employer and 20% is deducted from her salary. How much is the taxable benefit for Andrea?

a. The tax free benefit is $65,000 if the beneficiary is the estate

b. The taxable benefit is $157

c. The taxable benefit is $628

d. None of the above

Answer Key

1 C If investment/properties/businesses are present in a situation, this will be taxable disposition to pass on to heirs (however could be rolled over tax-deferred to spouse)

A is false, group plans can have different classes depending on positions/rank in company, and different benefits for its different classes.

2 C

B is false, the coverage can continue for 31 days and can be converted within this time

C is true, the policy holder of the group plan is the sponsor (employer)

D is false, although the group plan is convertible to individual, there is no medical required to do so.

A is false, premiums would increase for the individual when converting from a group.

B is false, group plans are less expensive than individual plans

3 D

4 A

5 B

C is false, optional additional coverage will not be paid for by the employer

D is true, employer portion of contribution will be taxable income for employee

A is correct, they have limited income with young dependents, and to effectively cover the mortgage, they can get a term coverage (joint-first to die for limited income), and waiver of premium since they don’t have emergency savings in case of disability.

B, C, and D are incorrect, permanent would be too expensive for this scenario

Naming the spouse revocable beneficiary would be suitable over irrevocable (there is no legal document requiring irrevocable, and no need to name spouse irrevocable as they are preferred beneficiaries which also qualify for protection from creditor seizure). Children as contingent beneficiaries if both spouses die at the same time.

6 D Medical Information Bureau is used by insurers to cross-check information for any non-disclosures on the application

7 C We are looking for the most aggressive option. YRT is more aggressive than Level cost. Equity funds are more aggressive than Income funds

8 B If investment/properties/businesses are present in a situation, this will be taxable disposition to pass on to heirs (however could be rolled over tax-deferred to spouse)

A is false – increasing the face amount would require evidence of insurability

B is false – renewal premiums cost more than re-applying

9 C

10 D

11 C

C is true – a policyholder can reduce the amount of coverage anytime

D is false – waiver of premium rider takes effect 3 months after total disability, not unemployment

A is false – the employer is the beneficiary of a key person insurance

B is false – key person insurance is not tax deductible by the employer

C is false – the benefits of a key person insurance is tax free

D is true - A split dollar arrangement is a valid key person insurance setup to which the benefit is split between the face amount (to the employer) and accumulated value (to the employee)

In a partnership setup, buy-sell agreement supported by permanent insurance would be the solution to protect the business in case of either partner’s death. With the mortgage in the situation, a declining term insurance would be ideal to cover the debt

12 A Morbidity is the risk of disability, not death

13 C

A, B and D are true – MTAR is the UL investment’s tax exemption limit. Excess investment is taxable, but face amount can be increased to increase the MTAR.

C is false – If the policy investment exceeds the MTAR, the excess becomes taxable

D

A is false – it is mandatory for the advisor to illustrate investment worst case scenario

B is false – a higher cost of insurance would mean a smaller resulting investment value

C is false – there won’t be taxable disposition if assigned to spouse or child.

D is true – YRT is ideal for more aggressive investment growth, but more risk.

15 A With flexibility in mind and knowing that the couple has a large disposable income, UL will be ideal in this situation 16 B Kara’s policy is participating – with dividends, which could increase the death benefit.

240,000 (50,000 x 2 children ÷ .04 Short: 265,000

A Total short: 2,140,000 18 C Total short: 295,000 19 D Total short: 650,000 20 D Total short: 825,000

Drawdown (72,000 ÷ 2) x 20 years = 720,000 short Liabilites Assets 30,000 final exp.

22 A

Liabilites Assets

50,000 Mortgage is insured

Short: 10,000 50,000 Needs

64,000 ÷ 0.5

Short: 1,280,000 0 (no survivor income)

Liabilites Assets

350,000 + 50,000 + 50,000 = 450,000

Short: 10,000

100,000 Needs Income (5,000 x 12) = 60,000 50,000 (survivor)

L is greater than A, Short. -350,000 N is greater than I, Short. -10,000 / year, ÷ 1.94% (see formula below) = -515,464

Real Rate of Return Formula (1+rate) ÷ (1+inflation) – 1 (1.05 ÷ 1.03) – 1 = 1.94%

Insurance Needed: 350,000 + 515,464 = 865,464 (866,000 is the closest)

Liabilites Assets (1.5 x 82,000) = 123,000 existing insurance

Capital of Income -82,000 ÷ 2.46% (see formula below) = -3,333,333 required

23 B

A is greater than L, Surplus. +123,000

Real Rate of Return Formula (1 + rate) ÷ (1 + inflation) - 1 (1.04 ÷ 1.015) - 1 = 2.46%

Insurance needed: 3,333,333 – 123,000 = 3,210,333 (3,211,000 is the closest)

A

Liabilites Assets

175,000 existing insurance

Capital of Income

-54,000 ÷ 1.78% (see formula below) = -3,033,708 short

25 B

A is greater than L, Surplus. +175,000

Real Rate of Return Formula (1 + rate) ÷ (1 + inflation) - 1 (1.03 ÷ 1.012) - 1 = 1.78%

Insurance needed: 3,033,708 – 175,000 = 2,858,708 (2,859,000 is the closest)

Taxation (Surrender of life insurance)

Policy Gain = 41,250 CSV – 24,240 ACB = 17,010

% Withdrawn = 4,000 withdrawn ÷ 41,250 CSV = 9.7%

17010 Policy Gain x 9.7% withdrawn = 1,649 Taxable

Taxation (Policy Loan)

26 D

27 D

Loan excess of ACB is taxable

4,000 Withdrawn is less than 24,240 ACB, therefore 0 taxable

This policy was last acquired after Dec 2, 1982, we use the new formula: ACB = Premiums – NCPI – (Dividends cash out – reinvested) – (Policy loan balance – interest) ACB = 95,200 premiums – 56,250 NCPI – 18,310 Dividends – 0 Policy Loan = 20,640

28 B Mortality increases slowly while under 40, but the rate of increase would become higher and eventually by age age 40, mortality increase is more dramatic.

29 D Males have more mortality than females, and older people have higher mortality

30 D If a person does not have much to give, he/she can get life insurance to leave funds and legacy to heirs/ children/beneficiary

31 C It is impossible to avoid death. Everyone would die one sooner or later

Liabilites Assets

Capital of Need

32 B

Capital gains tax on cottage: (250k - 180k)/2 X 30% = 10,500 Home is exempt from tax. 0

Total need: 910,500

Short 3,000/mo x 12 ÷ .04 =900,000

33 B Male have higher risk compared to female at any given age

34 C Grace period is 30 days. Last premium paid was 2 weeks ago (less than 30 days), still within the grace period, therefore still covered.

35 C

It is important to be mindful: Was the Beneficiary still alive at the time of the life insured’s death? Ara was still alive when Manny (her husband) died, so she is supposed to receive benefits. Knowing she is dead, benefits go to her estate.

>If Ara died before or at the same time Manny died, contingent beneficiary would receive the death benefits.

36 B As mortality increases, life expectancy decreases (see page 4, HLLQP book)

37 B Lucas is already retired and his son is independent, so the concern is not income loss. Residence is exempt from capital gains tax. The son would best pay out the mortgage.

38 A Mortality is the risk of dying

39 A A Life table (also known as mortality table) is a table that shows the % risk of dying at a certain age

40 C Death is low probability but high severity

41 D By choosing to accept a policy with exclusion, she exercises risk retention (accept risk) By choosing to buy insurance, she exercises risk transfer (insurance) By being careful on selecting dive areas, she exercises risk reduction (safety)

42 D Reference: HLLQP book page 2

43 C Jane took safety precaution – risk reduction

44 A Policy illustration contains figures and numbers. For policies with cash value, it is used to illustrate the cash value, but term insurance does not have cash value so it is for illustrating premiums on renewal instead.

45 B This is what mortality is = risk of death at a certain age. Life expectancy is the expected length of time (years) to live at a certain age.

46 D They want their child to be taken care of when one or both parents die

47 B Risk Transfer = insurance

48 A Risk Reduction = taking safety measures

49 A Limited Payment means number of years for the policy to be paid up. No more premiums to be paid, policy is in-force (permanently)

50 D The concern is an employee may leave the company. The type of insurance should not be permanent.

51 D

52 C 100,000 salary x 5 = 500,000 insurance coverage

The 200,000 is just the salary cap, but the person’s salary is 100,000.

53 B For calculation purposes, the tax rates to be used would be average tax rate, as using marginal tax rates would require a more difficult calculation.

54 A

Joint First to die is best used to give benefit to surviving spouse.

Joint Last to die is best used to give benefit to cover taxes.

D would not be the best answer because the mortgage is a temporary need, and the policy in question is T-100 (a permanent life)

55 C The contract is between the insurer and sponsor (employer). The member (employee) receives a certificate of insurance, which is not a contract.

56 A The employer is the plan sponsor

57 A

58 D

59 D

They are looking for a low-maintenance policy. UL must be reviewed often, as the investments can fluctuate depending on the choice the client has taken.

The death benefit option selected is level + cumulative premiums, which means the face amount (500,000) + deposit (72,000) = 572,000. Death benefit is tax free.

The MIB is used as an application cross checker to find any non-disclosures of medical AND non-medical information on the application form. However, insurers cannot use only this information to rate/decline the application, they would have to seek further information (through Attending Physician Statement, Inspection Report, etc)

60 C The bigger the difference between the ACB and CSV, the bigger the policy gain which makes a bigger taxable portion if surrendered.

61 A

62 D

63 B

64 B

Adjustable whole life premiums would change according to the interest rate. This gave rise to the universal life policies, so currently makes adjustable whole life rare

This policy was last acquired after Dec 2, 1982, we use the new formula:

ACB = Premiums – NCPI – (Dividends cash out – reinvested) – (Policy loan balance – interest)

ACB=(3000+13000)premiums – 7000 NCPI – (500–700)Dividends –(200-20)Policy Loan = 9020

Taxable on surrender = (CSV – ACB) x %withdrawn = (12000 CSV – 9020 ACB) x 100% full surrender = 2980 taxable

Financial underwriting = checking if the coverage is reasonable to the financial status and if the insured can afford the premiums

As mortgage is the sole concern, we would get term insurance. We would try to match the term to the length of the amortization period (10 yrs) And to effectively cover mortgage, we will get a declining (reducing) coverage

65 D Death benefits (including investment component) is paid out tax free

66 C 20,000 + 4% +4% +4% = 22,497.28

67 D

68 A

Misstatement of Age: benefit would be adjusted proportionately. 245 ÷ 320 = 76.56% (he was paying this % of the actual) 350,000 x 76.56% = 267,968.75 (benefit would be prorated)

69 C Divorce revokes the spouse from the will. However it does not revoke the beneficiary designation automatically. (If it is just separation and not yet divorce, spouse is not yet revoked from the will)

70 A If you do not respond to the renewal notice, don’t worry. It renews automatically.

71 C The beneficiary would be the one to fill up the claims form, assisted by the advisor. The executor (who deals with the will) has nothing to do with this, because life insurance bypasses the will.

72 A Keyword: improperly replacing a policy with the SAME insurance company is Churning

73 D

74 C

75 A

Renew or reapply? If person is still healthy, reapplying would be better as cost would be less than renewing. If person is unhealthy, renewing is the only option because no medical evidence is required to renew up to the same benefit amount.

C is the answer, this does not involve getting another policy. A, B and D require LIRD because it entails getting replacement coverage with another plan (even using policy loan to purchase another insurance, as policy loans reduce benefit amount)

Misstatement of Age: benefit would be adjusted proportionately. 9.40 ÷ 17.20 = 54.65% (he was paying this % of the actual) 500,000 x 54.65% = 273,255.81(benefit would be prorated)

76 C

Instead of the partners buying life insurance on each other, the corporation would buy insurance on each and is the beneficiary. Should one partner die, the deceased’s shares go to the estate and the surviving partner would take the tax-free benefit from the corporation’s tax-free capital dividend account and use it to purchase the deceased’s shares. This is called share-redemption.

77 C Covering obligation in case of loss of caregiver is also a need of life insurance

78 D GIB and PUA is used if the client would need to increase coverage later. Child Rider is used if the client wants to cover the children, but there is no spouse or the spouse would not be insured. In this situation, the entire family needs insurance, including the spouse and children, so we take family rider.

79 A It is more important to insure the (higher) income-earner of the family

80 D TIA is coverage from application until underwriting is complete, and requires up-front payment. However, the life insured must not have extra-ordinary risks (whether medical or non-medical)

81 A Collateral loan is not taxable, so no policy gain will be assessed.

Anti-dump-in (250%) rule: starting on the 10th year, if the policy’s investment reaches 250% of the investment 3 years prior, MTAR is effectively lessened, making the policy more at risk to tax.

82 C

In this situation:

25000 fund value on year 10 – 20600 difference = 4400 fund value on year 7 25000 / 4400 = 5.68. This is a 568% increase. Clearly you can see that the insured is now dumping in money.

83 B Advisor must assess situation first before recommending product or even quoting

Reference HLLQP Book 7.6.4

84 B

A is possible but that is not recommended because this triggers the anti-dump in rule B is true

C is possible but not recommended due to her long term absence D is false

85 A False = A because the anti-dump-in rule starts applying on the 10th year, in which the fund value is compared to that 3 years ago (which is year 7) B, C, and D are true

86 B 15 Days is the minimum age for a child’s life to be insured

87 D 60 days grace period to remedy the issue, otherwise policy will fail exempt test, and policy will become non-exempt forever.

To avoid the policy failing the exempt test, there are some remedies:

• Excess investment put into taxable side account

88 A

• Increase Face Amount up to 8% per year

• Withdraw some funds (could have tax)

89 B When renewing or converting term life insurance, no medical requirement is needed, which is Adverse Selection, therefore insurers charge more for renewing / converting term insurance; and require medical insurability tests when applying for new insurance.

90 D

91 B

Formula for Calculating Modal Factor:

Modal factor = installment premium ÷ annual premium

Modal factor = $21.60 ÷ 240

Modal factor = 0.09

Formula for Calculating Modal Factor:

Modal factor = installment premium ÷ annual premium

Modal factor = $721.44 ÷ $2672

Modal factor = 0.27

She is paying $721.44 quarterly which per year (x 4) is $2,885.76

$2,885.76 - $2,672 = $213.67 difference

$213.67 difference ÷ $2,672 annual premium = 8%

Lolita would be paying 8% more if she pays quarterly premiums compared to annual premiums

Alternate calculation

(Modal factor x number of periods) - 1 = difference

(0.27 x 4 quarters per year) - 1 = difference

1.08 - 1 = difference

.08 (or 8%) difference

Step 1: How much is the client paying per installment?

$200 annual premium x 0.09 modal factor = $18 per month

Step 2: How much is the annualized installment payment?

92 C

93 A

94 C

$18 per month x 12 = $216 total monthly premiums

Step 3: How much is the difference

$216 total monthly premiums - $200 annual premium = $16 difference

Adverse selection is an imbalance of risk which happens when people of higher risk are likelier to purchase insurance

This is a Cross purchase, Criss-cross insurance

Cross-purchase Agreement – This is where the shareholders will use the insurance proceeds to buy the shares of the deceased owner.

Criss-cross insurance – Each owner purchases insurance on the other business owner(s)/shareholder(s)

Learning Notes on this Topic:

When looking at the structure of agreement, insurance purchase and payout arrangement in buy-sell agreements, you would need to understand first how the Buy-Sell (Buy-Out) agreement is laid-out, which could follow one of these arrangements (answers the question WHO WILL BUY THE SHARES?):

A. Cross-purchase Agreement –used when there are two equal partners. This is where the shareholders will use the insurance proceeds to buy the shares of the deceased owner.

B. Entity Purchase / Share Redemption Agreement – commonly used when there are more than two partners / shareholders, or if the ownership division is unequal. This is where the company will buy back the shares of the deceased owner

Second, the insurance would need to be purchased Buy-sell (Buy-out), here are the possible insurance purchase arrangements (answers the question WHO WILL BUY THE INSURANCE?):

1. Criss-cross insurance – Each owner purchases insurance on the other business owner(s)/shareholder(s)

2. Company owned insurance – Company purchases the policy on the businessowners / shareholders lives. This makes use of a tax-free Capital Dividend Account (CDA) for the insurance benefit.

If Company Owned insurance is used with Cross Purchase agreement, the surviving owner, with a promissory note, buys the shares of the deceased owner. The surviving owner will then use the funds in the CDA to pay off the promissory note.

If Company Owned insurance is used with Entity Purchase / Share redemption agreement, Company uses money in CDA to buy the shares of the deceased owner.

95 B

This is a Cross purchase agreement, where the company owns the insurance policy.

Cross-purchase Agreement – This is where the shareholders will use the insurance proceeds to buy the shares of the deceased owner.

Company owned insurance – Company purchases the policy on the businessowners / shareholders lives. This makes use of a tax-free Capital Dividend Account (CDA) for the insurance benefit.

In this case, Company Owned insurance is used with Cross Purchase agreement, the surviving owner, with a promissory note, buys the shares of the deceased owner. The surviving owner will then use the funds in the CDA to pay off the promissory note.

Learning Notes on this Topic:

When looking at the structure of agreement, insurance purchase and payout arrangement in buy-sell agreements, you would need to understand first how the Buy-Sell (Buy-Out) agreement is laid-out, which could follow one of these arrangements (answers the question WHO WILL BUY THE SHARES?):

A. Cross-purchase Agreement –used when there are two equal partners. This is where the shareholders will use the insurance proceeds to buy the shares of the deceased owner.

B. Entity Purchase / Share Redemption Agreement – commonly used when there are more than two partners / shareholders, or if the ownership division is unequal. This is where the company will buy back the shares of the deceased owner

Second, the insurance would need to be purchased Buy-sell (Buy-out), here are the possible insurance purchase arrangements (answers the question WHO WILL BUY THE INSURANCE?):

1. Criss-cross insurance – Each owner purchases insurance on the other business owner(s)/shareholder(s)

2. Company owned insurance – Company purchases the policy on the businessowners / shareholders lives. This makes use of a tax-free Capital Dividend Account (CDA) for the insurance benefit.

If Company Owned insurance is used with Cross Purchase agreement, the surviving owner, with a promissory note, buys the shares of the deceased owner. The surviving owner will then use the funds in the CDA to pay off the promissory note. If Company Owned insurance is used with Entity Purchase / Share redemption agreement, Company uses money in CDA to buy the shares of the deceased owner.

This is a Share redemption agreement where the company owns the insurance policy.

Entity Purchase / Share Redemption Agreement – the company will buy back the shares of the deceased owner Company owned insurance – Company purchases the policy on the businessowners / shareholders lives. This makes use of a tax-free Capital Dividend Account (CDA) for the insurance benefit.

In this case, the Company Owned insurance is used with Entity Purchase / Share redemption agreement, so the Company uses money in CDA to buy the shares of the deceased owner.

Learning Notes on this Topic:

When looking at the structure of agreement, insurance purchase and payout arrangement in buy-sell agreements, you would need to understand first how the Buy-Sell (Buy-Out) agreement is laid-out, which could follow one of these arrangements (answers the question WHO WILL BUY THE SHARES?):

A. Cross-purchase Agreement – used when there are two equal partners. This is where the shareholders will use the insurance proceeds to buy the shares of the deceased owner.

B. Entity Purchase / Share Redemption Agreement – commonly used when there are more than two partners / shareholders, or if the ownership division is unequal. This is where the company will buy back the shares of the deceased owner

Second, the insurance would need to be purchased Buy-sell (Buy-out), here are the possible insurance purchase arrangements (answers the question WHO WILL BUY THE INSURANCE?):

1. Criss-cross insurance – Each owner purchases insurance on the other business owner(s)/shareholder(s)

2. Company owned insurance – Company purchases the policy on the businessowners / shareholders lives. This makes use of a tax-free Capital Dividend Account (CDA) for the insurance benefit.

If Company Owned insurance is used with Cross Purchase agreement, the surviving owner, with a promissory note, buys the shares of the deceased owner. The surviving owner will then use the funds in the CDA to pay off the promissory note. If Company Owned insurance is used with Entity Purchase / Share redemption agreement, Company uses money in CDA to buy the shares of the deceased owner.

97 A

98 D

The immediate and ongoing needs on Emmanuel’s death far exceeds those of the spouse’s death. This is evident because Emmanuel is the sole income earner and bearing more debt than the wife

Note: Whoever earns more and has a bigger debt has greater needs for insurance

A is false: The client no longer needs the insurance coverage and cannot afford the premium.

Switching from annual to monthly premiums will not save the client any money due to the modal factor.

B is false: Although B may be a good choice, letter D would be a better choice since most insurance companies refund unused premiums which Masha can use towards the children’s other needs.

C is false: Term insurance has no cash value.

D is true: Because the client needs to free up cash flow, she may cancel the policy. There would not be any cash value for term insurance, so a cancellation would not carry penalties.

Cancellation must be done in writing

99 A

A policyholder has 60 days to remedy a break in the MTAR line

If the coverage applied for is above the retention limit, the insurer contracts reinsurance company/ies to cover the excess coverage

Note about Reinsurance:

100 B

Insurers may accept to provide policies with huge coverage. However insurers generally also have a “retention limit” – maximum amount an insurer will take risk

If the coverage applied for is above the retention limit, the insurer contracts reinsurance company/ies to cover the excess coverage. The primary insurer collects premiums and passes some of the premium to the reinsurer. In a nutshell, the insurer has another insurer to cover the excess of the retention limit

101 A Younger people generally have lower cost of insurance

Adverse selection or (anti selection) is a phenomenon where someone who is at greater risk will get more coverage and is more likely to make a claim than the average member.

102 C

Example: Unhealthy people are more likely to purchase life and health insurance

By requiring medical tests, this helps reduce the risk of adverse selection.

$10,000 Cash

$20,000 Chequing account

$5,000 Savings account

$8,000 money market fund

GIC’s are not liquid

Term deposits is not liquid

103 A

104 B

RRSP is not liquid

Liquid assets are items that are easy to sell without loss in value. Examples include cash on hand, chequing account, savings account and the $8,000 money market funds

For RRSP, there would be withholding tax that reduces its value so it is not considered a “liquid” asset, even if you could withdraw these.

Guaranteed Insurability Benefit Rider allows increases to the life insurance coverage without need for providing proof of medical insurability. There are restrictions that may be applied, such as the total increase, the increase each time it is exercised, when and how many times it is exercised.

Note: In this question, the answer is false because $100,000 is not an absolute answer, and the amount will depend on the contract.

105 D Terminal Illness benefit is payable to the policyholder, because the life insured is still alive

106 A

107 C

108 A

Adverse selection or (anti selection) is a phenomenon where someone who is at greater risk will get more coverage and is more likely to make a claim than the average member.

Example: Unhealthy people are more likely to purchase life and health insurance.

If the life insurance benefit would be used for supporting children (under 18) and when naming minors as beneficiary, a trustee is required. The trustee will manage the funds until the child reaches the age of majority.

If a client is making $10,000+ cash deposits within 24-hour period, agent must report the transaction to Financial Transactions & Reports Analysis Centre of Canada (FINTRAC)

Refer to Ethics & Professional Practice module for details on FINTRAC

Taxation (Surrender of life insurance)

Policy Gain = $45,000 CSV – $12,000 ACB = $33,000

109 C

This is a full surrender, 100% Withdrawn

$33,000 Policy Gain x 100% withdrawn = $33,000 Taxable

Tax rate given is 30%

$33,000 Taxable x 30% tax rate = $9,900 Tax payable

Anti Dump-in Rule (or 250% rule) prevents policyholders from pumping more money into an existing policy

110 A

This is calculated by multiplying the cash value of 3 years prior by 250% , or 2.5

$64,000 x 2.5 = $160,000

Because of marriage, her name changed and she needs to submit her marriage certificate as the other document as proof of her identity together with her new government issued photo ID.

111 D

Other choices’ explanations:

A - The change of name document is not usually asked

B & C - The birth and death certificates of the deceased are regular submissions.

Partial assignment is the same as collateral loan, but is not absolute assignment.

Calculation:

112 D

113 A

114 D

$1,000,000 death benefit - $100,000 partial assignment = $900,000

- $450,000 collateral assignment = $450,000 Remaining death benefit paid to beneficiary

Smoking status and Medical History. It is normal procedure for underwriter to look into these aspects.

In this situation Driving record would not be a factor as he was not at fault and he does not have indication of bad driving habits. There is no mention of Drinking issues

Take into account that Digna has limited disposable income, so an affordable policy (Term insurance) is a good choice. Also, the child rider will convert to child’s education fund if parent dies. GIB rider would be advisable as well, due to the risk of future health problems.

Other choices’ explanations

A, B & C: the cost of this policy could be more than what she may afford for her needs

115 D

116 A

The first life insurance policy has the estate named as beneficiary, thus C is correct. The other policies have the nephew and grandchild as beneficiaries, so they receive the benefits. They (the beneficiaries) cannot be forced to pay debts of deceased.

Jo as policy owner can absolutely assign even to non-arm’s length person including creditors; but would have to pay tax for deemed disposition. The $500,000 of the death benefit is now owned by the third-party lender. Marie receives what is left of the death benefit.

Calculation:

$1,000,000 original death benefit - $100,000 partial assignment = $900,000 - $500,000 collateral loan = $400,000 remaining death benefit

117 C

Note: Topics from other modules may appear in this module. This, in particular, is a topic in Segregated Funds & Annuities module

Deferred Annuities delays the starting payment to a future date.

Other choices’ explanations:

• Accumulation annuities function as a savings account, upon maturity it could be cashed out or converted to life annuity

• Prescribed annuities are a type of non-registered annuity which equalizes the interest portion over the annuity’s life (less tax initially compared to non-prescribed)

• Term certain annuities pay out income for a specific timeframe (ie. Number of years or to a certain age)

118 C Notice of assessment provides a clear summary of her total income

If an employer pays some or all of the premiums for a group life insurance plan, those premiums are considered to be a taxable benefit for the employee.

Any premiums paid by the employee are not deductible to either the employer or the employee. The premiums paid by the employee via payroll deduction are taken from his pay.

119 C

Calculation:

$785 Annual premium x 80% employer payment = $628 employer payment of premium which is taxable benefit to employee

Accident and Sickness

Chapter 01

Risk of Accident and Sickness

• Financial Protection Provided by Accident and Sickness Insurance

• Risk Management

• Making Insurance Premium Lower

Question 01

What do you call the risk of disability?

a. Mortality

b. Morbidity

c. Longevity

d. Insurability

3 Personal Risks

• Death – Mortality

• Disability – Morbidity

• Old Age – Longevity

Question 02

Which is a concern when dealing with the risk of accident & sickness?

a. Loss of Income

b. Lower lifestyle

c. Longevity

d. All of the above

Financial Risks that Threaten Individuals

and Their Families:

• Unexpected Expenses

• Loss of Savings

• Debt

• Inflation

• Loss of Income

• Lower Lifestyle

• Longevity

Question 03

Which of the following would be an example of a “non-systematic” risk?

a. Poor food quality leads to the a restaurant’s poor performance. Lower lifestyle

b. Oil prices increase, causing lower transport company profits

c. Drought affecting farmers’ harvests to be weak

d. An increase in interest rates, resulting to weaker real estate sales

Systematic vs Non-systematic Risk in Business

Systematic

• Risk to business environment, economy/market risk

• Affects multiple companies

Non-Systematic

• Business risk

• Affects only a specific company

Is disability of business owner a systematic or non-systematic risk?

Non-systematic – it affects only that particular business

Question 04

Buying insurance is the prime example of:

a. Risk retention

b. Risk avoidance

c. Risk reduction

d. Risk transfer

Risk Management

Self Funding

• “Own expense”

• Save up for rainy day

• Risk Retention

Non-Systematic

• Generally a better way to handle risk

• Let insurance company deal with it

• Risk Transfer

Question 05

Which of the following would decrease the cost of insurance?

a. Longer Benefit period

b. Higher deductible

c. Shorter Waiting period

d. Higher coverage

How to make insurance premium smaller

Waiting Period

• Elimination period

• For Disability insurance

• Initial time when benefits are not paid yet.

• Used if insured has some savings or existing coverage (like EI or group benefits)

Deductible

• For Extended health plans (and some other forms of insurance)

• This is the amount not covered by the insurer.

• Used if insured has savings to cover the deductible.

Smaller Coverage

• Can be used if insured has existing coverage when a lot is not needed.

• Coinsurance: portion the insurer pays (example: 80% coinsurance factor = 80% coverage)

Chapter 02

Insurance to Protect Income

Key Concepts

• Sources of Income Protection

• Government Disability Income Sources

• Individual disability insurance

º Riders for Individual Disability Insurance

º Taxation of benefits

º More about Individual disability Insurance

• Group Disability Insurance (Employer/Associate)

• Creditor Insurance (Lenders)

Government Disability Income Sources

• Canada Pension Plan

• Employment Insurance

• Workers’ Compensation

CPP Disability

• Must be under 65

• Must have contributed (worked, had substantial taxable income)

• Disability must qualify

º Severe unable to work any job

º Prolonged indefinite, terminal, or 1+ years

• Long term benefit

º 4 month waiting, benefit to age 65

• Additional benefit for children:

º Dependants under 18

º Dependants under 25 studying full time

Question 06

Who of the following can claim for CPP disability?

a. Hakim, 50 years old, who fractured his ankle and was disabled for 6 months and recovered

b. Julius, 65 years old, who was diagnosed of Alzheimer’s disease, and cannot work indefinitely

c. Lili, 30 years old, who was diagnosed of a permanent skin condition which she has to stay in office doing modified duties

d. Daryl, 40 years old, who was diagnosed of terminal bone cancer and given less than 6 months to live

Question 07

Jenny, a single mother, has 3 children: Jimmy (aged 13), Jane (aged 19), and Julie (aged 20). Jimmy is still in grade 7 and is in custody of his father. Jane studies part time, lives with Jenny and works part time. Julie is in university full time, and lives on her own in the university’s residence. Who of these dependents would qualify for CPP dependent’s benefit in case Jenny claims CPP disability?

a. Jane

b. Jimmy

c. Julie

d. All of the above

E.I Sickness Benefit

For Employees

• 600 work hours requirement

• Short term benefit

Self Employed: Optional

• 1 week waiting

• 15 weeks benefit

Question 08

Michelle, age 40, is a nurse for the same employer for 5 years. One day she got a severe headache and she suffered a stroke. Because of this she is bed-ridden and unable to work for years until she makes a recovery. Which of these government plans would cover her disability?

a. WCB

b. EI

c. CPP

d. Both b and c

Workers Compensation

• Work related

• Generally must be at work

• Employees covered

• Self-employed: depends, but sole proprietors generally don’t have this

Question 09

Which of the following government disability benefits are tax free?

a. WCB

b. EI

c. CPP

d. Both b and c

Taxation of Government Disability Benefits

Question 10

Which of the following government disability benefits are “non-contributory”?

a. WCB

b. EI

c. CPP

d. Both b and c

Premiums of Government Disability Benefits

• Employer + Employee º CPP

º EI

Question 11

• Employer Only º WCB

Which of the following government disability benefits is not under federal jurisdiction?

a. WCB

b. EI

c. CPP

d. None of the above

Government Disability Benefits

• CPP

• EI

• WCB

Question 12

• Federal

• Provincial

Ally is a 35 year old lawyer who has a non-cancellable total disability policy with “own” occupation definition, residual benefits, future income option, cost of living allowance rider, and a waiver of premium rider. Her policy has a 30 day elimination period, and a benefit period to age 65. One day, while driving on her way to work, she gets into a car accident and cannot work for 6 months.

i. CPP disability

ii. Worker’s Compensation

iii. Employment Insurance

Which of the following government benefits can provide benefits during her disability?

a. i and ii

b. i, ii, and iii

c. ii and iii

d. iii only

Disability Insurance

Income Replacement Plan

How much disability insurance is required?

• Income Based Approach

º (Pre-disability income x benefit%)

º Passive income – Pre-disability income includes active & passive income received

• Expense Based Approach

º Total Monthly Expenses

Both could be used, also consider affordability of the coverage

Note: this is for individual disability insurance.

Group insurance follows a different formula (discussed later).

Question 13

Ronnie is a consultant whose business revenue is $85,000, and expenses is $12,000. He also receives $5,000 in dividends paid out annually from his stock portfolio. Calculate how much is the pre-disability income to be considered, and assuming a 60% disability benefit, how much is the monthly total disability benefit?

a. Pre-disability income is $78,000, Total disability benefit is $3900/mo

b. Pre-disability income is $78,000, Total disability benefit is $3483/mo

c. Pre-disability income is $73,000, Total disability benefit is $3650/mo

d. Pre-disability income is $73,000, Total disability benefit is $3233/mo

Question 14

Jamie, your client, earns $60,000 a year and has a group disability plan that covers 50% of his salary. If his monthly expenses total $3,000/mo, how much additional disability insurance should Jamie get?

a. $3,000/month

b. $2,500/month

c. $500/month

d. $0

Question 15

All else being equal, who would have the greater chance of suffering a disability this year?

a. A 40-year-old man

b. A 45-year-old man

c. A 40-year-old woman

d. A 45-year-old woman

Morbidity Factors

Age

Sex

Health

Lifestyle

Occupation

Question 16

Older → lower risk of total disability but longer duration → higher cost

Females are at higher risk for disability and for longer duration → higher cost

Including family medical history

Smoking, habits, hobbies, travel

High, medium, or low occupation class –discussed in next section

Who of the following is considered in a 4A (High) Occupation class?

a. Mariel, a roofing laborer

b. Cherry, a Chartered Accountant

c. Ding, a registered nurse

d. Hamm, owner/operator of his cleaning company

Occupation Class

• High Class

º 4A – executive, low risk, high skill, professional

• Medium Class º 3A – low/mid risk, manager, clerical staff

º 2A – mid risk, supervisor, sales, consultants

º 1A – mid/high risk, trades and technicians

• Low Class º B – high risk, very physical, hazardous or unskilled work

Occupation Risk Change

• Change of position/job – Higher or lower

• More Claims – Higher

• Decreased Risk

º Could apply for smaller premium

• Increased Risk

º Depends on contract type if premiums will increase

Types of Contracts

• Non-cancellable

º Most expensive, best type

º Insurer cannot cancel / cannot increase premiums

º Can be converted to “guaranteed renewable” at 65, coverage until 72-75, with 1-2 year benefit period

• Guaranteed Renewable

º Not so expensive, not the best type

º Insurer can modify (increase premiums)

• Cancellable

º Least expensive, worst type

º Insurer can cancel / modify (increase premiums or lower coverage)

• Non Traditional Disability Insurance Plan

º For self-employed workers who are “unemployed” –currently not under contract.

º Coverage for disability: inability to get new contracts due to disability

º Provides the insured with limited monthly benefits, while disabled, to “contract out” the services they were previously providing.

Question 17

Cherry, your client, has purchased a disability policy with you. She has observed that her auto insurance premiums increase every renewal, even if she had not claimed, so she is wondering if that would also be the same for her disability policy. What type of policy is protected from such premium increase?

a. Non-cancellable

b. Guaranteed Renewable

c. Cancellable

d. Both B and C

Question 18

Clement has a guaranteed renewable policy. What reasons can the insurer increase the premium?

a. Clement’s health has gone worse since the policy was issued

b. The insurer is experiencing more claims from the occupation class Clement is in

c. Clement is switching to a riskier job

d. Both B and C

Insured Cannot Work

the Defined Cccupation:

Definition of Disability (as Stated on the Contract)

• Own Occupation

º Best coverage

º Given to High Occupation Class (4A)

º As long as insured cannot perform regular duties, benefits will still pay out

• Regular Occupation

º Normal coverage

º Mid Occupation Class (3A, 2A, A)

º If insured returns to work whether part time of full time, benefit is reduced / terminated

• Any Occupation

º Worst coverage

º Given to Low Occupation Class (B)

º Regardless of recovery, if insured has capability to work any job, benefit stops

Own Occupation (4A Class)

Example:

Mely is a dentist making $15,000/mo. She has a disability insurance that will pay $10,000 as a monthly disability benefit. Mely suffered disability when she went skiing and landed on her hands.

Since Mely was not able to perform her regular duties, Mely receive disability benefit. After 1 year of recovering, she is still not able to perform her dental practice, therefore Mely started teaching at the University of Alberta making $8000/ mo, also she works as a consultant for a dental firm making $7000/mo.

But since she is not able to perform her duties anymore, Mely will still receive disability benefit.

Regular Occupation (3A, 2A, A Class)

Example:

Josie is a warehouse supervisor making $8000/mo. She has a disability insurance that will pay $5000 as a monthly disability benefit.

Josie suffered disability when she slipped on a wet floor at home causing her a broken hip. Since Josie was not able to perform her regular duties, Josie receive disability benefit. After 1 year of recovering, she started working part time as a making 3000/mo.

Therefore, the insurer will only pay her $2000 as a disability benefit.

Any Occupation (B Class)

Example:

Lanie is a window cleaner making $4000/mo. She has a disability insurance that will pay $2500 as a monthly disability benefit.

Lanie suffered disability when she fell off the ladder while cleaning the roof’s gutters and broke her ankle. Lanie was not able to perform her regular duties, but the insurer denied her claim because according to the insurer, she could still work in other jobs that do not require standing.

Question 19

Which of the following types of disability policies would have the least restrictions to claims?

a. A Cancellable total disability policy with an any occupation definition, waiting period of 30 days and benefit period of 5 years

b. A Guaranteed Renewable total disability policy with a regular occupation definition, waiting period of 60 days and benefit period to age 65

c. A Non-cancellable total disability policy with an own occupation definition, waiting period of 30 days and benefit period to age 65

d. A Cancellable accident only policy which has a waiting period of 30 days and benefit period of 5 years

Question 20

Julien is a automobile mechanic and also owns an automobile maintenance garage which earns $120,000 each year. He employs 6 people to work for him. Aside from managing the business, he supervises and works on cars whenever work is busy. He has inquired about disability insurance policy for himself.

Which definition of total disability would you recommend to Julien?

a. Any Occupation

b. Regular Occupation

c. Own Occupation

d. Disability insurance is not recommended for self-employed individuals

Question 21

Ally is a 35 year old lawyer who has a non-cancellable total disability policy with “own” occupation definition, residual benefits, future income option, cost of living allowance rider, and a waiver of premium rider. Her policy has a 30 day elimination period, and a benefit period to age 65. One day, while driving on her way to work, she gets into a car accident and cannot work. Which of the following is true?

a. Ally’s premiums would increase if she works at a different job upon recovery

b. If Ally is able to work in other duties during her period of disability but in a different job, she would not be able to claim for total disability benefits

c. If Ally recovers and returns to work taking a different job, her premiums stay the same

d. Ally would never have to pay premiums when she becomes disabled until recovery

Riders:

• Cost of Living Adjustment (COLA) Rider

• Future Purchase Option (FPO)

• Waiver of Premium

• Return of Premium (ROP)

• Accidental Death and Dismemberment

Cost of Living Adjustment (COLA) Rider

• Starting the 2nd year of disability, benefits increase based on the rate of increased cost of living / Consumer Price Index (CPI) (the Inflation rate) of the previous year

• Best for long term disability needs

• Depending on the contract, indexing percent may be capped, and excess unused indexing may be carried over the following year

• Partial Disability benefit

• Residual Disability benefit

Example: $1,000 monthly benefit, COLA capped at 3% with carryover

Year 1: 2% inflation, no increase yet

Year 2: 4% inflation, increase benefit by 2% (last year) = $1,020

Year 3: 2% inflation, increase benefit by 3% (last year with cap) = $1,050.60

Year 4: 2% inflation, increase benefit by 3% (last year with +1% carryover) = $1,082.12

Question 22

Which of the following is false?

a. Cost of Living Allowance (COLA) Rider would allow increases your disability benefit to inflation every year from the time your policy has been enforced

b. Future Purchase Option (FIO) Rider allows you to increase your coverage without medical evidence should income of the insured increases

c. Waiver of Premium Rider would increase net income of the insured after waiting period

d. Return of Premium on Death Rider would refund part of the premiums if the insured dies before claiming

Future Income Option/ Future/ Purchase Option (FIO/FPO)

• Can increase benefit at certain times to certain amounts when income increases

• No medical underwriting, needs financial underwriting.

• Best use for clients expecting bigger income later. Cannot be used if 55+

Presumptive Disability

• Permanent loss of sight, hearing or speech, or use of 2 limbs

• Counted as Total disability (as presumed disabled)

• Regardless of work status

• Waiting period is waived and benefit is not affected work status

Question 23

Louis runs a recording studio in St. John’s. His business earns $45,000 after all expenses. He has a total disability policy. In November 2013, he had a rare disease which severely affected his hearing, thus is deaf on both ears. However, ever since he moved to Toronto, he was able to find work and now earns more as a special needs instructor. Which clause in the disability policy enable him to claim in Louis’ situation?

a. Grace Period

b. Presumptive Disability

c. Residual Disability

d. He cannot claim as he is earning more than before

Partial Disability

Partial Benefit

• 50% of total disability benefit

• Provides benefit if insured cannot do certain duties, or working less hours

• Does not require total disability

Residual Benefit

• Benefit based on lost income

• If loss is between 80% and 20% of pre-disability income

• Must have been totally disabled for a period of time (qualification period)

Question 24

Lenie works as a warehouse picker making $5500/mo.

How to calculate Partial Disability

Pre-disability income x % of benefit = Total disability benefit

Total Disability benefit x 50% = Partial Disability Benefit

Assuming that Lenie has suffered disability, have recovered and is now working half of her regular shift, calculate the amount of disability benefit that Lenie is about to receive if her insurer will cover 65% of her income.

a. $3,573

b. $1,787.50

c. $2,323.75

d. He cannot claim as he is earning more than before

How to calculate Residual Disability?

FIND THE LOSS FIRST Loss = Pre-disability – Post-disability

CONVERT to LOSS% Loss% = Loss ÷ Pre-disability

Residual benefit = Loss% x Total disability benefit

Question 25

Lina earned $5,000 per month pre-disability. She became totally disabled and was receiving a monthly benefit of $3,000. Lina has now returned to work and she is able to work part days. She is currently earning $1,800 per month. If the policy had residual benefits, how much would Lina’s policy pay her now?

a. $3,000

b. $2,520

c. $1,920

d. $1,520

Residual Disability Calculation

Question 26

Luke earns $6,000/mo and has a disability policy which has a 60% benefit, and residual benefit rider. Recently, she became totally disabled, and after 6 months, was recovering and is working part time earning $500. How much will her disability insurer pay?

a. $3,600

b. $3,300

c. $300

d. $0

Question 27

Karen, who earns $4,000/mo had purchased a $2,500/mo total disability policy with residual benefits. Recently she became totally disabled and after a while returned to work, working 3 days a week. How much would Karen’s insurer pay?

a. $2,500

b. $1,600

c. $1,500

d. $1,000

Waiver of Premium

• On disability, premiums are free

• Waiting period is 90 days

Return of Premium (ROP)

• Returns all or part of the premiums

• On Death or Expiry or after a number of years

• No claims were made or the total claims amount is less than the premiums paid

• If present, policy pays out death benefit in case insured dies while on disability claim

• A qualification period may apply (ex. 12 months)

• Lump sum benefit to insured’s estate of usually 3x the monthly total disability benefit

Hospitalization Benefits

First Day Hospitalization Rider

• Rider has no waiting period but needs minimum number of hours of hospital stay (ex. 18 or 72 hours)

• Bridges the gap between first day of hospitalization and when disability benefits begin

• Benefit is daily pro-rata of total disability benefit

Question 28

Hospital Indemnity Rider

• After 24 hours stay in hospital

• Covers hospitalization expenses to a certain daily amount (ex. up to $250/day) for up to 3 or 4 months

Joy is an accounting staffer who had an individual disability coverage which had “regular occ” total disability coverage with 30 days elimination period, benefit period of up to 3 years, and has the residual benefit rider, hospitalization indemnity rider, presumptive benefits and waiver of premium. One day, she was on a fishing trip and sustained an injury to her eye causing temporary blindness and she needed to be hospitalized for 2 days. She then stayed home for two weeks and was able to return to work after.

Would Joy have been able to receive benefits from her policy?

a. Yes, Joy would be able to receive certain hospitalization benefits from her policy.

b. Yes, Joy would not have to pay premiums for the period she was disabled.

c. Yes. Joy would be able to receive total disability benefits.

d. No benefits could be paid to Joy.

Question 29

Juris was a barista in a premium coffee shop in Banff. She has a disability policy which a regular occupation definition, covers 65% of her income, and has residual benefits, and a future purchase option rider. Three years later, she was able to start a coffee shop of her own, but already showing signs of heart problems. She would like to increase her disability coverage.

Which of the following is true?

a. Juris may not be able to increase her coverage due to the heart problems

b. Juris would be able to increase her coverage if she shows an increase of income

c. Policy premiums would remain the same upon increase of coverage

d. Both B and C

Taxation of Disability Benefits

Pay Now, Enjoy Later

• Personally (or employee) pay premiums

• Tax free benefit

Enjoy Now, Pay Later

• Employer pay premium

• Taxable benefit

What if only a portion of premium is paid by employer?

• Initial benefit is tax free, up to the total amount employee paid

• Afterwards, disability benefit becomes taxable

Question 30

Arthur purchased a disability policy at age 25 that would terminate at age 65. The policy had a Return of Premium rider. Arthur just turned 65. During the life of the policy, he received $50,000 in benefits. In total, he paid $28,000 in premiums.

How much can he expect to receive upon expiry?

a. $0

b. $28,000 tax free

c. $28,000 taxable

d. $22,000 tax free

Question 31

Ally is a 35 year old lawyer who has an individual non-cancellable total disability policy with “own” occupation definition, residual benefits, future income option, cost of living allowance rider, and a waiver of premium rider. Her policy has a 30 day elimination period, and a benefit period to age 65. One day, while driving on her way to work, she gets into a car accident and cannot work for 6 months.

Which of the following is true?

a. She can claim from CPP disability benefits

b. Ally’s disability claim would be taxable

c. A regular occupation definition would suit Ally better

d. Ally’s disability claim would be tax-free

Premium Factors

Morbidity

• Age Sex Health Lifestyle Occupation

Type of Contract

• Non Cancellable, Guaranteed Renewable, Cancellable

Definition for total disability

• Own, Regular, Any Occupation Riders

• COLA, FPO, WP, ROP

Waiting Period

• Shorter is expensive

Benefit Period

• Longer is expensive

Question 32

Normally, the maximum age for a disability benefit claim be paid is:

a. Age 60

b. Age 65

c. Age 70

d. There is no age restrictions

Recurring Disability

• Disabled, recovered, then disabled again

• Previous or related disability returns within 6 months

• Treated as a continuation of claim

Example:

Question 33

Lyka has a total disability policy with a 120 day waiting period, and a benefit period for up to 5 years. The contract includes a recurring disability clause which provides one continuous waiting period and one continuous benefit period.

Recently, she became disabled for 9 months, and then recovered within 6 months, but had to stop working again for another 3 months due to complications.

Assuming this is a recurring disability, how many months of benefit would she have claimed in total (including the first instance)?

a. 18 months

b. 12 months

c. 8 months

d. 3 months

Pre-Existing Conditions

If an applicant for disability insurance has a pre-existing medical condition, what could the insurer do?

Decline: If the condition is too serious/grave

Approve: If condition is not significant

Rate: More cost for increased risk

Longer waiting period

Short benefit period

Exclusion of condition: most common – if condition is present

Question 34

Claudia is a 32 year old waitress who is applying for disability insurance. While completing the application, you learn that both her parents has been taking medication for heart problems.

Which of the following can happen as a result of this condition?

a. Standard premiums would apply

b. Premiums would be rated

c. Policy would be declined

d. Exclusion on disability related to heart problems

Question 35

Jeremy is a 25 year old technician who is applying for disability insurance. On application, you learn that he had incurred a shoulder injury while skiing, and has been undergoing treatment ever since.

Which of the following can happen as a result of this condition?

a. Standard premiums would apply

b. Exclusion on disabilities involving his shoulder

c. Policy would be declined

d. None of the above

Can you get multiple disability policies?

• You may, but the maximum benefit you can collect is 85% of pre-disability income (ALL SOURCES MAXIMUM)

• Offset Clause

º Government disability benefits will reduce (offset) disability benefit.

º Direct source (payments to the individual personally only – CPP, EI & WCB)

º Indirect source (including payments to individual’s dependent spouse/children)

• Do not over-insure disability

Question 36

Miggy earns $48,000 per year and Miggy currently has $2000 monthly group disability. He is looking for additional coverage.

How much additional monthly disability coverage could Miggy get?

a. $16,800

b. $3,400

c. $2,000

d. $1,400

Subrogation

If there is at-fault party, insurer pays client and runs after the at fault-party

Denial for claims of benefits

1. Misstatement of a material fact – 2 year contestability

2. Fraud – No time limit

3. Absence of loss – must prove inability to earn income

4. Absence of proof – must have medical proof

5. Delay – Time limit for submitting a claim (within 30- 180 days)

Exclusions/Limitations:

• War, whether declared or not;

• Terrorist acts

• Self-inflicted wounds;

• Attempted suicide;

• Participating in illegal activities;

• Normal pregnancy and delivery

Group Disability Insurance

Providers of group disability insurance

• Work for the same employer

• Work in the same industry

• Are members of the same association

• Are alumni of the same university

• Belong to the same union. etc.

Types of Group Disability Insurance

Short Term Disability

• Benefits are 70% – 75% of the employees pre-disability income.

• The maximum benefit is always 12 months.

• The definition of disability is OWN.

Long Term Disability

• Benefits are 50% and 60% of the employees previous income.

• The benefit is payable for either 2, 5, 10 years or to age 65.

• The definition of disability will be converted into ANY.

Employers would urge the employees to use LEAVE OF ABSENCE first before submitting disability.

Amount of Disability Benefit

All Sources Maximum (85% of earned income)

Maximum Overall (As determined by contract, may require medical) Non Evidence Maximum (Basic to certain coverage amount, no medical needed)

Creditor Insurance

Advantages

• Less expensive – Offered like a group plan

• Wider variety of coverage – Like job loss insurance

• No medical test up-front – Easier to apply

Disadvantages

• Less control of benefits – Policy owner and beneficiary is the lender

• Post-claim medical underwriting – Any undisclosed medical conditions known or unknown if found out on claim may void the claim

Disability benefit is based on the master contract – a percent of the person’s employment income up to a maximum.

Example:

66.67% of the salary, up to $6,000 per month

If person’s income is $5,000 per month, disability benefit is 66.67% x $5,000 = $3,333/mo

If person’s income is $10,000 per month, 66.67% x 10,000 is $6,667, but is capped at $6,000 only, thus disability benefit is only $6,000/mo

Note: passive income does not affect group benefits, but Government and Retirement plan benefits Offset (reduce) group benefits

Chapter 03

Insurance to Protect Assets

Critical Illness (CI) Insurance

Conditions can vary among plans, but usually covers the “big-4”:

º Cancer

º Stroke

º Heart Attack

º Coronary bypass

• Must have survived the survival period (30 days). No coverage if insured dies within 30 days.

• Policy must have been in force for at least 30 days to take effect (90 days for cancer/stroke), no claims within this qualification period.

• Benefit (usually lump sum) can be used for anything

CI Riders

Return of Premium

Insurance will return 100% of the premium paid upon meeting different conditions:

• Upon death

• Upon Maturity

• Upon Surrender

Second/Multiple Occurrence Rider

A second CI diagnosed later could be covered

Question 37

Stan, Eric, Kyle, and Kenny are friends who have “Big-4” critical illness insurance policies. Unfortunately, after seven years of purchasing their policies all four of them fell ill at almost the same time. Stan fell ill with cirrhosis, and is currently recovering. Eric needed a heart bypass surgery. Kyle is afflicted with early onset Alzheimer’s disease, while Kenny suffered a stroke and died 2 weeks later.

Who of the following would be covered by all critical illness policies?

a. Stan, Eric, Kyle

b. Eric

c. Eric, Kenny

d. None of the above

Question 38

Harry bought a $50,000 critical illness (CI) policy. It was a 4-condition policy with coverage until age 100. Harry had cancer five years ago and received a $50,000 benefit, and recovered. Harry now needed a coronary bypass surgery. If he could survive, how would most policies have dealt with this case?

a. He would only be able to receive benefits if he died

b. After the first claim, the policy would have terminated

c. The second claim would have been covered if the policy is still in-force

d. There will be a benefit each time the insured was diagnosed with a covered illness and survived the waiting period

Long Term Care (LTC) Insurance

• Insurance to cover care costs in case a person is not able to live independently.

º LTC facility, assisted living facility, home care, etc.

º Can be reimbursement or indemnity (direct bill)

• Usually for people approaching elderly stage (although there is no age restriction)

• To qualify for benefits, a designated medical professional must approve that insured is not be able to perform 2 activities of daily living (ADL’s)

º Dressing

º Toileting

º Eating

º Bathing

º Continence

º Changing body

º Posture

Long Term Care (LTC)

Insurance Cont’d...

• Another criteria may be:

º Reasoning

º Remembering

• There is a waiting period

Critical Illness Insurance and Long Term Care Insurance Exclusions

• Act of war, declared or otherwise;

• Non-occupational AIDS/HIV.

• Act of terrorism;

Return of Premium

• If the insured passed away claims free COLA: Cost of living adjustment

• Benefit will increase every year; adjusted to inflation rate

• Abuse of non-prescription drugs;

• Attempted suicide;

• Criminal activities;

Question 39

• Self-inflicted wounds;

• Normal pregnancy

Chuck and Berry have purchased long term care insurance 20 years ago. The policies have a 90 day waiting period, as well as a return or premium on death rider. You explain that in order to claim for Long Term Care benefits, the insured must not be able to perform 2 activities of daily living. Which of the following is most correct that describes activities of daily living?

a. Toileting, Bathing, Changing Body Positions, Eating, Dressing

b. Bathing, Dressing, Speaking, Reading, Writing

c. Eating, Drinking, Driving, Walking, Changing Body Positions

d. Dressing, Cooking, Toileting, Texting, Talking

Question 40

Barry is now unable to bathe himself or get in or out of bed. He is, however, able to get around in a wheelchair, and he simply sleeps in his chair. He is of sound mind and refuses to have anyone help him, and he will not agree to live in a long-term care facility.

Will there be a payout from Barry’s LTC policy?

a. Yes. The benefits from an LTC policy can be used for anything

b. No. Though he does qualify for the benefit, the policy requires actual care costs

c. Yes, because he is unable to perform two activities of daily living, the policy will pay out a monthly benefit

d. It depends if he has a three-, four-, ten-, or twenty-condition policy

Chapter 04

Insurance to Protect Savings

Does the Government give Health coverage?

Provincial Health Care

Generally Covers:

º Emergency

º Hospital Procedures and Supplies

º Diagnostics

Generally won’t cover:

º Prescription drugs

º Dental and Vision

º Semi-private/private room

º Procedures/supplies outside of hospitals

Extended Health (Group and Individual)

To cover the gaps in provincial health care

Exclusions:

º Purely cosmetic procedures (non-medically necessary)

º Self-inflicted (including intake of substances/sedatives)

º Acts of war/commission of crime

º If covered by government (Provincial health care or WCB)

Benefits are tax free

Question 41

Which of the following medical expenses could be covered by extended health care insurance?

a. Crutches for injuries sustained in an automobile collision while drunk driving

b. Nose reconstruction due to it being bitten off in a dog attack

c. Hospitalization while on vacation in Vietnam

d. X-rays ordered by the family physician

Question 42

Which of the following would be not covered by basic dental insurance?

a. Check-ups

b. Whitening

c. X-rays

d. Cleaning

Dental Coverage

• Orthodontic (braces and retainers)

• Major restorative (surgical that requires anaesthesia, dentures, crowns)

• Basic (cleaning, x-rays, extractions, fillings)

Prescription Drugs

• Depends on the formulary on what’s covered

• Cost of generic drug is covered, extra cost for brand name is not.

• Normally does not cover Over the Counter medication and Supplements (even if prescribed)

Enhanced Medical or Hospital Care

• Chiropractors, Massage therapy, Physiotherapy, etc.

• Has limits or number of visits in a year

Vision care

• Prescription eyeglasses;

• Contact lenses;

• Optometrist fees (where not covered by provincial health plans).

Accidental Death and Dismemberment

• For death or loss of use of limbs from accident (365 days time-frame)

• Death has to be DIRECTLY due to accident

• Not covered (in addition to previously mentioned):

º Surgical mishaps

º Flying as pilot/crew, Non-commercial flight

º Extreme sports

º Criminal and Illegal Activity

º Terrorism and war (declared or not)

º Self Inflicted / Suicide attempts

º Substance/poison invloved

Question 43

Which of the following would likely not be covered by AD&D?

i. A patient dies because of anaesthesia overdose during heart surgery

ii. A botched cosmetic surgery leads to an amputation of an infected limb

iii. A person was shot to death by police while committing robbery

iv. A pilot lost both legs when his private single-engine plane crashed

a. All of these are not covered

b. ii, iii, iv

c. iii, iv

d. All of these are actually covered

Travel Insurance

• For travellers going to/from Canada

• Minimal underwriting on application

• Medical is post-claim underwritten

• Important to disclose conditions that arise before date of travel, otherwise it would not be covered

Travel Insurance Exclusions

• Pre-existing conditions

• Attempted suicide

• Self-inflicted injuries

• Act of war

• Normal pregnancy

• Drug or alcohol abuse.

• In addition, certain exclusions are specific to travel insurance and are not common to other types of insurance:

º Engaging in hazardous activities (such as hang gliding, parasailing or scuba diving);

º Travelling to countries on a “watch list”;

º Medical treatment in non-emergency situations.

Question 44

Xian and Kim are married. They both have extended health plans with their employers. Xian was born on July 12, 1989. Kim was born on April 19, 1990. Xian’s plan contains $150 deductible and thereafter contributes 80%. Kim’s plan contains $200 deductible, and thereafter covers 90%. This year, it is the first visit of Xian to the hospital.

Whose plan will be the primary payor?

a. Kim, because her birthday is first in the calendar

b. Xian, because he is older

c. Kim, because her coverage is higher

d. Xian, because he is the claimant

When using 2 or more plans to cover medical expense, usually when both spouses have insurance to cover the medical expense

WHO IS PRIMARY?

• If insured is claimant, USE OWN PLAN FIRST, Spouse’s next

• If dependent is claiming:

º The plan that does not allow coordination of benefits is primary

º If using for a child and both have, who has the birthday FIRST IN CALENDAR is primary (regardless of year)

º If both have same birthday (regardless of year), the name first in dictionary is primary

• If divorced:

º Joint/Split custody: biological parents (same rules above)

º Sole custody: Custodial parent, then step-parent, then other biological parent

Question 45

For Primary

• (Claim amount – Deductible) x co-pay factor % = coverage for primary

• Remaining Balance = Claim amount - coverage for primary

For Secondary

• (Claim amount – Deductible) x co-pay factor % = coverage for secondary

• Check if the Remaining balance is within the insurance coverage for secondary. If yes, secondary will pay remaining balance only. If not, secondary will only cover what is calculated for itself.

Marian and Dingdong are married. Marian was born on August 12, 1984, Dingdong was August 2, 1980. They both have plans for dental coverage. Marian’s plan contains 80-20 coinsurance, and has a deductible of $150. Dingdong’s plan contains 90-10, and has $100 deductible. Their child needed dental treatment that costs $900.

How much will each plan pay?

a. Dingdong’s plan would pay $720, while Marian’s will cover $24

b. Dingdong’s plan would pay $720, while Marian’s will cover $180

c. Marian’s plan would pay $600, while Dingdong’s will cover $300

d. Marian’s plan would pay $600, while Dingdong’s will cover $180

Question 46

Richard and Maya are married. Richard was born on May 18, 1967, Maya was born on June 16, 1982. They have 5 children. Richard’s health plan covers 80% with $50 single deductible and $150 family deductible. Maya’s plan contains 70% coverage with zero deductible. All 5 children needed dental treatment that cost a total of $2,000.

How much will each plan pay?

a. Maya’s plan would cover $1480, while Richard’s plan would cover $520

b. Maya’s plan would cover $1400, while Richard’s plan would cover $600

c. Richard’s plan would cover $1560, while Maya’s plan would cover $440

d. Richard’s plan would cover $1480, while Maya’s plan would cover $520

Child is claimant, birth-date rule: Dingdong is primary

900 claim – 100 deductible= 800 800 x 90% coverage = 720

Remaining: 900-720 = 180

Marian: 900 – 150 = 750X 80% = 600 (enough to cover remaining balance)

B

Children are claiming, birth-date rule:

Richard is primary 2000 claim – 150 family deductible = 1850 x 80% coverage = 1480

Remaining: 2000-1480 = 520

Maya: 2000 – 0 = 2000X 70% = 1400 (enough to cover remaining balance)

D

Single/Family Deductible

• Single (Individual) Deductible = Annual Maximum PER PERSON

• Family Deductible = Total Annual Maximum of the Family

• Each individual is assigned a deductible, but only until the Family Deductible is reached, after which no further deductible would apply for the time period/year

A&S Taxation

• AD&D

º Tax free benefit

• Critical Illness

º Tax free benefit

• Long Term Care

º Tax free benefit

º Premiums eligible as medical expense for tax credits

• Extended Health

º Tax free benefit

º Premiums eligible as medical expense for tax credits

• Travel Insurance

º Tax free benefit

º Premiums eligible as medical expense for tax credits

Question 47

Which of the following premiums may be claimed for the purpose of tax credits?

a. Extended Health Insurance

b. AD&D Insurance

c. Critical Illness

d. None of the Above

Chapter 05

Group Plan Specifics

Question 48

Who of the following would form the contract for a group policy?

a. Insurer, Employer

b. Insurer, Employer, Employees

c. Employer, Employees

d. Insurer, Employees

What is Group Insurance?

• Group insurance is a plan bought by a sponsor and offered to members

• This would apply to company/employer benefits, and to associations (other groups, like professional organizations or unions) Employer

• Owner

• Master Contract Employees

• Insured

• Members

• Booklet/Certificate

Characteristics

Advantages

• Less cost

• Like wholesale

• Shared premiums for group income

• Contributory: Employer + Employee

• Non-contributory: employer only

• Generally no medical insurability requirement needed

• Conversion option to individual plan, no medical required

• Life Insurance: 31 days

• Disability Insurance.: 30 days

• Extended Health Insurance & Dental Insurance: 60 days

• Quebec – only Life Insurance may be converted

Disadvantages

• Not very flexible

• Some allow members to purchase more coverage

• Life insurance: limited benefit, usually term

• Benefits are tied to employer

• Not portable

Question 49

Which of the following is not an advantage for group insurance?

a. Generally, no medical proof of insurability is required for members to join the group

b. The cost for group insurance is generally cheaper compared to individual insurance

c. Upon termination of employment, an employee may convert group insurance coverage to an individual plan without proof of insurability

d. Group insurance is portable, regardless of whichever group the member join

Other Characteristics

• Membership classes

º Can have different benefit for different positions

º Example: managers class would have higher benefits than lower staff class

• Actively at work requirement

º Employee must be actively at work on the day coverage in the group plan starts.

º Example: If probation ends tomorrow but employee is still disabled, the group coverage starts when employee returns to work

• Can have some flexibility

º Members can purchase more insurance coverage. Employer won’t pay for the extra, and medical may be needed

• Premiums calculated yearly, risk is shared/spread among members

• Full time employment required

Short term disability (STD)

Long term disability (LTD)

Extended health insurance (Dental, vision, prescription medicine, travel)

Accidental Death and Dismemberment

Employee Assistance Program (EAP)

Health Spending Account

• Can be dollar amount, or salary based benefit

• Provides benefit for short duration (less than 1 year)

• Employer usually pays 100% of premiums

• Benefit range between 70-75% of pre-disability income.

• Definition of disability: “Own occ” (least restriction to claim)

• Benefits often have 7 days waiting period, maximum benefit period is 12 months, some companies stagger waiting / benefit period to avoid offset from EI

• Takes over STD if member is still disabled after 1 year

• Benefit period can be 2 years or more

• Benefit range between 50-60% of pre-disability income

• Definition of disability: “Any occ” (most restrictive, which may encourage the member to seek another job if disability is not severe enough).

• Confidential personal counselling (psychological, marital, legal, addiction). Plans may limit number of hours

• Allowance for health related expenses (flexible)

Question 50

You mention to Joe that it would be useful to include Employee Assistance Program as part of the group benefits. Which of the following is true regarding Employee Assistance Program?

a. Provides dental, travel, and extended health coverage for the group member

b. Provides psychological, addiction, marriage, and legal counselling

c. Provides employee-housing and transportation services to and from work

d. Provides benefits for group members needing assistance in case of a physical/mental incapacity

Group Insurance Setup (Insurance Funding / Accounting Method)

Fully insured (Pooled Plan)

• Medium to large company

• Surplus will be refunded to the client company; Surplus is the difference of the premiums minus expenses and claims paid by the insurer

Fully insured, non-refund (Pooled Plan)

• Employer transfers risk to insurer

• Cost is based on anticipated number of claims, which is based on past claims experience

Administrative services only (ASO)

• For large companies with thousands of employees and huge assets/cash flow

• Employer funds the benefits, and takes the risk: SELF FUNDING

• Not applicable to small companies due to c ash flow problems

Group Insurance Setup (Summary)

Non-Refund Accounting (Pooled)

• Employer contracts an insurer to pay benefit

• Insurer keeps surplus

• More claims = increased cost at renewal

• For smaller companies (< 50 employees)

Refund Accounting (Retention)

• Less claims = surplus = refund

• More claims = increased cost at renewal

• For bigger companies (50+ employees

Admin Service Only (ASO)

• Self-insured

• Employer funds and pays benefit

• For huge companies

• Not recommended for small companies: risk to cash

Question 51

Which of the following is true regarding refund and non-refund method of accounting?

a. Refund method refunds surpluses back to the employer

b. Deficits are carried over in refund and non-refund methods

c. The employer does not get back unused premiums in a non-refund plan

d. All of the above

Question 52

Joe Carr is a business owner in a local consignment store. He employs 10 people and has contractors whenever needed. He has approached you to inquire about setting up group plans for his employees.

Taking into consideration the nature and size of his business, what premium funding method would be most suitable for Joe Carr’s business?

a. Non-Refund method of accounting

b. Refund (Retention) method of Accounting

c. Admin Service Only

d. Self-Insured Plan

Question 53

Why is Admin Service Only (ASO) structure not recommended for small companies?

a. The employer assumes the risk to corporate cash flow

b. The claims are indexed to inflation

c. Not enough members and assets to adequately absorb the risk

d. A and C

What affects group insurance premium?

Premium is affected by:

• Make up of group: (Average age of group, gender, Size of group, Member turnover rate – higher is riskier)

• Nature of business

• Benefits offered

• Past claims experience

How do insurers rate the risk and premium?

MANUAL (pooled) RATING

• Companies just applying now, no previous insurance

• No credibility

• Questionnaire and compare

BLENDED RATING

• Medium credibility

• Mixed rating

EXPERIENCE RATING

• If company has existing insurance for a long time

• High credibility

• Based on track record (10 yrs + )

Question 54

Logos owns a restaurant which employs 5 people, and is inquiring about switching insurers. The business had offered group benefits for more than 10 years. What rating method would the insurer employ?

a. Manual Rating

b. Pooled Rating

c. Blended Rating

d. Experience Rating

Guaranteed Issue Policies

Special type of group disability policies, for those in the high occupation class

Guaranteed standard risk

• Guaranteed coverage at standard rates.

• More administrative restrictions

Guaranteed to issue

• Guaranteed coverage, but policy may be affected

• Requires medical

• This may have rated premiums, less coverage or exclusions.

Group Insurance Taxation

Type of Benefit If

Question 55

Eula has a group insurance policy that covers life, disability, and extended health. The employer pays 100% of the premiums. Which of the following is false?

a. The employer could claim the premium amount as a business expense for tax deduction

b. The employee would not have to report the premium paid for life insurance as taxable benefit

c. Her entire disability benefit would be taxable

d. Her life insurance benefit would be tax-free

Question 56

Eunice earns $50,000 per year has a group life insurance policy, which the employer pays $70/mo for premiums. How much is Eunice’s annual taxable earnings?

a. $840

b. $50,840

c. $50,070

d. $50,000

Question 57

Among the following, which would be the best solution to decrease the premium for group members struggling to pay the contribution of the plan in a group benefits, including dental benefits?

a. Make the deductible $200 and coinsurance of 80%

b. Make the deductible $50 and coinsurance of 50%

c. Make the deductible $25 and coinsurance 90%

d. Make the deductible $200 and coinsurance 20%

Buy-Sell Agreement (Entity Purchase)

Used when business has multiple owners of equal shares. Requires the business owners to buy insurance on each other. In event of disability/ death of an owner, surviving owners are required to use insurance proceeds to buy the shares of that deceased owner.

Used when business has multiple owners of unequal shares. Requires the company to buy insurance on each owner. In event of disability/ death of an owner, the company is required to use insurance proceeds to buy the shares of that deceased owner.

Insure the vital employee of the company, company is owner and beneficiary of insurance on the life of key employee

Health Spending Accounts

Provides flexible allowance for health care expenses

• Health and Welfare Trusts (HWTs)

º For health related expenses (flexible)

º Contributions usually made only by employer No time limit for employees to utilize the contributions to acquire benefits

• Employee Health Trusts (EHTs)

º Similar to HWTs, except that the trust must be resident in Canada unlike HWTs

º For medium to large employers due to more complexity and cost

Question 58

Which of the following would be taxable to the employee?

a. Benefits of a PHSP

b. Premiums of a PHSP

c. Benefits of an EHT

d. Benefits of a HWT

Taxation of Health Spending Accounts

• Private Health Services Plans (PHSPs)

º Members can purchase more insurance coverage Employer won’t pay for the extra, and medical may be needed

º Also known as Personal Health Spending Plans

º Designed for sole proprietors and partnership owners and their families

º $1500/yr contribution limit for business owners and spouse, $750/yr limit for dependents under 18

º Time limit: Funds must be used within 2 years of contribution, otherwise funds will be forfeited

Practice Bubble Answer Sheet

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Practice Reviewer

Accident & Sickness

V7.0.0

DISCLAIMER:

Do not memorize the answers. Understand the rationale (why that’s the answer).

The questions in the exam may be different from the questions here, worded differently, or different situation. Refer to the the answer key in the subfolder for the explanations.

QUESTION 1

Jane, a Burnaby resident, is a manager in a retail store. The salary is $51,000 annually. She also receives regular bonuses of $8,000 each year. She receives an extra $1,200 from her mutual funds. Her policy has a 30 day waiting period, and a 5 year benefit period.

How much is the monthly disability benefit if the policy she has a total disability benefit of 70%?

a. $3,412

b. $5,512

c. $2,975

d. $3,045

QUESTION 2

Corazon has been employed as a full time clerk in Sportsmart and has employer-sponsored benefits that has a total disability benefit which covers 65% of her income. The disability policy has a 60-day elimination period, a benefit period of 5 years, regular occupation definition of total disability. On August 15, she slipped and fell on wet stairs on her way to work and sustained injuries that caused her to be out of work. The doctor deemed her unable to work for 6 months.

When would Corazon receive her first disability payment cheque?

a. October 15

b. November 15

c. August 15

d. February 15

QUESTION 3

Jejomar is a real estate agent and has who has purchased a total disability insurance which covers 65% of her income. The disability policy has a 30-day elimination period, a benefit period to age 65, and an “regular” occupation definition of total disability, a residual disability benefit with a 2 month qualification period, and a recurring disability clause. On March 10, he got a concussion in a car accident that caused him to be out of work. Jejomar was able to work again on March 30, but within 1 month, he started experiencing lingering headaches, which was found to be caused by the concussion in the car accident. He then was not able to work for 3 months to have a proper recovery.

Which of the following statements is true?

a. Jejomar would have to wait for 30 days again before disability benefit payment can begin

b. Jejomar cannot make claim a benefit on this condition

c. Jejomar would be able to receive residual benefits after 2 months

d. Jejomar’s benefit period would begin in 10 days

QUESTION 4

Mar is an dentist who runs a dental practice in Regina. His finances show the following: Total Revenue: $880,000 Mar also receives $5,000 from Capital gains, $3,000 in dividends, and $2,000 in interest. Business expenses:

Office Rent: $48,000

Phone/Internet: $36,000

Utilities: $24,000

Staffing costs: $158,000

If he applies to get an individual disability policy which the company’s issue and participation limit of 60% and his tax rate is 35%, how much monthly disablity benefit can he apply for?

a. $50,333

b. $31,900

c. $30,367

d. $19,630

QUESTION 5

Which of the following is considered a definition of occupation for total disability?

a. Regular Occupation

b. Qualifying Occupation

c. Full-time Occupation

d. Legal Occupation

QUESTION 6

Which of the following types of disability policies would have the least restrictions to claims?

a. A Cancellable total disability policy with an any occupation definition, waiting period of 30 days and benefit period of 5 years

b. A Guaranteed Renewable total disability policy with a regular occupation definition, waiting period of 60 days and benefit period to age 65

c. A Non-cancellable total disability policy with an own occupation definition, waiting period of 30 days and benefit period to age 65

d. A Cancellable accident only policy which has a waiting period of 30 days and benefit period of 5 years

QUESTION 7

Matt is an 48 year old veterinarian who earns $126,000 annually. Matt is married with 3 children. He works primarily in the office, only visiting to sites as needed. He enjoys visiting the shooting range and is a member of the local rifle club. He already has individual life insurance with a face amount of $700,000 with a spousal rider and $80,000 critical illness coverage. He is interested in purchasing disability insurance coverage from you.

Which of the following disability policies would you recommend to Matt?

a. A non-cancellable total disability policy with an own occupation, with residual benefits, cost of living adjustment rider

b. A non-cancellable total disability policy with a regular occupation, with residual benefits, cost of living adjustment rider

c. A guaranteed renewable total disability policy with an own occupation, with residual benefits, cost of living adjustment rider

d. A guaranteed renewable total disability policy with a regular occupation, with residual benefits, cost of living adjustment rider

QUESTION 8

Julien is a automobile mechanic and also owns an automobile maintenance garage which earns $120,000 each year. He employs 6 people to work for him. Aside from managing the business, he supervises and works on cars whenever work is busy. He has inquired about disability insurance policy for himself.

Which definition of total disability would you recommend to Julien?

a. Any Occupation

b. Regular Occupation

c. Own Occupation

d. Disability insurance is not recommended for self-employed individuals

QUESTION 9

Louis runs a recording studio in St. John’s. His business earns $45,000 after all expenses. He has a total disability policy. In November 2013, he had a rare disease which severely affected his hearing, thus is deaf on both ears. However, ever since he moved to Toronto, he was able to find work and now earns more as a special needs instructor.

Which clause in the disability policy enable him to claim in Louis’ situation?

a. Grace Period

b. Presumptive Disability

c. Residual Disability

d. He cannot claim as he is earning more than before

QUESTION 10

Liliana is an employee in a educational institution. Her salary is $51,000 annually. She has an group disability policy that covers 65% of her income, with a 30 day waiting period, and a 5 year benefit period, and she has residual benefits with a qualifying period of 3 months and a future purchase option. On December 6, 2010, she became seriously ill and was out of work for 8 months, after which she was able to get back to work 3 days a week.

Which of the following statement is correct?

a. Her monthly residual benefit is $1,657.50

b. Her monthly residual benefit is $2,550.00

c. Her monthly residual benefit is $1,696.50

d. Her monthly residual benefit is $1,105.00

QUESTION 11

Ally is a 35 year old lawyer who has a non-cancellable total disability policy with “own” occupation definition, residual benefits, future income option, cost of living allowance rider, and a waiver of premium rider. Her policy has a 30 day elimination period, and a benefit period to age 65. One day, while driving on her way to work, she gets into a car accident and cannot work.

Which of the following is true?

a. Ally’s premiums would increase if she works at a different job upon recovery.

b. If Ally is able to work in other duties during her period of disability but in a different job, she would not be able to claim for total disability benefits.

c. If Ally recovers and returns to work taking a different job, her premiums stay the same.

d. Ally would never have to pay premiums when she becomes disabled until recovery.

QUESTION 12

Which of the following statements is FALSE?

a. Most insurers require a claim form be filed within 30 days, but not more than 6 months

b. Medical proof must be submitted together with notifying the company of the claim

c. Insurers require proof that the insured is taking treatment before benefits can be paid

d. Insurers would deny the claim should the insured does not respond to follow-up requests of medical proof of treatment from the physician

QUESTION 13

Who among the following would the best candidate to get a non-cancellable policy?

a. Justin, a secretary in a law firm who keeps records and answers phone calls

b. Jason, IT technician who is frequently assigned in cybersecurity

c. Ariana, a marketing consultant for a specialty coffee brand who travels frequently

d. Nicki, a surgeon who has had 10 years experience in neurosurgery

QUESTION 14

Which of the following is false?

a. Cost of Living Allowance (COLA) Rider would allow increases your disability benefit to inflation every year from the time your policy has been enforced.

b. Future Purchase Option (FIO) Rider allows you to increase your coverage without medical evidence should income of the insured increases.

c. Waiver of Premium Rider would increase net income of the insured after waiting period.

d. Return of Premium on Death Rider would refund part of the premiums if the insured dies before claiming.

QUESTION 15

Juris was a barista in a premium coffee shop in Banff. She has a disability policy which a regular occupation definition, covers 65% of her income, and has residual benefits, and a future purchase option rider. Three years later, she was able to start a coffee shop of her own, but already showing signs of heart problems. She would like to increase her disability coverage.

Which of the following is true?

a. Juris may not be able to increase her coverage due to the heart problems

b. Juris would be able to increase her coverage if she shows an increase of income

c. Policy premiums would remain the same upon increase of coverage

d. b and c

QUESTION 16

Ally is a 35 year old lawyer who has an individual non-cancellable total disability policy with “own” occupation definition, residual benefits, future income option, cost of living allowance rider, and a waiver of premium rider. Her policy has a 30 day elimination period, and a benefit period to age 65. One day, while driving on her way to work, she gets into a car accident and cannot work for 6 months.

Which of the following is true?

a. She can claim from CPP disability benefits

b. Ally’s disability claim would be taxable

c. A regular occupation definiation would suit Ally better

d. Ally’s disability claim would be tax-free

QUESTION 17

Which of the following combination of waiting and benefit period would be most expensive?

a. A long waiting period and a short benefit period

b. A long waiting period and a long benefit period

c. A short waiting period and a short benefit period

d. A short waiting period and a long benefit period

QUESTION 18

Normally, the maximum age for a disability benefit claim be paid is:

a. Age 60

b. Age 65

c. Age 70

d. There is no age restrictions

QUESTION 19

May Trias is an accountant for 15 years. She was severely injured in a car accident. Her doctor deems that she would not be able to recover from her injuries, but she would survive. May has two children: a son who is 26, lives with May, and is studying in a post-secondary institution full-time; and a daughter who is 22, works part-time, lives on her own in a college residence, and attends college full time.

Who will receive the Canada Pension Plan disability benefit?

a. May, her son, and her daughter

b. May and her daughter

c. May and her son

d. May only

QUESTION 20

Bruce Winn is a 45 year old psychiatrist. He has had experience in dealing with criminal psychologial evaluation and treatment, however one day, he was attacked by one of his clients and his back was broken, aside from several bones broken and irreversible nerve damage. He would be unable to get back to work.

i. Taxable Employment Insurance Benefits

ii. Tax-Free Employment Insurance Benefits

iii. Taxable Canada/Quebec Pension Plan Benefits

iv. Tax-Free Canada/Quebec Pension Plan Benefits

v. Taxable Workers’ Compensation Benefits

vi. Tax-Free Workers’ Compensation Benefits

Which of the following government benefits may Bruce be able to have access to, and what is the tax implication?

a. i, iv, vi

b. ii, iv, v

c. i, iii, vi

d. ii, iii, v

QUESTION 21

Joe Carr is a business owner in a local consignment store. He employs 10 people and has contractors whenever needed. He has approached you to inquire about setting up group plans for his employees. He comes to the question of the taxation.

Which of the following premiums paid by the employer would be tax deductible?

a. Employment Insurance, Canada/Quebec Pension Plan, Worker’s Compensation, Group Insurance Premiums

b. Employment Insurance, Canada/Quebec Pension Plan, Group Insurance Premiums

c. Employment Insurance, Worker’s Compensation, Group Insurance Premiums

d. Canada/Quebec Pension Plan, Worker’s Compensation, Group Insurance Premiums

QUESTION 22

Jess, aged 63, works as an architect for an engineering company. He tells you that he has been under treatment since has been diagnosed having a degenerative bone disease. His doctor has deemed that he is unable to work anymore because of his medical condition. Jess has worked for this company for 20 years, however he had already retired from the company 3 years ago and that leaves him without disability insurance. He is already receiving pension income from his employer’s pension plan. He is planning to claim from CPP disability.

Which of the following is true on the CPP disability claim?

a. He will be approved to receive a Canada Pension Plan disability pension because the doctor confirmed the condition

b. He will not be approved because he is already receiving employer pension benefits

c. He will not be approved for Canada Pension Plan disability pension because he has not contributed to the CPP since he stopped working

d. He will not be approved because of his age.

QUESTION 23

Ally is a 35 year old lawyer who has a non-cancellable total disability policy with “own” occupation definition, residual benefits, future income option, cost of living allowance rider, and a waiver of premium rider. Her policy has a 30 day elimination period, and a benefit period to age 65. One day, while driving on her way to work, she gets into a car accident and cannot work for 6 months.

i. CPP disability

ii. Worker’s Compensation

iii. Employment Insurance

Which of the following government benefits can provide benefits during her disability?

a. i, ii

b. i, ii and iii

c. ii and iii

d. iii only

QUESTION 24

Claudia is a 32 year old waitress who is applying for disability insurance. While completing the application, you learn that both her parents has been taking medication for heart problems.

Which of the following can happen as a result of this condition?

a. Standard premiums would apply

b. Premiums would be rated

c. Policy would be declined

d. Exclusion on disability related to heart problems

QUESTION 25

Jeremy is a 25 year old technician who is applying for disability insurance. On application, you learn that he had incurreda shoulder injury while skiing, and has been undergoing treatment ever since.

Which of the following can happen as a result of this condition?

a. Standard premiums would apply

b. Exclusion on disabilities arising from skiing

c. Policy would be declined

d. None of the above

QUESTION 26

Miggy and Laida Montenegro are a married couple. Miggy earns $48,000 per year and Laida earns $72,000. Miggy currently has $2000 monthly group disability benefits and Laida has $3000 group disability benefits. They are concerned about the impact of a disability should one of them get disabled.

Which would be the best recommendation for this couple?

a. Miggy should get an additional $1350 monthly individual disability benefit

b. Miggy should get an additional $3400 monthly individual disability benefit

c. Laida should get an additional $2000 monthly individual disability benefit

d. Laida should get an additional $3000 monthly individual disability benefit

QUESTION 27

Miggy and Laida Montenegro are a married couple. Miggy earns $48,000 per year and Laida earns $72,000. Miggy currently has $2000 monthly group disability benefits and Laida has $4000 group disability benefits. They are concerned about the impact of a disability should one of them get disabled.

Which would be the best recommendation for this couple?

a. Miggy should get an additional $1350 monthly individual disability benefit

b. Miggy should get an additional $3400 monthly individual disability benefit

c. Laida should get an additional $2000 monthly individual disability benefit

d. Laida should get an additional $3000 monthly individual disability benefit

QUESTION 28

When does the “offset clause” take effect?

a. After six months of receiving a defined government benefit such as CPP, GIS or OAS

b. When EI benefits are exhausted, usually after one calendar year’s worth of government prescribed income

c. When a person is not eligible for CPP disabiltiy

d. When government disability benefits are received together with private individual or group insuance

QUESTION 29

Which of the following would likely not be covered by AD&D?

i. A patient dies because of anesthesia overdose during heart surgery

ii. A botched cosmetic surgery leads to an amputation of an infected limb

iii. A person was shot to death by police while commiting robbery

iv. A pilot lost both legs when his private single-engine plane crashed

a. i, ii, iii, iv

b. ii, iii, iv

c. iii, iv

d. None of the above

QUESTION 30

Which of the following would be not covered by basic dental insurance?

a. Check-ups

b. Whitening

c. X-rays

d. Cleaning

QUESTION 31

Stan, Eric, Kyle, and Kenny are friends who have “Big-4” critical illness insurance policies. Unfortunately, after seven years of purchasing their policies all four of them fell ill at almost the same time. Stan fell ill with cirrhosis, and is currently recovering. Eric needed a heart bypass surgery. Kyle is afflicted with early onset alzheimer’s disease, while Kenny suffered a stroke and died 2 weeks later.

Who of the following would be covered by all critical illness policies?

a. Stan, Eric, Kyle

b. Eric

c. Eric, Kenny

d. None of the above

QUESTION

32

Stan, Eric, Kyle, and Kenny are friends who have “Big-4” critical illness insurance policies. Unfortunately, after seven years of purchasing their policies all four of them fell ill at almost the same time.

If any of them are covered, what can be done with critical illness insurance benefits?

a. Debt repayment

b. Vacation in North Korea

c. Medical expenses

d. Any of the above

QUESTION 33

Chuck and Berry are twins who are both good in writing and playing music, and have been on the road plenty of times. They have purchased long term care insurance 20 years ago. The policies have a 90 day waiting period, as well as a return or premium on death rider.

i. If Chuck becomes gets into a car accident and benefits are paid, the contract terminates upon recovery

ii. Berry would not receive any benefit if he died before the waiting period expires

iii. Chuck would not receive benefits if a family member takes care of him instead of hiring a caregiver.

iv. Berr could receive a lump sum benefit from the long term care policy.

v. Chuck and Berry would have to pay tax on the long term care benefits received.

Which of the previous following statements are FALSE in regards to their long term care insurance policies?

a. v only

b. iii, iv, v

c. i,ii,iii,iv,v

d. None of the above

QUESTION 34

Chuck and Berry are twins who are both good in writing and playing music, and have been on the road plenty of times. They have purchased long term care insurance 20 years ago. The policies have a 90 day waiting period, as well as a return or premium on death rider. You explain that in order to claim for Long Term Care benefits, the insured must not be able to perform 2 activities of daily living.

Which of the following is most correct that describes activities of daily living?

a. Toileting, Bathing, Changing Body Positions, Eating, Dressing

b. Bathing, Dressing, Speaking, Reading, Writing

c. Eating, Drinking, Driving, Walking, Changing Body Positions

d. Dressing, Cooking, Toileting, Texting, Talking

QUESTION 35

Daniel and Kathryn are a couple who both have employer sponsored extended health plans who have named each other as dependents on their plans. Daniel earns $47,000 while Kathryn earns $49,000 annually. Daniel’s birthday is on April 26, 1995 while Kathryn’s birthday is on March 26, 1996. Daniel’s plan covers 80% of the medical expenses, no deductible, with an annual maximum benefit of $1,000; Kathryn’s plan covers 100% of the medical expenses but with a $75 deductible, with an annual maximum benefit of $800.This year, Daniel’s first claim was a $250 prescription medicine bill.

How much will both plans cover on this medical claim?

a. $200 covered by Daniel’s plan, $50 covered by Kathryn’s plan

b. $200 covered by Daniel’s plan, $0 covered by Kathryn’s plan

c. $175 covered by Kathryn’s plan, $75 covered by Daniel’s plan

d. $175 covered by Kathryn’s plan, $200 covered by Daniel’s plan

QUESTION 36

Marian and Dingdong are married. Marian was born on August 12, 1984, Dingdong was August 2, 1980. They both have plans for dental coverage. Marian’s plan contains 80-20 coinsurance, and has a deductible of $150. Dingdong’s plan contains 90-10, and has $100 deductible. Their child needed dental treatment that costs $900. How much will each plan pay?

a. Dingdong’s plan would pay $720, while Marian’s will cover $24

b. Dingdong’s plan would pay $720, while Marian’s will cover $180

c. Marian’s plan would pay $600, while Dingdong’s will cover $300

d. Marian’s plan would pay $600, while Dingdong’s will cover $180

QUESTION 37

Xian and Kim are married. They both have extended health plans with their employers. Xian was born on July 12, 1989. Kim was born on April 19, 1990. Xian’s plan contains $150 deductible and thereafter contributes 80%. Kim’s plan contains $200 deductible, and thereafter covers 90%. This year, it is the first visit of Xian to the hospital. He had $1,500 in expenses. How much will each plan pay?

a. Kim’s plan would reimburse $1170, while Xian’s would reimburse $330

b. Kim’s plan would reimburse $1150, while Xian’s would reimburse $350

c. Xian’s plan would reimburse $1080, while Kim’s would reimburse $420

d. Xian’s plan would reimburse $1050, while Kim’s would reimburse $450

QUESTION 38

Richard and Maya are married. Richard was born on May 18, 1967, Maya was born on June 16, 1982. They have 5 children. Richard’s health plan covers 80% with $50 single deductible and $150 family deductible. Maya’s plan contains 70% coverage with zero deductible. All 5 children needed dental treatment that cost a total of $2,000.

How much will each plan pay?

a. Maya’s plan would cover $1480, while Richard’s plan would cover $520

b. Maya’s plan would cover $1400, while Richard’s plan would cover $600

c. Richard’s plan would cover $1560, while Maya’s plan would cover $440

d. Richard’s plan would cover $1480, while Maya’s plan would cover $520

QUESTION 39

Joe Carr is a business owner in a local consignment store. He employs 10 people and has contractors whenever needed. He has approached you to inquire about setting up group plans for his employees. Upon finishing the fact finding, you have listed down Joe’s employees:

Joe – Owner/CEO

Harley – Executive Assistant

Ivy –Marketing Director

Lex – Quality Control Manager

Cathy – Cashier

Freida - Cashier

Toufaiz – Technical Support

Pan – Stockroom Manager

Clayton – Stockroom Attendant

Ryder – Stockroom Attendant

Obain – part time bookkeeper

Hugo – part time stockroom attendant

Joe Carr’s raised a question to you regarding how the rates are calculated. What would you answer?

a. Rates are based on mortality and morbidity of group plan members and dependents

b. Rates are based on a comparison to a similar company of similar size, working in a similar field

c. Rates are based on actual claims and expenses

d. A combination of a & b

QUESTION 40

Joe is concerned that if his core managers Lex, Toufaiz, Pan, Harley and Ivy become disabled, the company would suffer a setback. What product would you recommend for this objective?

a. Disability Buy-out Agreement

b. Business Overhead Expense Insurance

c. Key Person Disability Insurance

d. Employee Assistance Program

QUESTION 41

You mention to Joe that it would be useful to include Employee Assistance Program as part of the group benefits. Which of the following is true regarding Employee Assistance Program?

a. Provides dental, travel, and extended health coverage for the group members

b. Provides psychological, addiction, marriage, and legal counselling

c. Provides employee-housing and transportation services to and from work

d. Provides benefits for group members needing assistance in case of a physical/mental incapacity

QUESTION 42

Joe inquires about the group coverage benefits for his employees. Which of the following is correct regarding group coverage?

a. Group insurance benefit levels must be the same for all members

b. If a member resigns, that member may convert his group coverage to individual insurance within 31 days of leaving the plan, without evidence of insurability

c. The employer can pay 100% of the premiums without tax implications on the employee

d. Group plans may not offer members to increase their level of coverage above the set limit

QUESTION 43

Joe Carr is a business owner in a local consignment store. He employs 10 people and has contractors whenever needed. He has approached you to inquire about setting up group plans for his employees. Taking into consideration the nature and size of his business, what premium funding method would be most suitable for Joe Carr’s business?

a. Non-Refund method of accounting

b. Refund (Retention) method of Accounting

c. Admin Service Only

d. Self-Insured Plan

QUESTION 44

Which of the following is true regarding refund and non-refund method of accounting?

a. Refund method refunds surpluses back to the employer

b. Deficits are carried over in refund and non-refund methods

c. The employer does not get back unused premiums in a non-refund plan

d. All of the above

QUESTION 45

Why is Admin Service Only (ASO) structure not recommended for small companies?

a. The employer assumes the risk to corporate cash flow

b. The claims are indexed to inflation

c. Not enough members and assets to adequately absorb the risk

d. a & c

QUESTION 46

Which of the following is/are the consequences associated with longevity?

a. Outliving your retirement funds/income

b. Reduced estate value on death

c. Prolonged medical costs

d. All of the above

QUESTION 47

All else being equal, who would have the greater chance of suffering a disability this year?

a. A 40-year-old man

b. A 45-year-old man

c. A 40-year-old woman

d. A 45-year-old woman

QUESTION 48

Nemo is an 18 year old employee of McWendy’s fast food chain. As the swing manager, he gets group disability benefits that cover 65% of his salary. One winter day, while walking on a platform of the city’s rail transit system, he slipped on ice and fractured his hip. Not wanting to get involved with the legal processes, he claimed from his disability policy for benefits. However, his insurer invoked the subrogation clause.

What would be the most accurate description of the subrogation clause?

a. Nemo’s insurer has the right to stop benefits if the insured has a legal claim against the third party

b. Nemo and his insurer will sue the at-fault party and insurer can take a share in the settlement

c. Nemo’s insurer will pay no-fault claims

d. Nemo’s insurer will pay the claim, and will collect back from the at-fault party

QUESTION 49

Which of the following would be an example of a “non-systematic” risk?

a. Poor food quality leads to the a restaurant’s poor performance.

b. Oil prices increase, causing lower transport company profits

c. Drought affecting farmers’ harvests to be weak

d. An increase in interest rates, resulting to weaker real estate sales

QUESTION 50

Clement has a guaranteed renewable policy. What reasons can the insurer increase the premium?

a. Clement’s health has gone worse since the policy was issued

b. The insurer is experiencing more claims from the occupation class Clement is in

c. Clement is switching to a riskier job

d. b & c

QUESTION 51

Larry has many medical conditions and as a result has a shorter life expectancy and higher likelihood of disability. He would like to be able to obtain a disability policy. Larry is an executive for a global Company. Which of the following types of plans would he be most likely to obtain?

a. Guaranteed-to-issue Disability Insurance policy

b. Guaranteed standard risk Disability Insurance policy

c. Individual disability plan with “any occupation” as the definition of disability

d. Individual disability plan with “regular occupation” as the definition of disability

QUESTION 52

Martina owns her own business and is the only shareholder. She purchased a disability policy last year. At the time, her annual net income from the business was $65,000. She also had $5,000 in annual investment income. The insurer provided her with maximum coverage based on her income and authorized a Future Purchase Option (FPO) rider to be added to the policy. The rider allows her to add a maximum of $20,000 in coverage. Her annual income has now increased to $75,000 as a result of her investment income increasing to $10,000 per annum. Which of the following is correct?

a. Martina can increase her coverage without medical underwriting

b. Martina will be allowed to increase her disability coverage by $7,000, which is 70% of her increased income

c. Martina can increase her coverage with medical and financial underwriting

d. Martina cannot increase her coverage, it is the investment income which has increased

QUESTION 53

Lina earned $5,000 per month pre-disability. She became totally disabled and was receiving a monthly benefit of $3,000. Lina has now returned to work and she is able to work part days. She is currently earning $1,800 per month.

If the policy had residual benefits, how much would Lina’s policy pay her now?

a. $3,000

b. $2,520

c. $1,920

d. $1,520

QUESTION 54

Hayley owns an Long Term Care policy. Last summer while working in her home, she was severely injured when she fell from a ladder. She became paralyzed and lost the use of both legs. She is able to get in and out of her wheelchair by herself and is able to drive. She does, however, need assistance with bathing herself and cooking.

Does she qualify for benefits from her policy?

a. Yes. Paralysis is covered under LTC

b. It would depend on the covered conditions

c. No, she is not able to receive benefits

d. Yes, she is unable to do two or more ADLs

QUESTION 55

Harry bought a $50,000 critical illness (CI) policy. It was a 4-condition policy with coverage until age 100. Harry had cancer five years ago and received a $50,000 benefit, and recovered. Harry now needed a coronary bypass surgery. If he could survive, how would most policies have dealt with this case?

a. He would only be able to receive benefits if he died

b. After the first claim, the policy would have terminated

c. The second claim would have been covered if the policy is still in-force

d. There will be a benefit each time the insured was diagnosed with a covered illness and survived the waiting period

QUESTION 56

Which is true of the tax implications of LTC?

a. The LTC premium qualifies for the medical expense credit

b. LTC insurance requires a T4 statement from the applicant

c. LTC premiums are tax deductible

d. The benefit received from an LTC policy is taxable

QUESTION 57

Barry is now unable to bathe himself or get in or out of bed. He is, however, able to get around in a wheelchair, and he simply sleeps in his chair. He is of sound mind and refuses to have anyone help him, and he will not agree to live in a long-term care facility.

Will there be a payout from Barry’s LTC policy?Will there be a payout from Barry’s LTC policy?

a. Yes. The benefits from an LTC policy can be used for anything.

b. No. Though he does qualify for the benefit, the policy requires actual care costs.

c. Yes, because he is unable to perform two activities of daily living, the policy will pay out a monthly benefit.

d. It depends if he has a three-, four-, ten-, or twenty-condition policy.

QUESTION 58

James owns an individual disability policy that provides benefits after satisfying a 60-day elimination period, benefit period is five years, has presumptive disability coverage and a recurring disability clause. James was involved in a car accident resulting in a him permanently losing sight and severe headaches.

James is able to partially recover from his headaches after therapy and began a new career as a recording artist after being off work for one year. Three months later, the headaches returned, and James may not be able to work again.

How would the second claim be handled?

a. A second claim is not needed. He would be receiving benefits after the 60-day waiting period and would result in benefits being paid for five years regardless of his employment status.

b. A second claim is not needed. He would be immediately receiving benefits for a period of five years regardless of his employment status.

c. He would be receiving benefits immediately for a maximum of five years.

d. He would be receiving benefits immediately for a maximum of four years.

QUESTION 59

What occupation class would most likely qualify for “own occupation” definition of disability?

a. 4A – a lower-risk classification (professionals)

b. 4A - a higher-risk classification (labourers)

c. A - a lower-risk classification (labourers)

d. A - a higher-risk classification (professionals)

QUESTION 60

Paul is applying for an individual disability policy and disclosed the following financial information:

Income from full-time job: $60,000 per year

Income from part-time job: $5,000 per year

Lifetime royalty (Patents from inventions): $12,000 per year

Rental income: $14,000 per year

Paul will be paying the premium with after-tax dollars (net income). As such, the insurer is willing to offer a maximum of 60% coverage of earned income.

What is the maximum policy benefit that Peter can expect?

a. $36,000

b. $39,000

c. $54,600, which could potentially be reduced by $26,000

d. $46,200, which could potentially be reduced by $14,000

QUESTION 61

Arthur purchased a disability policy at age 25 that would terminate at age 65. The policy had a Return of Premium rider. Arthur just turned 65. During the life of the policy, he received $50,000 in benefits. In total, he paid $28,000 in premiums. How much can he expect to receive upon expiry?

a. $0

b. $28,000 tax free

c. $28,000 taxable

d. $22,000 tax free

QUESTION 62

Herb is 25 and has very few assets and a large debt. He wants to buy a home and afterwards pay down the debt. He had accumulated some savings to buy the home. If he becomes disabled, he would like to have funds to pay down the higher interest loans.

Which policy would not be appropriate for Herb?

a. Group disability insurance, because any benefits are taxable

b. Individual disability insurance, because the premiums are higher

c. Mortgage disability insurance, because the beneficiary is the lender

d. None of the above are correct

QUESTION 63

Which one of the following statements is true regarding creditor insurance?

a. Premiums would be a tax-deductible expense

b. The creditor is the owner and beneficiary of the policy

c. The definition of disability is “own occupation”

d. Full medical underwriting is required when acquiring creditor insurance, and this would affect premiums

QUESTION 64

Hannah is a teacher earning $5,000 per month. She has a total disability benefit that pays 60% of her pre-disability income, residual benefits, and a cost of living rider that allows indexing capped to 4%, with carry-over of unused indexing.

Should she become disabled, how much is Hannah’s monthly benefit if she is still disabled in the third year and inflation rate for year 1 is 2%, for year 2 is 6%, and for year 3 is 5%?

a. $3,053.60

b. $3,105.90

c. $3,182.40

d. $3,243.60

QUESTION 65

Which policy provides the least coverage in terms of the percentage of pre-disability income?

a. A group disability plan for which the employer and employee are splitting the premium

b. An individual disability plan for which the insured is paying the premium

c. A group disability plan which the employer is paying the 100% of the premiums

d. The insurer will likely offer the same maximum coverage in all of the above scenarios

QUESTION 66

Mariflor and Marites are business partners who are 50/50 shareholders in their house remodeling business. They are concerned about the consequences if one of them encounter a severe disability. They decide to create a buy-sell agreement funded by disability insurance.

Which of the following statements are true regarding disability buy-out insurance?

a. Premiums can be claimed as tax deductions and will be taxable when received

b. Waiting period has to be less than one year, and the benefit period has to be lump-sum

c. Company valuation is best done first before a buy-sell agreement can be made

d. If either Mariflor or Marites recovers, the buyout/payout stops

QUESTION 67

Lorie’s is a general store which hired a manager. This manager is considered to be very important to the company’s operations, the corporation bought key person insurance on her.

Which of the following is true regarding key person disability insurance?

a. Key person disability insurance definition of disability should be “own occupation”.

b. Employer pays key person insurance premiums. The employee is the beneficiary.

c. Key person premiums are tax-deductible, however the benefits are taxable.

d. Key person disability insurance waiting periods are usually longer than 3 months.

QUESTION 68

Which of the following is true regarding partial disability benefits?

a. This refers to the situation when an insured person has a past condition

b. Partial benefits are the same as residual benefits

c. Partial benefits are based on the percentage of income lost compared to pre-disability

d. Partial benefits is based on the inability to perform certain work duties

QUESTION 69

Which of the following disability policies would cost the most for a 25 year old male?

a. Non-cancellable policy, 30 day waiting period, 2 year benefit period

b. Non-cancellable policy, 60 day waiting period, benefit to age 65

c. Guaranteed renewable policy, 60 day waiting period, benefit to age 65

d. Cancellable policy, 30 day waiting period, 2 year benefit period

QUESTION 70

Harold purchased a disability policy when he was 25 years old. This policy had “regular occupation definition” of total disability, residual benefits, with a Waiver of Premium rider and Return of Premium Rider. The waiting period is 60 days and benefit period is for 10 years.

Which of the following is true?

a. If Harold becomes disabled, he would not need to pay disability insurance premiums

b. If Harold terminates his policy anytime, he could get back all premiums he paid

c. Harold would be able to receive residual benefits if he was trying to recover and was working one hour a day due to disability

d. Should Harold’s income level at the time of claim is less than his original income when he applied, the resulting disability benefits will also be less.

QUESTION 71

Eric purchased travel insurance for his family’s vacation to Hawaii. Two weeks before his departure date, he felt chest pains and sought a doctor, who advised a full medical check-up. However, Eric ignored the the advise and proceeded to go on vacation. In Hawaii, he suffered a heart attack and was hospitalized.

Will his travel insurance pay benefits?

a. No, because Eric’s chest pain is considered pre-existing condition

b. No, however Eric could be covered if the claim is not related to his chest pain

c. Yes, because Eric did not proceed with the check-up, and thus there is no formal diagnosis of heart conditions prior to travel

d. Yes, because Eric had no pre-existing conditions when he purchased the travel insurance

QUESTION 72

Sarah had acquired a mortgage loan for her home 1 year ago, with the interest rate linked to the Consumer Price Index (CPI). This year, the CPI has increased by 1%. What kind of risk does this demonstrate?

a. Debt risk

b. Inflation risk

c. Longevity risk

d. Expense risk

QUESTION 73

XYZ warehouse company hired ABC insurance company as their group insurance provider. The company offers benefits that includes Life Insurance, disability insurance and critical illness. In the case of a claim, ABC insurance pays the claims. The insurer never paid back some of the premiums, even after years of good experience. What type of accounting was used?

a. ASO

b. Non-refund accounting

c. Retention accounting

d. Refund accounting

QUESTION 74

Nobita is an accountant who runs an accounting firm. He employs a handful of people (admin staff and junior accountants) and contracts services of other professionals. The junior accountants are able to work independently and earn money for the business. He leases an office in the business centre and had to take a small loan of $1,000,000 for his business. His insurance agent advised that if in case of his disability, he would need to have coverage to keep his business running.

Which of the following would NOT be covered by Business Overhead Expense Disability Insurance?

a. Professional fees for the lawyer

b. Interest potion of loan payment

c. The salary of the junior accountants

d. The salary of the administrative staff

QUESTION 75

Which of the following would refer to claims adjudication?

a. Assessing a disability claims form, deciding whether a condition would be covered based on the policy definitions

b. Gathering information on the severity/type of disability

c. Determining how much a disability benefit would pay out

d. All of the above

QUESTION 76

Among the following, which would be the best solution to decrease the premium for group members struggling to pay the contribution of the plan in a group benefits, including dental benefits.

a. Make the deductible $200 and coinsurance factor of 80%

b. Make the deductible $50 and coinsurance factor of 50%

c. Make the deductible $25 and coinsurance factor 90%

d. Make the deductible $200 and coinsurance factor 20%

QUESTION 77

Karina, a successful sole proprietor, acquired a personal disability insurance and a Business Overhead Expense (BOE) insurance to make sure a portion of her income and the monthly expenses of the business is paid in case of her disability.

The BOE policy covers the following business expenses, except:

a. Rent and utilities

b. Income and Property Taxes

c. Interest on loans

d. Capital portion of loan payments

QUESTION 78

Karina, a successful sole proprietor, acquired a BOE policy that provides a coverage of $6,000 per month for 24 months. The maximum benefit in total is $144,000. Unfortunately, Karina got into a car accident preventing her from working. She is worried that the monthly expenses of the business such as utilities and salaries of her 10 employees may be missed while she recovers. She phoned her advisor, Lily, who informed her that:

a. The insurance company will pay $6,000 monthly

b. The insurance company will reimburse the actual cost of eligible expenses up to $6,000 per month

c. The insurance company will pay $144,000 lump sum

d. Karina has to prove that she cannot work any occupation for the insurance company to pay the benefit

QUESTION

79

Karina, a successful sole proprietor, micro-manages her business but due to a car accident is unable to visit the production floor as the doctor informed her recovery will take 6 months. She is relieved that the BOE insurance she purchased a year ago will cover eligible monthly expenses. Karina’s accountant has been diligent submitting the required receipts to the insurance company and received a total of $140,000 eligible expenses for the whole year. The benefit received will be:

a. Non-taxable

b. Taxable

c. 50% will be non-taxable

d. 50% can be claimed as a tax credit

QUESTION 80

Regie, age 77, has grown physically weak and he is now unable to take care of himself, requiring assistance with getting up, changing clothes, feeding himself, etc. He has a long term care policy which has lifetime coverage of $5,000,000, with a daily maximum of $200. His family had inquired costs fom two assisted living residences: Facility A costs $180 per day while Facility B costs $220 per day.

Which is true about Regie’s LTC policy coverage in relation to these costs?

a. The entire cost for Facility A may be covered, and for a longer period of time compared to if Regie was admitted to Facility B

b. Part of the cost for Facility B may be covered if Regie was admitted to Facility B

c. The entire cost for Facility B may be covered, but for a shorter period of time compared to if Regie was admitted to Facility A

d. a & b

QUESTION 81

Which of the following could be included into the extended health care plan?

a. Accidental Dental

b. Basic Dental

c. Major Restorative

d. Orthodontia

QUESTION 82

Jimmy and Jolly work in the same marketing firm, which provides for a long term disability coverage of 60% of the salary, to a maximum of $5,000 per month. Jimmy’s salary is $70,000 per year while Jolly’s salary is $140,000 per year.

How much will Jimmy and Jolly’s monthly long term disability benefit be?

a. Jimmy’s LTD benefit is $3,500/mo, Jolly’s LTD benefit is $5,000/mo

b. Jimmy’s LTD benefit is $3,500/mo, Jolly’s LTD benefit is $7,000/mo

c. Jimmy’s LTD benefit is $5,000/mo, Jolly’s LTD benefit is $7,000/mo

d. Jimmy and Jolly’s LTD benefit are both $5,000 per month

QUESTION 83

Bonnie and Clyde were a young couple who attended a birthday party and drank too much liquor. While blackout drunk, the couple robbed a bank. They were escaping in their van and Clyde was driving, when it rolled over, and since they were not wearing a seatbelt, they were ejected. Clyde died instantly, while Bonnie was severely injured. They both have life insurance and individual disability insurance which were both in-force since 4 years ago.

Would there be any benefit from the life insurance and disability insurance policies?

a. Clyde’s life insurance benefit would pay out, but not Bonnie’s disability insurance

b. Bonnie’s disability insurance benefit would pay out, but not Clyde’s life insurance

c. Both Bonnie’s disability insurance and Clyde’s life insurance would pay out

d. Both Bonnie’s disability insurance and Clyde’s life insurance would not pay out

QUESTION 84

Nancy has purchased an individual disability policy 5 years ago when her income was still $72,000 per year. The disability policy would have paid her $3,600 per month in case she became disabled. Last year, she lost her previous job and found a new employer but is earning only $60,000 per year.

If she becomes disabled, how much will her disability benefit be?

a. Her disability benefit will increase to $4,200 /mo

b. Her disability benefit will decrease to $3,000 /mo

c. Her disability benefit will stay at $3,600 / mo

d. Her disability claim will be denied

QUESTION 85

Nancy has purchased an individual disability policy 5 years ago when her income was still $72,000 per year. The disability policy would have paid her $3,600 per month in case she became disabled. Last year, found a new employer and now earns $84,000 per year.

If she becomes disabled, how much will her disability benefit be?

a. Her disability benefit will increase to $4,200 /mo

b. Her disability benefit will decrease to $3,000 /mo

c. Her disability benefit will stay at $3,600 / mo

d. Her disability claim will be denied

QUESTION 86

Bonnie and Clyde were a young couple who attended a birthday party and drank too much liquor. While blackout drunk, the couple robbed a bank. They were escaping in their van in which Bonnie is the driver, when it rolled over, and since they were not wearing a seatbelt, they were ejected. Clyde died instantly, while Bonnie was severely injured. They both have life insurance and individual disability insurance which were both in-force since 4 years ago. In the life insurance policies, they named each other as beneficiaries.

Would there be any benefit from the life insurance and disability insurance policies?

a. Clyde’s life insurance benefit would pay out, but not Bonnie’s disability insurance

b. Bonnie’s disability insurance benefit would pay out, but not Clyde’s life insurance

c. Both Bonnie’s disability insurance and Clyde’s life insurance would pay out

d. Both Bonnie’s disability insurance and Clyde’s life insurance would not pay out

QUESTION 87

Health concerns associated with longevity may bring prolonged expenses and result in depletion of retirement funds and liquidation of assets. Which insurance products can provide benefits that could offset costs permitting seniors to maintain the value of his estate?

a. Critical illness and Long-term care insurance

b. Long-term care and Disability insurance

c. Disability insurance and Extended Health Plan

d. Extended Health Plan and Accidental Death Insurance

QUESTION 88

Perla purchased a disability income replacement 10 years ago when she was earning $80,000 annually which will pay her 60% of her income if she were to become disabled. She decided to resign and take in a lighter job and is now earning $60,000 a year.

If Perla becomes disabled now, how much will her monthly maximum benefit be?

a. $4,000

b. $6,700

c. $5,000

d. $3,000

QUESTION 89

Merlin took out a guaranteed renewable disability income replacement policy when he worked as an order desk agent in the office of a warehouse facility, a 3A classification. The waiting period is 60 days. He paid $200 a month for his coverage. Two year later, Merlin decided to switch jobs with the same employer and is now working as a full-time custodian at the warehouse facility.

What will likely happen to his policy after he informs the insurer of his change in occupation?

a. He will pay $200 a month for the same coverage and waiting period remains at 60 days

b. He will pay $150 a month for the same coverage and waiting period extends from 60 to 90 days

c. He will pay $300 a month for the same coverage and waiting period extends from 60 to 90 days

d. He will pay $300 a month for the same coverage and waiting period reduced from 60 to 30 days

QUESTION 90

Angel is an automobile mechanic who runs her own car maintenance shop. She employs 10 people to work for her. Angel suffered a major depression last year and was not able to work for 7 months. She was able to collect $5,000 disability benefit from a disability plan she bought 5 years ago. Angel just returned to work but on a part time basis. As a result, her salary and disability benefit were reduced.

Which of the following rider allowed her to collect under her disability insurance policy?

a. Residual disability benefits

b. Cost of living adjustment (COLA)

c. Return of premium (ROP)

d. Future purchase option (FPO)

QUESTION 91

Patricia, a newly life licence agent assisted Mario apply for disability insurance that will cover 60% of his current income in case of disability. It took a month for the insurer to make a decision and has recently approved Mario’s application. Patricia scheduled a meeting with Mario for the delivery of the contract. Upon their meeting, Mario was excited to share with Patricia that he recently accepted a new job with a different company that matched his current income but he will be eligible for a group benefit after 3 months probationary period.

What action/s should Patricia take?

a. Deliver the policy and inform Mario his disability benefit will cover 60% of his income in case of disability.

b. Create a new illustration with a 90 days waiting period to reduce the premium.

c. Do not deliver the policy. Patricia should collect more information about the new job and return the policy to the insurer with notes for re-evaluation.

d. Ask the client for proof of employment acceptance letter showing income from the new employer. Deliver the policy. Send a copy of proof to the insurer with a signed delivery receipt.

QUESTION 92

Hannah is a teacher earning $5,000 per month. She has a total disability benefit that pays 60% of her predisability income, residual benefits, and a cost of living rider that allows indexing capped to 4%, with carryover of unused indexing.

Should she become disabled, how much is Hannah’s monthly benefit if she is still disabled in the fourth year and inflation rate for year 1 is 2%, for year 2 is 6%, for year 3 is 5%, and for year 4 is 3% ?

a. $3,480.00

b. $3,390.00

c. $3,182.40

d. $3,309.70

QUESTION 93

Arnie and Winnie are business partners of a successful mom and pop store but they are worried about not having health coverage for themselves and their children. What will you offer?

a. Employee health trust (EHT)

b. Health Welfare Trust (HWT)

c. Private Health Services Plan (PHSP)

d. Group plan

QUESTION 94

Dan age 84 has lived a long and happy life. Recently, he needed help with most activities of daily living. He has 4 sons who have been very supportive and take turns to care for their father. Many years back, Dan purchased an LTC policy and is wondering if he qualifies to receive any benefit from his LTC policy.

Will he receive benefits from his LTC policy?

a. Yes. The benefits from an LTC policy can be used for anything.

b. No. Though he does qualify for the benefit, family members cannot receive LTC benefits.

c. Yes, because he is unable to perform two activities of daily living, the policy will pay out a monthly benefit.

d. It depends if he has a three-, four-, ten-, or twenty-condition policy.

QUESTION 95

What is FALSE about Health and Welfare Trust (HWT)?

a. It is not an alternative to group plans.

b. Contributions are usually made by the employer only, on a mandatory basis, and may never revert to the employer.

c. Contributions are tax-deductible by the employer and employees are not required to report a taxable benefit at any time.

d. There is no time limit specified during which the employees are required to utilize the contributions to acquire benefits.

QUESTION 96

Raquel bought a disability insurance policy 10 years ago. She is inquiring from you, her agent, how she could reduce her premiums without reducing her benefits. What is the best recommendation for Raquel?

a. Shorter benefit period

b. Higher deductible

c. Smaller coinsurance

d. Shorter waiting period

QUESTION 97

Julia is a single mother with 3 beautiful daughters. She is an accountant that works in the City of the Accountant Office. Jeva, her officemate recently applied for disability benefit because she had a stroke and cannot work indefinitely. Julia remembered that she has a critical illness insurance and life insurance policies that she got from her cousin’s husband, Joseph, who is an independent insurance broker. She booked an appointment with Joseph to discuss her critical illness policy because she did not understand how much coverage and what are the conditions of her critical illness insurance. They met in a coffee shop nearby and Joseph explained that the amount of the critical illness is $50,000 covering the big four illnesses with a second event rider of $20,000.

Julia is a hardworking mother. One day on her way to the market after working, she fainted and was rushed to the hospital. She was unconscious for 24 hours and was diagnosed with a stroke. She was brought home after more than a month in the hospital then went on medical leave for another 30 days. She claimed from her critical illness and was paid $50,000. She managed to work normally for 5 years until one time she had a severe stomach ache but she ignored it because she thought it was only her hyper acidity. After a couple of months, she decided to go to her family doctor because she could no longer bear the pain. She was referred to MRI and was found out that she had stage 4 colon cancer.

Which of the following statements is true?

a. If Julia survived within 30 days, the beneficiary of the critical illness can claim $50,000

b. If Julia will die within 30 days, the beneficiary of the critical illness can claim $20,000

c. If Julia will die within 30 days, the beneficiary cannot claim $50,000

d. If Julia survived within 30 days, the beneficiary of the critical illness can claim $20,000

QUESTION 98

Angel Rose Facial Mask Manufacturing owned by Jen Tiu and Zen Tia decided to provide health benefits (dental care, vision care, and prescription drugs). The company decided to have the alternative to group insurance, Health and Welfare Trust (HWT). In February 2010, the company decided again to give accident and sickness coverage to their employees through Employee Health Trusts (ETH). The owners worried about the pandemic, so they decided to set up Personal Health Spending Plans (PHSP) to provide health care benefits for the owners and their families.

Which of the following benefits are reported to employees as taxable income?

a. Health and Welfare Trusts (HWT)

b. Employee Health Trusts (EHT)

c. Personal Health Spending Plan (PHSP)

d. All of the above benefits reported to employee are taxable

QUESTION 99

For adults, critical illness policies usually be issued for qualifying applicants between the following age bracket:

a. 16 and 70 years old

b. 18 and 65 years old

c. Since birth and 65 years old

d. None of the above

QUESTION

100

Lorna is a stay home mother of 3 children. Rudy, the husband, is the sole earner of the family. Rudy recognized the importance of transferring the risk associated with death and disability, so he decided to have life insurance, disability insurance and critical illness insurance. Rudy also realized the importance of critical illness insurance for Lorna. Janice, the independent insurance advisor, met the couple and Lorna applied for critical illness insurance with waiver of premium rider. Since Lorna is not working, Rudy decided that he is the owner and payor of the policy. After 5 years, Rudy had an accident and became totally disabled for more than 3 months.

Which of the following is not true?

a. The premiums will be waived because Rudy became totally disabled

b. The premium will not be waived because it is not Lorna became disabled

c. The premium will not be waived if Lorna became disabled because she is the insured and not the owner/payor

d. None of the above

QUESTION 101

Jude has group benefit from work, 75% of premium is paid by employer and 25% from employees. He became disabled. Total paid premium is $4,800, and Jude received $16,000 in benefits.

How much is taxable?

a. $12,000

b. $14,800

c. $1800

d. $2500

QUESTION 102

Lorelei is looking into getting a Critical Illness insurance policy. She once had an episode of epilepsy 5 years ago. How will the insurer deal with this?

a. MIB

b. APS

c. Financial inspection report

d. Exclusion

QUESTION 103

Hans was receiving disability benefit from his plan. He was getting $2500. Then went up to $2800. What kind of rider does he have?

a. COLA

b. FPO

c. CI

d. EAP

QUESTION 104

Angie’s mother is currently in a nursing home. She approached you about Long Term Care and expressed worry about inflation in the future.

What kind of rider would you offer?

a. COLA

b. FPO

c. Disability Buy-Out

d. AD&D

QUESTION 105

Victoria went skiing with her family and dislocated her shoulder during skiing. She approached you about getting Disability Insurance. What will you tell Vicky about the insurer’s possible reaction?

a. Exclusion on Hazardous Sports

b. Exclusion on Skiing

c. Exclusion on dislocated shoulder

d. She will be denied coverage

QUESTION 106

Mr. Jennings qualified for CPP disability benefits for $1,000 a month and indirect benefit for his 8year old dependent grandchild of $420/mo. He has group disability of $4,000 a month. Using 85% direct sources maximum, how much group benefit can he get? His monthly salary is $6,000. Individual coverage is $500 /mo. Family needs $4,500/mo.

a. $5,100

b. $3,100

c. $3,000

d. $4,500

QUESTION 107

Jules is an insurance agent. How will he assess a housewife’s income contribution to the household income to calculate for her income replacement disability insurance?

a. Any kind of amount that avoids third party expenses

b. Same amount of salary as a caregiver

c. Average income of related jobs in the area

d. Notice of Assessment

QUESTION 108

Andrea’s group life insurance coverage is $65,000. Her annual premium is $785 of which 80% is paid by her employer and 20% is deducted from her salary. How much is the taxable benefit for Andrea?

a. The tax free benefit is $65,000 if the beneficiary is the estate

b. The taxable benefit is $157

c. The taxable benefit is $628

d. None of the above

QUESTION 109

Andrea’s annual salary is $65,000. Total premium paid is $785 of which 80% is paid by her employer. The remaining 20% is deducted from her salary. If she received $3,250 in disability benefit, how much is taxable to Andrea?

a. $3,250 is taxable

b. $3,093 is taxable

c. $785 is taxable

d. None of the above

QUESTION 110

All else being equal, whose disability insurance mortality cost / premiums is higher?

a. A 40-year-old man

b. A 45-year-old man

c. A 40-year-old woman

d. A 45-year-old woman

Answer Key

1 A

2 B

Disability benefit = (Pre-disability income x benefit%) – Passive income

Pre-disability income = active income + passive income received

Active income: $51,000 salary + $8,000 bonus = $59,000 Active income

Passive income: $1,200 Passive income

Pre-disability income = $59,000 + $1,200 = $60,200 Pre-disability income

Disability benefit = ($60,200 pre-disability income x 70% benefit) – $1,200 passive = $40,940 Disability benefit (annual)

÷ 12 months = $3,412 monthly disability benefit

Aside from the waiting period of 60 days (2 months), the disability cheque is given at the end of 30 days into the benefit period(like an income)

3 D This is recurring disability. He was reinjured, and already completed 20 days.

Disability benefit = (Pre-disability income x benefit%) – Passive income

Pre-disability income = active income + passive income received

Active income: Business revenue, subtract expenses:

$880,000 revenue - $48,000 rent - $24,000 utilities - $36,000 Phone & internet - $158,000 staffing cost = $614,000 Business income (ACTIVE)

4 C

Passive income: $5,000 + $3,000 + $2,000 = $10,000 Passive income

Pre-disability income = $614,000 + $10,000 = $624,000 Pre-disability income

Disability benefit = ($624,000 pre-disability income x 60% benefit) – $10,000 passive = 364,400 Disability benefit (annual)

÷ 12 months = $30,367 monthly disability benefit

Not taxable, as this is individual disability insurance

There are three definitions of occupation for total disability:

Own Occupation – least restrictive, highest cost. Insured would qualify for total disability as long as insured cannot perform regular duties. This is given to those in the high occupation class (4A)

5 A

Regular Occupation – medium restriction, medium cost. Total disability benefit is reduced or terminated if insured returns to work whether part-time or full-time. This is usually given to those in the mid occupation class (3A, 2A, A)

Any Occupation – most restrictive, lowest cost. If insured has capability to work any job, benefits cease. This is usually given to those in the low occupation class (B)

6 C Non-cancellable and own occupation definition have the least restrictions

7 A

High income, low risk professional workers are eligible for non-cancellable and own occupation definition of total disability. Guaranteed renewable is less expensive, used for higher risk occupations. Regular occupation for medium risk occupations.

8 B Auto mechanics are skilled tradespeople, thus may be classified in the A (mid) occupation class. These are medium risk jobs, eligible for regular occupation definition for total disability.

9 B

Presumptive disability provides benefits for loss of sight, hearing, or use of two limbs. The waiting period is waived, and it does not matter if the insured returns to work: benefits are still paid as long as the condition still exists.

10 D

Residual disability = Loss% x Total disability benefit

Working 3 days a week out of 5 working days, her loss is 2 / 5 days = 40% loss

Total Disability benefit is 65% of her $51,000 salary

Disability benefit = ($51,000 salary x 65% benefit)

= $33,150 Disability benefit (annual)

÷ 12 months = $2,762.50 monthly total disability benefit

Residual disability = 40% Loss x $2,762.50 total disability benefit = $1,105 monthly residual disability benefit

11 C She has a non-cancellable policy – this means premiums will not increase & policy would not be cancelled by insurer should Ally switch jobs (within accepted coverage)

If this was a guaranteed renewable policy or a cancellable policy, the premiums may be increased.

She has an “own occ” definition for disability, which allows her to receive disability benefits even if she works other occupations

Even if Ally has a Waiver of Premium benefit in the policy, she would still have to pay premiums for at least the first 3 months or 90 days (waiting period), after which the premiums would be waived and she would not need to pay premiums while disabled

12 B Notification is done first, the proof will be submitted together/after the claims forms are completed and submitted.

High skilled, low risk professionals (those in the high occupation class) are best candidates for non-cancellable policies

13 D

Travelling consultants are mid occupation class

Technicians are in the mid occupation class

Office administrators are in the mid occupation class

14 A COLA would index benefits to inflation rate after 1 year of being disabled, not when the disability policy becomes in-force. The rest of the choices are true.

15 B Future Purchase Option (FPO) allows insured to increase benefits, no medical but has to provide proof in income increase. Premiums, of course, increase.

Individual disability policy benefits are tax free (pay now, enjoy later).

16 D

A is false, she is not eligible for CPP because her disability is not severe & prolonged (more than 1 year and not being able to work any job).

B is false. C is false, she is a lawyer which own occupation is better, less restrictive.

17 D Short waiting, long benefit period is most expensive combination

18 B Normally, disability benefits pay out to age 65

19 B The daughter is also eligible, even if she lives on her own and works part time. CPP dependents are under 18, or 18-25 attending school full-time.

20 C CPP Disability and EI Sickness benefits are taxable. WCB benefits are tax free

21 A All of these are tax deductible to the employer

CPP disability eligibility:

- under 65 (he is 63 years old)

22 A

- severe & prolonged disability (it is mentioned he cannot work anymore)

- must have contributed to CPP

D

Insured is not eligible for CPP disabiity, the disability is not prolonged.

Insured is not eligible for Worker’s Compensation, injury happened is on the way to work, NOT AT WORK

She will be able to get EI for 15 weeks after a 1 week waiting period.

24 B Family medical history like this would be considered, and the policy premiums would most likely be rated.

25 D

26 C

This is a pre-existing condition, injury on a certain part of the body only. This would result to exclusion on that part of the body – NOT THE ACTIVITY OR INJURIES COMING FROM THAT ACTIVITY

The choices here talk about getting additional disability insurance. The all sources maximum is 85%: all disability benefits can total 85% of income

So, WHO and HOW MUCH can he or she get?

Follow the rule:

1.) Choose the higher income person -- prioritize the breadwinner (Laida)

2.) Her income is 72,000 / yr / 12 mo = 6,000 / mo

3.) income x benefit %

6,000 / mo x 85% = 5,100 /mo All sources maximum

4.) But she has group benefits of 3,000 / mo already. This will count towards the maximum.

5,100 maximum - 3,000 existing = 2,100 remaining.

Pick the answer closest, but not over. (C)

The choices here talk about getting additional disability insurance. The all sources maximum is 85%: all disability benefits can total 85% of income

So, WHO and HOW MUCH can he or she get?

Follow the rule:

1.) Choose the higher income person -- prioritize the breadwinner (Laida)

2.) Her income is 72,000 / yr / 12 mo = 6,000 / mo

3.) income x benefit %

6,000 / mo x 85% = 5,100 /mo All sources maximum

27 A

4.) But she has group benefits of 4,000 / mo already. This will count towards the maximum. 5,100 maximum - 4,000 existing = 1,100 remaining.

Looks like we don’t have choices for Laida. We will do the same for Miggy.

Her income is 48,000 / yr / 12 mo = 4,000 / mo

Income x benefit %

4,000 / mo x 85% = 3,400 /mo All sources maximum

But she has group benefits of 2,000 / mo already. This will count towards the maximum.

3,400 maximum - 2,000 existing = 1,400 remaining.

Pick the closest, but not over (A)

28 D Offset clause is used when you are receiving government benefits (CPP, EI, WCB)

Additional exclusions for AD&D (on top of Extended Health Exclusions)

- Overdose/taking in poison & sedatives (intentional or unintentional)

- Coming from surgical mishaps

29 A

- Commission of crime

- Non-commercial flight or as a pilot

- Extreme sports, racing

30 B Whitening is purely cosmetic, usually not covered by dental insurance

31 B Big-4 Critical Illness coverage: Cancer, Stroke, Heart Attack, Coronary Bypass

No benefit is paid if death happens within 30 days of diagnosis (survival period)

32 D You can use CI benefit for anything

33 C

34 A

All of these are false:

i. LTC continues even after a claim. Further occurrences are covered.

ii. There is return of premium on death benefit: this provides payout on death

iii. LTC benefits pay benefits whether insured enters assisted living facility, home-care or if a family member takes care of the insured

iv. LTC never pays lump sum benefit, always periodic or reimbursement

v. individual LTC insurance is tax free benefit

To qualify for benefits from LTC insurance, insured must not be able to perform

2 Activities of Daily Living (ADL’s):

Bathing, Dressing, Eating (Feeding), Toileting, Continence, Changing Body Positions (Transferring)

Coordination of Benefits:

Who is Primary? Claimant is Daniel (planholder), Daniel is primary Daniel Kathryn

250 claim – 0 deductible = 250

35 A

36 B

250 claim – 75 deductible = 175 X 80% = $200 (Daniel) X 100% = 175

Remaining: 250 – 200 = 50

Since remaining is less than the secondary calculation, Kathryn’s plan covers $50

Coordination of Benefits:

Who is Primary? Claimant is child, Dingdong is primary (by birthday)

Dingdong Marian

900 claim – 100 deductible = 800

900 claim – 150 deductible = 750 X 90% = $720 (Dingdong)

X 80% = 600

Remaining: 900 – 720 = 180

Since remaining is less than the secondary calculation, Marian’s plan covers $180

Coordination of Benefits:

Who is Primary? Claimant is Xian (planholder), Xian is primary Xian Kim

1500 claim – 150 deductible = 1350

37 C

38 D

1500 claim – 200 deductible = 1300

X 80% = $1080 (Xian) X 90% = 1170

Remaining: 1500 – 1080 = 420

Since remaining is less than the secondary calculation, Kim’s plan covers $420

Coordination of Benefits:

Who is Primary? Claimant are children, Richard is primary (birthday) Richard Maya

2000 claim – 150 fam. deductible = 1850

There were 5 children claiming. Per person (single deductible) is 50, until maximum is 150 (fam. Deductible)

2000 claim – 0 deductible = 2000

X 80% = $1480 (Richard) X 70% = 1400

Remaining: 2000 – 1480 = 520

Since remaining is less than the secondary calculation, Maya’s plan covers $520

39 A Manual rating is used for companies without experience – questionnaire and compare

40 C These people are key employees (very important employees)

B

42 B

43 A

44 D

45 D

46 D

A is false: There can be multiple classes, each with different benefit levels, according to positions in the company – the higher position usually has more benefits B is true.

C is false: if employer pays 100% of the premiums, employee would have to pay tax on premiums for life insurance and AD&D, and tax on benefits for disability benefits

D is false: there are plans that allow members to purchase extra coverage at the member’s own expense

Non-refund method of accounting is suited for small companies (<50 employees)

50+ employees, refund method would be suitable.

1000+ employees, ASO/self-insured may be used

Longevity is the risk of living longer than expected.

This is considered a personal risk because a person may outlive the retirement funds/income. By using up all the retirement funds, a person may need to liquidate some assets to sustain living expenses, leading to reduced estate value on death. With long term illnesses, there may be prolonged medical costs.

47 C Females are at higher risk of disability. Younger people would have a greater chance of disability, but at a shorter duration. Older people would have higher DI premiums due to longer durations of disability

48 D Subrogation – insurer pays the benefit, will run after at-fault party

49 A Non-systematic means it only affects one business. Systematic means it affects all.

50 D Job/occupation class risk changes can make disability premiums increase.

51 B

52 D

Guaranteed Standard Risk Policies are more desirable, especially if health is a concern. Guaranteed issue policies are special policies available to low risk professionals.

FPO allows increases in coverage without medical, if income increases. However it appears that only the passive income increased. This is stipulated by the statements: Her annual income has now increased to $75,000 as a result of her investment income increasing to $10,000 per annum. This means the maximum disability benefit could not increase if only the investment income increased. To illustrate, let’s assume a 60% coverage limit for the disability policy.

Before:

Pre-disability = Active income + Passive income received

Pre-disability = $65,000 + $5,000

Pre-disability = $70,000

Disability benefit = Pre-disability income x Benefit%Passive income

Disability benefit = $70,000 x 60% - $5,000

Disability benefit = $37,000

After:

Pre-disability = $75,000

Disability benefit = Pre-disability income x Benefit%

- Passive income

Disability benefit = $75,000 x 60% - $10,000

Disability benefit = $35,000

Comparing the “Before” Income and “After” Income, it is evident that the insurer will not allow an increase in disability benefit.

53 C

54 D

Residual disability formula

Residual disability benefit = Total disability benefit x Loss% where Loss% = amount loss ÷ pre-disability

loss% = $3200 loss ÷ $5000 pre-disability = 64% loss

Total disability benefit = $3,000

64% loss x $3,000 total disability benefit = $1,920 residual disability benefit

To qualify for benefits from LTC insurance, insured must not be able to perform 2 Activities of Daily Living (ADL’s): Bathing, Dressing, Eating (Feeding), Toileting, Continence, Changing Body Positions She is unable to perform Changing Body Position (Walking) and Bathing

55 B CI policies usually terminate after the payout, unless there is a second event rider

56 A LTC premiums can get a Medical Expense Tax Credit (not tax deduction). Benefits are tax free

57 B Long Term Care insurance covers care costs. Barry cannot perform 2 activities of daily living, but if he refuses care and no care costs are incurred, no benefit is paid out.

58 B

Presumptive disability provides benefits for loss of sight, hearing, or use of two limbs. The waiting period is waived, and it does not matter if the insured returns to work: benefits are still paid as long as the condition still exists.

59 A Own occupation definition is given to executive class (low risk, high rank occupation)

Disability benefit = (Pre-disability income x benefit%) – Passive income

Pre-disability income = active income + passive income received

Active income: $60,000 f/t income + $5,000 p/t income = $65,000 Active income

60 C

Passive income: $12,000 royalty + $14,000 rental = $26,000 Passive income

Pre-disability income = $65,000 + $26,000 = $91,000 Pre-disability income

Disability benefit = ($91,000 pre-disability income x 60% benefit) – $26,000 passive = $54,600 Disability benefit (annual) - $26,000 (passive)

61 A

He had already received more than what he had paid. No more will be refunded. He had already received more than what he had paid. No more will be refunded. ROP refunds premiums if total amount paid is more than what benefit is received (or if there are no claims)

62 C He stated he would like to use the disability benefits to pay down higher interest loans. Mortgage insurance does not give him the freedom to do that.

63 B A is false, premiums are not tax deductible. C is false, the definition used is “any occ”. D is false, limited medical underwriting is needed up front (just questions)

64 C

Cost of Living adjustment calculation of benefit for the beginning of the year uses the previous year inflation rate. Also note that COLA rider lets disability benefit increase after 1 year (starting year 2)

Starting disability income = $5,000 / mo x 60% = $3,000/mo

1 2%

2 6%

3 5%

65 B

66 C

67 A

68 D

69 B

70 D

71 B

n/a. Start of disability. During the first year, there is no increase.

2%. Use the previous year’s inflation rate to determine disability.

4%. Even if the previous year’s inflation rate is 6%, The policy has a 4% limit. The excess would carry over the following year

$3,000 x 1.02 = $3,060

$3,060 x 1.04 = $3,182.40

Note: Since on year 3, the inflation rate exceeded the limit by 2%, this may be carried over the following year if permitted by the disability contract

If employer is paying premiums, insurer usually allows a bigger maximum benefit to offset the tax payable. Individual insurance is tax free benefit, benefits are not as big. Individual policies’ disability benefit usually are limited to 60% of pre-disability income, where Short term disability coverage could go to 70% coverage.

A is false: premiums are not tax deductible, thus benefits are tax free

B is false: waiting period should be more than 1 year, and benefits, although usually lump-sum, can be done installment

C is true: buy/sell agreements need to indicate the company value and ownership portion of each partner D is false: if a partner/shareholder recovers, there is no effect on the payout/buyout

A is true: for key person disability insurance, the definition for total disability is “own occ”, which means if the insured person is unable to perform his/her pre-disability duties, the insurer would pay out total disability benefits

B is false: the policyholder and beneficiary is the employer.

C is false: premiums are not tax deductible and benefits are tax-free

D is false: waiting periods are usually kept short, less than 3 months

A is false: This is pre-existing conditions clause. B is false, C is false: this refers to residual disability.

Non-cancellable is the most expensive type. Shorter waiting period is more expensive, longer benefit period is more expensive. Letter A is a good candidate, but the cost of letter B benefit to age 65 is a lot more compared to a shorter waiting period.

A is false: Waiver of premium has a waiting period of 90 days. That means 3 months of premium payments are still applicable and will only be waived (and the paid premiums during the waiting period reimbursed) after the waiting period.

B is false: Return of Premiums would only return the part or all of the premiums if the policy reaches a certain age/time (like age 55 or 65)

C is false: 1 hour/8 hours is 12.5% work. That is 87.5% loss, he would receive total disability benefits, because this is more than 80% (residual covers more than 20% and less than 80% loss).

D is true: Disability insurance benefits cover the income at the time of disability.

Pre-existing condition will not void all coverage, but a claim may be denied if treatment is required specifically related to the pre-existing condition (CISRO A&S textbook 4.2.3.3)

72 B Consumer Price Index is used to measure inflation

73 B

Non-refund: The insurer pays the benefit, and does not provide refund in case of less claims

74 C Business Overhead Expense Insurance does not cover the following: loan (capital portion), salaries of owner and income-generating employees, capital expenditures (new assets).

75 D

76 A

77 D

78 B

79 B

Claims adjudication is assessment of claim, which involves deciding whether a condition would be covered based on the policy definitions, gathering information on the severity/type of disability, determining how much a disability benefit would pay out.

Coinsurance factors ranges from 50%-100%. Coinsurance factor is the portion the insurer covers. If the coinsurance factor is smaller, premium is smaller

Deductible is the amount the member/employee must cover if there is a claim. This helps eliminate frivolous claims and is usually the effective way of reducing premiums without sacrificing coverage.

Capital portion of loan payments is excluded from BOE insurance.

BOE does not cover new captial expenditures, salaries of employees who are independently able to generate revenue to the business, salaries of relatives of disabled partners who were hired after the onset of disability.

Only the exact eligible expense up to the maximum will be paid the by insurance company. In some months, actual expense may be less than the benefit amount. Some contracts allow extension of benefit period or carryover of benefits and expenses for unclaimed expenses.

Benefits paid by the policy is taxable. However since the benefits are covering business expense, tax deduction may be claimed on those expenses

Also note that BOE insurance premiums can be claimed as tax deductible.

80 D

81 A

Regie would qualify due to his inability to perform at least 2 activities of daily living LTC policies have a daily maximum and a policy lifetime maximum. Facility A’s cost is within the daily maximum coverage, unlike Facility B’s cost which is more expensive and more than the daily maximum coverage. The entire cost for Facility A may be covered.

However if Regie was to be admitted to Facility B, only part of the cost may be covered.

Accidental Dental is not part of the Dental coverage, but actually is covered under Extended Health Insurance

The group LTD benefit is 60% of the salary, to a maximum of $5,000

Jimmy’s salary is $70,000 / year, Jolly’s salary is $140,000 / year

82 A

Jimmy’s benefit = $70,000 x 60% ÷ 12 months = $3,500/mo

Jolly’s benefit = $140,000 x 60% ÷ 12 months = $7,000/mo, but is limited to the maximum of $5,000/mo

Life insurance would pay out because life insurance does not usually contain exclusions for this type of death, while disability insurance may likely deny the claim due to participation in illegal activity (robbery)

83 A

84 B

Note: In this question, Clyde was driving. The death was self inflicted and thus would most likely may pay out a benefit to Bonnie. If Bonnie was driving, the cause of Clyde’s death is Bonnie, who is the beneficiary, thus the insurer may likely see this as against public order (see Ethics Module for this topic) and not pay out the benefit.

If the insured’s income decreased prior to disability, the benefit would be decreased accordingly.

$72,000 salary ÷ 12 months = $6,000/ mo salary

$3,600/ mo disability benefit ÷ $6,000/ mo salary = 60% benefit

Salary decreased to $60,000

$60,000 salary x 60% ÷ 12 months = $3,000 /mo new disability benefit

Note:

If the insured’s income increased and the insured was not able to apply for increased benefits prior to disability, the disability benefit remains the same.

If the insured’s income decreased prior to disability, the benefit would be decreased accordingly. If the insured becomes unemployed prior to disability, the disability benefit would not be paid out, due to absence of loss.

85 C

86 D

If the insured’s income increased and the insured was not able to apply for increased benefits prior to disability, the disability benefit remains the same.

Note: If the insured’s income increased and the insured was not able to apply for increased benefits prior to disability, the disability benefit remains the same. If the insured’s income decreased prior to disability, the benefit would be decreased accordingly. If the insured becomes unemployed prior to disability, the disability benefit would not be paid out, due to absence of loss.

Disability insurance may likely deny the claim due to participation in illegal activity (robbery)

Even though life insurance would pay out because life insurance does not usually contain exclusions for this type of death, this is payment against public policy (beneficiary caused the death of the life insured) so no benefit would likely be paid.

Note: In this question, Bonnie was driving, the cause of Clyde’s death is Bonnie, who is the beneficiary, thus the insurer may likely see this as against public order (see Ethics Module for this topic) and not pay out the benefit. If Clyde was driving. The death is self inflicted and thus would most likely may pay out a benefit to Bonnie.

To address the need for longevity where people grow very old and may outlive their retirement funds and may need to liquidate their assets, clients could get insurance products to protect assets: Critical Illness Insurance and Long Term Care Insurance

87 A

88 D

Note: Disability insurance – protection of income

CI and LTC insurance – protection of assets

Extended Health, Dental, Prescription Drug, Vision, Travel and AD&D insurance – protection of savings

If the insured’s income decreased prior to disability, the benefit would be decreased accordingly.

Salary decreased to $60,000

$60,000 salary x 60% ÷ 12 months = $3,000 /mo new disability benefit

Note: If the insured’s income increased and the insured was not able to apply for increased benefits prior to disability, the disability benefit remains the same. If the insured’s income decreased prior to disability, the benefit would be decreased accordingly. If the insured becomes unemployed prior to disability, the disability benefit would not be paid out, due to absence of loss.

If occupation risk increases, we have to look at what kind of disability contract is owned. This is a guaranteed renewable contract, therefore the insurer may increase premium rates or adjust benefits

Note: Change of occupation risk

89 C

90 A

• If occupation risk decreases (either by change of occupation or by the number of claims of the class), policy premium rate may go down.

• If occupation risk increases (either by change of occupation or by the number of claims of the class), we have to look at what kind of disability contract is owned.

o If contract is non-cancellable, no change would be made.

o If contract is guaranteed renewable or cancellable, insurer may increase premium rates or adjust benefits, or, in the case of cancellable policies, cancel the contract.

Residual Benefit covers the situation whenever a person was initially totally disabled, but would be returning to work in a part time basis. Residual benefit is based on lost income, and the loss must be between 80% & 20% of pre-disability income. The insured must have been totally disabled for a period of time (qualification period).

Other choices:

• Cost of living adjustment (COLA) – indexes benefit to inflation / increase of CPI

• Return of premium (ROP) – refunds the premiums paid if no claims or claims are less

• Future purchase option (FPO) – if earned income increases, the insured may apply for increased disability benefit without proof medical insurability

91 C Refer to Ethics Module, Change of insurability

If there is a change of material fact at the time of delivery that is different from the application, the policy must be returned and insurer must be informed to re-evaluate the policy

Cost of Living adjustment calculation of benefit for the beginning of the year uses the previous year inflation rate. Also note that COLA rider lets disability benefit increase after 1 year (starting year 2) Starting disability income = $5,000 / mo x 60% = $3,000/mo

1 2% n/a. Start of disability. During the first year, there is no increase.

$3,000

92 D

93 C

2 6% 2%. Use the previous year’s inflation rate to determine disability.

3 5% 4%. Even if the previous year’s inflation rate is 6%, The policy has a 4% limit. The excess would carry over the following year

94 C

95 A

96 A

97 D

$3,000 x 1.02 = $3,060

$3,060 x 1.04 = $3,182.40

Note: Since on year 4, the inflation rate exceeded the limit by 3%, this may be carried over the following year if permitted by the disability contract

The Private Health Services Plan (PHSP) is health fund for sole proprietors or partnerships and their families with a maximum limit of $1,500 contribution per owner and spouse and $750 for their children. They have a 2-year limitation to use the fund.

LTC insurance contracts provide protection for the costs of in-home, assisted living or facilities services required by individuals who are recovering from an illness or injury or those who have a condition that requires chronic care.

Health and Welfare Trusts (HWT):

- Are an alternative to group plans.

- Contributions are usually made by the employer only, on a mandatory basis, and may never revert to the employer.

- Contributions are tax-deductible by the employer and employees are not required to report a taxable benefit at any time.

- There is no time limit specified during which the employees are required to utilize the contributions to acquire benefits.

The shorter the benefit period, the smaller the amount of claim the insurer is at risk of paying and the smaller the policy premium will be.

Deductibles and coinsurance may be applied to extended health plans and travel insurance, but does not apply to disability insurance

Shorter waiting periods in a disability policy increase the premiums

Multiple / Second Event Rider for Critical Illness Policies allows for a second CI claim.

In this case, even if Julia had a claim before, this second claim could be honored by the insurer, after satisfying the 30 day waiting/survival period.

Note: If there was no Multiple / Second Event Rider, Julia would not have been able to claim because the first claim would effectively terminate the CI policy.

98 B

Employee health trusts (EHT) tax treatment that the employer pays for the premiums (tax deductible by employer), and contributions would not be reported to employee taxable income, but when claiming, benefits are reported to employee as taxable income.

Learning notes: Taxation of Health Spending Accounts:

Health Welfare Trust (HWT)

Employer pays premiums, Employee claims benefits

Contributions tax deductible by employer: Yes

Contributions reported as taxable income by employee: No

Benefits reported as taxable income by employee: No

Employee health trusts (EHT)

Employer pays premiums, Employee claims benefits

Contributions tax deductible by employer: Yes

Contributions reported as taxable income by employee: No

Benefits reported as taxable income by employee: Yes

Private Health Services Plans (PHSP)

Employer pays premiums, Employee claims benefits

Contributions tax deductible by employer: Yes

Contributions reported as taxable income by employee: No

Benefits reported as taxable income by employee: No

99 B The standard adult Critical illness policy will cover ages 18 to 65

False: The premium will not be waived because it is not Lorna became disabled

100 B

101 B

102 B

Reason: Premiums will be waived because the waiver of premium may also cover the policyholder if the payor is not the insured

For Group disability insurance, premiums paid by employee is paid out first, tax-free. Therefore, 25% of $4,800 premiums paid is = $1,200 tax free.

$16,000 benefits paid out - $1,200 tax free = $14,800 taxable

There are topics from other modules which are tested in this module. This topic is discussed in the Ethics module.

Attending Physician Statement (APS) – when an underwriter looks at an application and requires more information regarding medical issues, an APS is requested. This is the answer because the insurer would like to get more information on this condition.

Other choices explanations:

Medical Information Bureau (MIB) – insurers use this to determine if there is misrepresentation on the application. MIB only contains codes, not detailed information.

Inspection Report - when an underwriter looks at an application and requires more information regarding non-medical issues, an inspection report is requested.

Exclusion is not going to be applied here, because epilepsy is not considered a critical illness.

Cost of Living Adjustment (COLA) Rider addresses rising prices and helps keep pace with inflation by increasing the benefit to inflation (or indexing), after 1 year of receiving benefits

Other choices‘ explanations:

103 A

FPO – Future Purchase Option allows increases to disability coverage without proof of medical insurability, if insured’s earned active increases

CI – Critical Illness insurance pays a lump sum benefit after 30 days of surviving a life threatening condition defined in the policy (ex. Cancer, stroke, heart attack)

EAP – Employee assistance program is a group benefit which provides confidential counselling (ex. Psychological counselling, Marriage counselling, Legal counselling)

104 A

105 C

Cost of Living Adjustment (COLA) Rider addresses rising prices and helps keep pace with inflation by increasing the benefit to inflation (or indexing), after 1 year of receiving benefits

Other choices‘ explanations:

FPO – Future Purchase Option allows increases to disability coverage without proof of medical insurability, if insured’s earned active increases

Disability Buy Out – (see Insurance for Businesses) this is used for multi-owner companies (partnerships or corporations) to help the business buy out the shares of the disabled partner/shareholder

AD&D – Accidental Death and Dismemberment is coverage for accidental death or loss of body parts/ function

Pre-existing injuries are usually excluded from coverage when applying for new / additional disability coverage

The group insurance pays out disability income of $4,000/mo

$1,000/mo CPP benefit is to be deducted from group disability benefit

$4,000 group disability benefit - $1,000 CPP disability benefit = $3,000 group disability benefit

Individual disability coverage is $500/mo

106 C

107 B

$3,000 group disability coverage + $1,000 CPP disability benefit + $500 individual disability benefit = $4,500/mo, which is just enough to cover the family needs of $4,500/mo

The disability policy states a 85% direct sources maximum. 85% x $6,000 income = $5,100 maximum. The total amount ($4,500) is within this maximum

A housewife functions as caregiver for the dependents. In case she gets disabled, disability income can be used to hire a caregiver for the children.

Note: The NOA is used for investment purposes.

108 C

109 B

If an employer pays some or all of the premiums for a group life insurance plan, those premiums are considered to be a taxable benefit for the employee. Any premiums paid by the employee are not deductible to either the employer or the employee. The premiums paid by the employee via payroll deduction are taken from his pay.

Calculation:

$785 Annual premium x 80% employer payment = $628 employer payment of premium which is taxable benefit to employee

If an employer pays some or all of the premiums for a group disability insurance plan and are not passed on as taxable benefit for the employee, the disability income benefit is tax-free up to the total amount the employee paid, and afterwards the disability income benefit becomes taxable.

Calculation:

$785 total premium paid x 20% employee paid portion = $157 tax free portion

$3,250 disability benefit – $157 tax free portion = $3,093 taxable portion

110 D

Females are at higher risk of total disability. Older people would have higher DI premiums due to longer durations of disability, even if the risk of total disability is lower. Younger people would have a greater chance of total disability, but at a shorter duration.

MODULE 04

Segregated Funds and Annuities

Chapter 01

Investment and Savings

Question 01

Why would a young person want to start early to invest?

a. Greater effect of time over money

b. Taking advantage of volatility spreading over time

c. Having the physical capability to earn money

d. All of the above

Investing Terminology

Investing

• Using money to make money

Principal

• Initial Capital/Seed

• Sometimes Adjusted Cost Base (ACB)

Fair Market Value

• Current Value

Return, Gain, Growth, Interest

• Profit above the principle

Key Concepts

• Investment & Saving Principles

• Investment Objectives

• Types of Investment

• Risks of Investing

Question 02

A person invested $15,000 last year. This year, the investment value is $17,500.

What is the person’s rate of return?

a. 85.71%

b. 16%

c. 16.67%

d. 14.29%

Question 03

Johnny’s mutual fund had earned 9% this year. He was not quite satisfied, as the stock market averaged 12% in the same year. The inflation rate has dropped to 2%. What is his real rate of return?

a. 3%

b. 7%

c. 9%

d. 10%

Formula for Rate of Return % Rate of Return = Gain ÷ Principal

Formula for Rate of Return (Taking inflation into account)

SHORT FORMULA (For Seg Funds) Real rate of return = nominal

Question 04

Temmie’s savings had earned 1% this year. He was always conservative, even as the stock market averaged 12% in the same year. The inflation rate has dropped to 2%. What is his real rate of return?

a. -1%

b. 1%

c. 10%

d. 13%

Time Value of Money

Question 05

Juris invested $20,000 today. How much is the market value next year if rate of return is 8%?

a. $21,600

b. $1,600

c. $20,008

d. $20,000.08

Question 06

Juris invested $20,000 today. How much is the market value in 15 years if rate of return is 8%?

a. $44,000

b. $324,000

c. $63,443

d. $24,000

Question 07

Becky wants to invest a lump sum today for her son’s education that will cost $95,000 in 20 years. Assuming a 3% investment return, how much will she need to invest?

a. $38,000

b. $59,375

c. $51,660.46

d. $52,599.20

Question 08

Neil received a graduation gift of $9000 and he wants to invest it in a segregated fund. What is the interest rate needed for the fund to be match $15,000 in four years?

a. 9%

b. 18%

c. 14%

d. 16%

Investing Terminologies

Diversification

• Contains many different types/areas of investment

• Decreases overall risk

Liquidity

• Quick, easy conversion to cash, without affecting value

Volatility

• Fluctuation in investment value

• Opposite of stability

Leveraging

• Borrowing money to invest

• A “multiplier” of risk and return

Inflation

• Increased cost of living

• Lowering the value of money over time

Investing Objectives

Purpose:

• Is it for education? Retirement? First-time home buyer?

• Can open Registered Accounts for specific purposes

• Non-Registered Accounts for various purposes

Financial Goal:

• How much do you need?

Need for Guarantee:

• Is the person risk-averse (conservative)?

• Check the risk tolerance

Time Horizon:

• Short term (< 3 years) – takes low risk

• Medium term (3-10 years)

• Long term (10+ years) – can take high risk

• Tax Preference / Tax Advantage

• Registered accounts have special tax rules

• Non-registered investment income

º Interest 100% taxable

º Dividends & capital gains taxed less

Question 09

Dale’s goal is to save $20,000 (which he believes will be enough) to buy a Chevrolet Impala in 2020. It is now 2016. How would you classify Dale’s goal?

a. A short-term goal

b. A medium-term goal

c. A long-term goal

d. A non-financial goal

Asset Classes

Equity

• Stocks

• Generally high volatility, high opportunity

Income

• Fixed Income, Bonds

• Generally low volatility, low opportunity

Cash

• Money Market, Treasury Bills

• No volatility, very low opportunity

Types of Investments

Ownership in a company

Two types of stocks:

1. Preferred shares

– Gets dividends first before common shareholders

2. Common shares

– Have voting rights

Question 10

Types of Investments – Stocks

Blue Chip stocks: Less risk, well established

Can be bought from a stock exchange (like TSX)

Market and industry risk (value can fluctuate)

Chantal is looking to invest in stocks. She is looking to get the maximum growth opportunity. Which of the following stocks should she look into?

a. Common shares of Microsoft, a big software company

b. Common shares of Supreme Cannabis, a start-up cannabis company

c. Preferred shares of TD Canada Trust, one of the major banks

d. Preferred shares of Tulip, a new tech company in Toronto

Debt investment –

As if investor is lending money to earn interest

Types of Investments – Bonds

• Could be issued by government (less risk) or corporation (more risk)

• If more established (less risk) then lower interest rate

Question 11

Has a certain interest rate & maturity date (When the principal is to be paid back)

Can be bought from bond dealers

Regarding bonds, which of the following would contribute to a higher rate of return?

a. Take bonds with lower credit rating

b. Have a shorter maturity

c. Have government instead of corporate bond

d. All of the above

Default risk, interest risk (if prevailing rates are higher, bond value is lower)

Question 12

Which of the following are bank products?

a. Stocks

b. Savings

c. GICs

d. B and C

• Very liquid

• Low volatility

• Very low return

Types of Investments – Savings

Can be opened in banks, credit unions, etc.

Types of Investments – Guaranteed Investment Certificates (GICs)

• Bank product

• Low volatility

• Low return Has a term/maturity, usually locked in (not liquid)

Question 13

Which of the following statements are true of GICs?

• Redeemable: could be cashed out but offers less interest

• Variable/market-linked: offers fluctuating interest

a. Cashable GIC’s would have greater returns over non-redeemable GIC’s

b. GIC’s are only offered at a guaranteed interest rate

c. GIC pays distributions that consist of interest, dividends, and capital gain

d. GIC’s rates can be linked to the performance of the equity market or an index

Sold by life insurers & banks (limited extent)

Types of Investments – Annuities

Bought with a lump sum then provides income installments which is made up of principal and interest

Could provide lifetime income or for a certain term

• Inflation risk

• Interest risk (for fixed-rate GIC)

• Liquidity risk (for non-redeemable)

Liquidity Risk, Interest Rate Risk (Generally not flexible)

Types of Investments – Mutual Funds

• Pooled, managed investment

• Diversified, liquid, but management fees can eat up investment

• Investors buy/sell units (could be portions of a unit which is flexible)

Bought from Mutual fund dealers / securities dealers Risk depends on mutual fund type

Types of Investments – Segregated Funds

Also pooled, similar to Mutual funds Issued by life insurers Has guarantee & maturity Risk depends on segregated fund type

Risk vs Return Chart My Fine Investment Broker Does Best to Illustrate Everything Gently Similar to Real Life

Question 14

Which of the following types of investments features the most stability?

a. Treasury bills / Money Market

b. Common Stocks / Equity

c. Labour sponsored investment funds

d. Foreign Corporate Bonds

Question 15

Which of the following types of mutual funds iffer greatest opportunity for growth?

a. Income Funds

b. Balanced Funds

c. Global Index Funds

d. Canadian Index Funds

Question 16

Nick had invested in a segregated fund 5 years ago, however he did not have a clue on what kind of investments it was invested in. You, Nick’s advisor met him in 2014 and reviewed his statements and see the following annual returns:

2010 = +6%

2011 = -12%

2012 = +3%

2013 = +16%

Which of the following funds could reflect this trend?

a. Bond Fund

b. Income Fund

c. Equity Fund

d. Money Market Fund

Types of Investments – Exchange Traded Fund (ETF)

Similar to mutual fund, but bought from a stock exchange Generally lower Management Fees Could be active or passive management

Types of Investments – Real Estate

• Very high risk

• Properties

• Can be for income or capital gain

• Not liquid

• Can end up not having a buyer Main risks: liquidity risk, market risk

Types of Investments – Hedge Funds Pooled, like mutual fund / ETF

• Goods, materials, or products

Types of Investments – Commodities

• Examples: Gold, Silver, Coal, Copper, Oil, Wheat, Corn, Livestock, Lumber

Generally used in Specialty (sector) funds

Question 17

A person wants to buy a house in 6 months, wants to invest money with a guaranteed principal. Which of the following would you recommend?

a. Bonds

b. Exchange Traded Fund

c. Segregated Fund

d. Savings

Non-Registered Taxation

Interest

• Paid by income asset class:

º GICs, Bonds, Savings, Money Market

• Fully Taxable

Dividends

• Paid to holders of stocks

• Part of earnings shared to shareholders

• Less Tax

Question 18

Which of the following are considered “tax-preferred”?

i. Dividends

ii. Capital gains

a. i,ii

b. i,ii,iii

c. ii only

d. All of the above

iii. Interest

iv. Foreign income

Capital Gains

Profit from sale of higher investment value

• Capital losses can offset gains in the future or in the previous 3 years

• Less Tax Foreign Income

• No tax advantage

• Fully Taxable

Investor Protection

Canadian Investor Protection Fund (CIPF)

• Stocks, bonds, mutual funds, ETFs

Mutual Fund Dealers Association (MFDA)

• For mutual funds

Canada Deposit Insurance Corporation (CDIC)

• GICs, Savings (bank products)

• Maturity must be less than 5 years

Assuris

• For segregated funds & annuities (life insurers)

Question 19

Darren had purchased a life annuity 10 years ago. He called you today regarding his concern he saw in the news that the insurer he has his life annuity with is undergoing insolvency.

Which protection does Darren’s annuity have?

a. CIPF

b. CDIC

c. Assuris

d. None of the above

Investment Risks

Economy Risk

• Political/legal risk, affects all investments

Inflation Risk

• Inflation defeating returns: for very low return investments like savings, non-redeemable GIC’s and government bonds

Interest Rate Risk

• Decrease in value or being locked with low rates: for locked in rates like fixed-rate GIC’s and bonds

Liquidity Risk

• Can’t withdraw early/easily without penalty: for locked in investments like non-redeemable GIC’s and real estate

Question 20

Default / Credit Risk

• Issuers may default on debt: for corporate bonds

Market Risk

• Fluctuation in prices due to supply and demand: for volatile investments like stocks, real estate, and certain mutual / Seg funds

Foreign Exchange Risk

• Fluctuation in exchange rates: for foreign investments / funds

Industry Risk

• Risk if not diversifying investment to the different economic sectors

Marcel is fascinated with electric cars. He had purchased stocks of companies all in the technology sector. What type of risks is Marcel exposed to?

a. Inflation and Interest Risks

b. Foreign Exchange and Liquidity Risks

c. Industry and Market Risks

d. Default and Interest Rate Risks

Question 21

What is the greatest risk for corporate bonds?

a. Inflation Risk

b. Liquidity Risk

c. Market Risk

d. Default Risk

Market Timing

• Buy low, sell high – repeat

• More advanced, more risk Investment Strategies

• Taking advantage of market swings

Dollar Cost Averaging

• Consistent investing, same deposits

• Buying more when market is low, buying less when market is high

• Slow but steady, simpler – less risk

Chapter 02

Segregated Funds

Key Concepts

• Characteristics of Seg Funds

• Death/Maturity Guarantees

• Contract Resets

• Assuris Protection

• Withdrawals

• Management / Trading Expenses/Fees

• Sales Charges

• Segregated Funds vs Mutual Funds

Segregated Funds

• Individual Variable Insurance Contract (IVIC)

• Similar to mutual funds as pooled –Liquid, diversified, active management

• Issued by life insurers

• Can name beneficiaries – protected against creditor seizure, bypass estate and probate

• If annuitant (life insured) dies, beneficiary receives the funds

• Has guarantees and maturity

Death/Maturity Guarantees

• “Safety net” in case market drops

• On Death or Maturity

• Minimum guarantee

• 75% of principal

• Maturity

• 10 years from deposit date

• Future deposits have a separate maturity 10 years after date of deposit

• Can be reset to secure growth

Account Value is higher: Guarantee not required

Question 22

Account Value is Lower: Insurer provides top-up to reach guarantee

Harold had purchased a seg fund 10 years ago with $10,000, 100% guarantee. When the policy matured, the contract value was at $7,000. How much could Harold get from the Seg fund?

a. $17,000

b. $10,000

c. $7,500

d. None, Harold had not died

Question 23

Cindy had purchased a Seg fund 10 years ago with $50,000, 75% guarantee. When the policy matured, the contract value was at $67,000. How much could Cindy get from the Seg fund?

a. $50,000

b. $37,500

c. $67,000

d. None, Cindy had not died

Question 24

Lily purchased a Seg fund for $20,000, 75% guarantee. 10 years later, the contract valued at $12,000. How much would Lily receive from the insurer as guarantee?

a. $15,000

b. $3,000

c. None, Lily had not died

d. None, the contract did not mature

Question 25

Nancy had purchased a Seg fund 2 years ago with $20,000, 100% guarantee. Unfortunately, Nancy passed away today from an accident. The contract value of the seg fund is at $12,000. How much could Nancy’s beneficiary receive?

a. $20,000

b. $15,000

c. $8,000

d. None, the policy did not mature

Question 26

Lily purchased a Seg fund for $20,000, 75% guarantee. Now, 5 years after purchase, the contract is valued at $12,000. If she surrenders the contract now, how much would Lily receive from the insurer as guarantee?

a. $12,000

b. $3,000

c. $15,000

d. None, the contract did not mature

1. Guarantee is updated

2. Maturity resets

3. Reset options depend on the contract

Question 27

Enrique is a self-employed home security consultant who had purchased a segregated fund for $15,000 on his 20th birthday. The segregated fund he has features a 100% guarantee on death and maturity, as well as reset options four times every year. He has named his wife, Liza, as the beneficiary. He managed to reset the contract 8 years later when the value was $21,074. Unfortunately, Enrique died just when he turned 29 years old. The contract value at the time of his death is $18,502. Enrique has outstanding debt of $19,200.

How much would Liza receive from this contract after probate?

a. $0

b. $1,874

c. $18,502

d. $21,074

Assuris Protection –

Funds

• Not needed when account value is higher than guarantee

• Assuris applies if account value is less than guarantee

• 100% of guarantee up to $60,000 or 85% of guarantee, whichever is higher

Question 28

Judy has an IVIC whose original investment of $75,000 and guarantee is 100%. If the contract matures and the market value is $50,000 but the insurer had declared insolvency, how much would Judy receive?

a. $85,000

b. $0

c. $75,000

d. $63,750

Important Documents

To be given to the client upon/before application

Fund Facts

• Statistics, Data, Numbers, Graphs

• Net Asset Value Per Unit (NAVPU)

= (total assets – total liabilities) ÷ number of outstanding units

• Inception date – Date the fund began

• Performance data

• Fund Manager

Information Folder

• Rules, Terms and Conditions – Contract provisions

• Guarantees

• Reset options

• Sales Charges

• Penalties

• Right of Rescission – 2 days only

Question 29

You are meeting with your friend, Manny, to set up the transfer his RRSP into a registered seg fund. Which of the following source of information would you find the requirements and conditions to transfer funds from one institution to another?

a. Information Folder

b. Fund Facts

c. Insurer’s website

d. Income Tax Act

Question 30

Where could someone see how much he/she has in her segregated fund account?

a. Information folder

b. Fund Facts

c. Account Statement

d. Income Tax Act

Withdrawals

Guarantees will be reduced

Tax may apply:

• Registered

º Tax deferred

º Fully taxable (G/RRSP, Pensions)

• Non-Registered

º Seg funds earnings (allocations) reported annually

º Capital Gains Tax if withdrawn

Question 31

Management and Trading Expense Ratios

• MER and TER

• Covers management, operating, trading expenses, and guarantees

• Seg Funds higher MER than Mutual Funds because of guarantees

• Higher MER for volatile/active funds vs stable/passive funds

Which of the following is true regarding Seg Funds withdrawals?

a. Tax would not apply as this is an insurance contract

b. If withdrawing less than the amount gained above the principal, guarantees would remain the same

c. Registered Seg funds are taxable only if there is a gain

d. Seg funds may be withdrawn prior to maturity

Question 32

Which one of the following investments would likely have the highest management fees?

a. An equity mutual fund

b. An equity segregated fund

c. A money market segregated fund

d. A money market mutual fund

Question 33

Which of the following investments would most likely have the greatest potential return?

a. A bond mutual fund

b. An equity mutual fund

c. An equity segregated fund

d. A bond segregated fund

Sales Charge –Commissions for Agents

Front-End Load

• Up front, % of each deposit charged for agent commission

• Example: Deposits of $200 per month with a 3% front end load. That means monthly, 3% of $200 = $6 is taken as a sales charge. The deposit is $194 to the fund and the bases for guarantees

Deferred / Back-End Load

• No charge up front, but charged for early withdrawal

• Most common type, used to encourage clients to keep their investment for a long time

• Example: Year 1: 5% charge. Year 2: 4.5%, Year 3: 4%, Year 4: 3.5%,Year 5: 3%, Year 6: 2.5%, Year 7: 0% charge

No Load

• No charge on deposit or withdrawal, sometimes may have a higher MER for individual investors

Question 34

What type of seg funds sales charge is recommended for long term investing?

a. Front end load

b. Deferred sales charge

c. No load

d. Over load

Chapter 03

Annuities

Key Concepts

• Characteristics of Annuities

• Advantages of Annuities

• Assuris Coverage

• Cost & Annuity Income

• Types of Annuities

• Disadvantages of Annuities

• Annuity Taxation

Annuities

Would you rather:

Lump Sum?

• More Control

• Could invest

• Must be responsible

Lifetime Income (Installments)?

• Less Control

• Less Management

• Guaranteed

Advantages of Annuities

• Easy to understand

• Income security (life/term/spousal)

• Creditor Protection (by having beneficiaries)

• Estate planning benefits (insured life annuity)

• Annuitant protection (Assuris)

Question 37

Which one of the following insurance products addresses longevity?

a. Life insurance policy

b. Segregated fund

c. Index-linked GIC

d. Life annuity

Pay Lump Sum

Receive Income Installments = Principal + Interest

Death or end of Term

• Annuities provide monthly/quarterly/annual payout (income stream)

• Offered usually by life insurance companies (banks too, but only offer term annuities)

Who uses Annuities?

Converting retirement funds to retirement income

Receive lifetime income instead of lump sum

Assuris Coverage: Annuities

Whichever is greater:

• 100% up to $2,000 monthly income

• 85% of the income

Usually minors or to provide ongoing support, no need for management

Providing long term income support while disabled

Question 38

A life annuity pays out $1500 per month. How much is the assures coverage?

a. $2000/mo

b. $1500/mo

c. $1275/mo d. $85/mo

More annuity income

• Less options

• Less up-front benefits

• Less cost

Types of Annuities

Less annuity Income

• More options

• More up-front benefits

• More cost

Payout vs Accumulation

Payout Annuity

Pays out income

Accumulation Annuity

Savings - on maturity this can be surrendered or converted to pay out annuity

Question 39

Single One annuitant

Joint

Two or more annuitants, payment will continue until last person dies (called a joint & last survivor annuity)

Janice and Jacob are a retiring couple. They are looking for guaranteed lifetime income that would pay for as long as they live. Which annuity meets their need best?

a. Term annuity

b. Single life annuity

c. Joint and last survivor annuity

d. Payout annuity

Survivor Benefit

• Costs more = smaller annuity income

• Survivor income does not decrease

Question 40

• Costs less = greater annuity income

• Survivor income decreases

Janice and Jacob is about to purchase a joint and last survivor annuity. While going through the meeting, they ask whether the surviving spouse receives the full income if one of them die. What do you answer?

a. No, the income is reduced to half when one spouse dies

b. No, the annuity terminates upon death of annuitant

c. It could, but the cost of annuity is higher

d. It could, and the cost of annuity is the same

Term vs. Life

Term (Certain) Annuity

• Payout is only for a specified time or certain

Life Annuity

• Payout is until death, calculation based on life expectancy

The longer the stretch, the thinner it gets.

Likewise, the longer the annuity payout (more years), the smaller the annuity income.

Question 41

Which one of the following annuities would cost the most for young people?

a. A 30-year term certain annuity

b. A 30-year term annuity

c. A life straight annuity

d. A joint-and-last survivor annuity

Types of Annuities:

Life Straight Annuity

• No Payout to Beneficiary

• Very low cost = high annuity income

• Could be used for single person, no need to leave funds behind

• Could be used in tandem with life insurance – insured annuity

Insured Annuity

• Policy owner determines how much is needed on death & purchase permanent life insurance (T-100 or WL) with face amount equal to the need

• Purchase a life straight annuity to provide to pay the life insurance premiums & provide income

• On death of annuitant, annuity ends and life insurance proceeds pay out to beneficiaries/estate

Impaired Annuity

• Accelerated benefits for people with shortened life expectancy

• Very short time-frame = higher annuity income

Life Annuity

• Live beyond life expectancy

– Good for annuitant, annuity continues on

• Die before life expectancy

– Good or insurer, annuity terminates

º Guaranteed Period (n) years guarantee

º Example: 20-year guarantee; annuitant dies in year 15. Beneficiary receives 5 years’ worth of payments

º Guaranteed Capital Cash (lump sum) or installment refund

º Example: Cash refund; Annuitant had deposited $500,000. Died on year 16, total amount paid is $260,000. Beneficiary receives $240,000

Question 42

What does a 20-year-guarantee do in a life annuity?

a. The annuitant could cancel the annuity within 20 years and get a refund of the difference of the payout and principal

b. The beneficiaries could receive the remaining payments of the guaranteed period if the annuitant died within 20 years

c. The annuity pays out a fixed interest rate for 20 years, after which the interest rate would depend on the current rate

d. The beneficiaries could receive lifetime income if annuitant dies within 20 years

Other Types

• Immediate – Payments right away.

• Deferred – Payments start at a later day. Annuitant can continue to deposit in the accumulation phase and start income payout later.

• Indexed – Increasing income over time. For inflation/cost of living.

Question 43

• Variable – income based on returns of a selected investment mix.

• Commutable – (for term and accumulation annuity): can withdraw early, not locked in, but subject to market value adjustment (MVA) penalty based on interest rate difference, expenses, and time to maturity.

Tracy is 60 years old was recently disabled. She is relying on her savings to get her through. She needs to have a steady cash flow to support her until age 65 when she can start receiving her pension. What product should Tracy get?

a. 5 Year Term Annuity

b. Deferred Annuity

c. Life Annuity

d. Life Annuity with 5 year Guarantee

Funding Annuity

• Transfer from a Registered Account

º Comes from RRSP/Pension, all income received taxable

º RRSP can be converted life annuity, or term-to-90 or term-to-18 (on death of RRSP/RRIF holder whose beneficiary is dependent under 18)

• Lump Sum

• Regular Deposits

Annuities Taxation

• Registered

º Comes from RRSP/Pension, all income received taxable

º RRSP can be converted life annuity, or term-to-90 or term-to-18 (on death of RRSP/RRIF holder whose beneficiary is dependent under 18)

• Non-Registered

º Comes from non-registered investment, only the interest portion is taxed

º Non-Prescribed (Accrual): more interest payment and more tax up front. Better if tax rate is higher at the later stages

º Prescribed: Interest and principal portions are equal over life of annuity (thus tax is level, reducing the upfront tax burden

Question 44

How much must an annuitant need to declare on the annual tax return from the income of a prescribed annuity that pays $2,000 monthly, of which $300 is the interest portion?

a. $300

b. $2,000

c. $3,600

d. $24,000

Annuity Payout Factors

Other factors that affect payout

• Sex, Age, Interest Rate, Principal, Payment Frequency, Length of Payout

Question 45

Which of the following statements are true regarding annuity payouts assuming the same principal amount?

a. Males receive more annuity income than females

b. Smokers receive more annuity income than non-smokers

c. Monthly payouts are higher compared to annual

d. A 20 year term would pay a greater monthly income than a 10 year term

Seg Funds Act Like Annuities?

Guaranteed Minimum (or Lifetime) Withdrawal Benefit –GMWB or GLWB Rider

Stage 1 – Savings Phase

• Policyholder accumulates funds

• Insurer provides extra credit

• Could withdraw, but accumulated amount and principal reduce, which reduce guarantee

Stage

2

– Payout Phase

• Policyholder starts withdrawing income

• Insurer provides guaranteed withdrawal amount (or lifetime income) based on accumulated amount

• Extra withdrawals are possible, but future withdrawal amount guarantee is reduced

Question 46

A client has invested in segregated funds. She read something about having guaranteed income in the information folder. You have pointed out to her the benefit of GMWB. Which of the following is true regarding Guaranteed Minimum Withdrawal Benefit (GMWB)?

a. Withdrawals can be made only when payout phase begins. Withdrawals of any amount can be made to any amount since withdrawal is guaranteed

b. Withdrawals can be made only when payout phase begins, however withdrawals cannot be made more than the prescribed amount

c. Withdrawals can be made during the savings and payout phase, however excess amounts over the prescribed amount may reduce future payment guarantees

d. Withdrawals within the savings phase reduce the final minimum guarantee, while excessive withdrawals during payout phase reduce future payment guarantees

Question 47

Peter Norton is 55 years old and divorced. Peter doesn’t have any plans of being remarried. Peter would like to invest the commuted value of his Segregated into an annuity. He doesn’t have any children. Peter wants to be sure that the annuity will start paying him out as soon as he retired at the age of 65. What annuity would you recommend for Peter?

a. Indexed Accumulation annuity

b. Deferred Single life annuity

c. Immediate Term annuity

d. Joint and last survivor annuity

New Types of Annuities

• From RRSP/RRIF/DPSP or DCPP

• Addresses longevity; may defer payments until end of year that annuitant turned 85.

• May delay up 25% of the pension plan or total of $150,000; inflation factored.

• Funds are to be controlled by the financial institution.

• From PRPP or DCPP

• Annuity must be set up as a group.

• Periodic payment may begin at the end of year that member turned 71

Chapter 04

Investor Profile

Financial Situation of the Investor

Client’s Net Worth = Assets – Liabilities

Personal Factors that Affect Investment(s)

• Personal Values (Ethical Investments)

• Health Concerns (Poor Health)

• Legal Considerations (Family law, will, power of attorney)

• Personal Risks (Risk of bankruptcy, risk of job loss)

Key Concepts

• Financial Situation of the Investor

• Personal Factors that Affect Investment

• Investor Needs

• Government Retirement Pension Income

• Employer Provided Retirement Pensions

• Employer Provided Savings Plan

• Individual Registered Savings Plan

• Investor Profile

Personal Risks

• Low level of financial literacy

• Job loss

• Longevity

• Bankruptcy

• Leveraging

• Unforeseen Expenses

Investor Needs

• Need for income

• Need for retirement income

• Need for emergency fund

• Need for tax efficiency

• Need for liquidity

• Need for creditor protection

• Need for estate planning

• Need for diversification

• Need for investment management

• Other specific needs

Government Retirement / Pension Income

• Old Age Security (OAS)

• Canada Pension Plan (CPP)

• Guaranteed Income Supplement (GIS)

• Allowance

Old Age Security (OAS)

• Passive income (funded by tax payers)

• Taxable

• Subject to claw back

• Can be deferred (with bonus)

• Be 65 or older

• Canadian citizen or a legal resident

• Have resided in Canada for at least 10 years after turning age 18 (in Canada)

• Have resided in Canada for at least 20 years after turning age 18 (Outside Canada)/

Guaranteed Income Supplement (GIS)

• Passive income

• Tax free

• Low income earners

• Age 65 upon application

• Amount to be received depends on marital status

• Must be receiving OAS to receive GIS

Allowance

• No contribution needed

• Taxable

• Will terminate upon remarriage

• For the spouse of a deceased OAS recipient (age 60-64)

Old Age Security (OAS)

OAS Repayment Calculation:

• (Net Income – Threshold) x 15% = Repayment

Example:

Clive earns $85,000 of net income 2015. The applicable threshold for OAS pension is $71,592. Calculate the amount that Clive has to repay:

Calculation:

($85,00 – $71,592) x 15% = $13,408 x 15% = $2,011.20

Canada Pension Plan (CPP)

• Contributory plan (employee and employer)

• 4.95% of pensionable earnings (matched by the employer)

• Benefit is Taxable

Eligibility

• All workers from age 18 to 65 must contribute (if still working at age 65-70, it is optional)

• To be eligible for a retirement pension, a worker must have made one valid CPP contribution.

• An application must be made; it cannot be submitted until one month after turning age 59.

CPP Retirement pension benefit is affected by:

• The number of years contributions are made

• The amount contributed

CPP Pensionable Earning Calculations

• The year’s basic exemption (YBE) : earnings are not subject to contributions: $3,500

• The Year’s Maximum Pensionable Earnings (YMPE) as of 2022 is $64,900.

• If income is less than $64,900; use the lesser income minus $3,500.

Ex. If employee’s income is $35k: $35k – $3,500 = $31,500

• If income is more than $64,000; use the $52,500 minus $3,500

Ex. If the employee’s income is $80k: $64,900 – $3,500 = $61,400

Example:

Stan earns $66,200 annually. Calculate the amount that Stan may contribute to his CPP:

• Since Income is greater than the Year’s Maximum Pension

• Use $64,900 – $3,500 = $61,400 pensionable earnings x 5.25% = $3,223.50 CPP contribution

CPP Inclusion/Deduction

• Receiving benefits early or deferring

• Can be received as early as age 60; latest age 70

If received before age 65

– Benefits will be reduced 0.6% per month

Example:

• Receiving benefits at age 63

• Estimated pension: $1,114.17

• 65 – 63 = 2 years or 24 mos x .6% = 14.4% deduction

• $1,114.17 x 14.4% = $160.44 deduction

• $1,114.17 – $160.44 = $953.73 new CPP pension

Registered Plans

• “Registered” with the government for tax purposes

• Follows special tax rules

• “Tax-deferred” – Pay tax later (on withdrawal), except TFSA

Registered Pension Plans (RPP)

Defined Benefit Pension Plan (DBPP)

• Traditional pension setup

• Employer promises a benefit, based on employee’s income and number of years of service (may purchase past service years to boost benefit)

• Employer is at risk: has to fund plan if there is deficit

• Employer responsible

• Employee may contribute to the plan

Defined Contribution Pension Plan (DCPP)

• Modern pension setup

• Benefit is based on accumulated amount, which puts employee responsible for funding and investment decisions, thus not secured

• Employer has a set contribution, not obligated for deficits

• Employee responsible

• Employee may contribute to the plan

Vesting – usually 2 years

• Must be employed & part of the plan for a specified time in order to get the employer share

• Once vested, employee can get employer share but funds are locked in

If received after age 65

– Benefits will be increased 0.7% per month

Example:

• Receiving benefits at age 68

• Estimated pension: $1,114.17

• 68 – 65 = 3 years or 36 mos x .7% = 25.2% inclusion

• $1,114.17 x 25.2% = $278.54 deduction

• $1,114.17 + $278.54 = $1,392.71 new CPP pension

Employer Provided Retirement Pensions

1. Defined Benefit Pension Plan (DBPP)

2. Defined Contribution Pension Plan (DCPP)

3. Pooled Registered Pension Plans (PRPPs

Question 48

Which is true regarding the difference between DBPP and DCPP?

a. DB Plans are subject to market fluctuations unlike DCPP

b. Employers are more at risk in DB Plans unlike DCPP

c. Employees do not contribute in a DB Plan, unlike DCPP

d. Employers are not obliged to contribute to a DCPP, unlike DBPP

Question 49

Which of the following plans is the employer at most risk?

a. Group RRSP

b. DPSP

c. DBPP

d. DCPP

Pension Plans

Pooled Registered Pension Plans (PRPP)

• Similar to DCPP, but used by the self-employed or those without pension plans available with their employer

• Lower fees, compared to getting individual RRSP

• Employer may contribute, but not mandatory

Question 50

Janice is a self-employed marketing consultant. She would like to invest in a registered plan for her retirement, but is wary about the administrative fees that could eat up her investment. Which type of account best suits her needs?

a. PRPP

b. Individual RRSP

c. DBPP

d. DCPP

Withdrawing Pension Plan Funds

If not yet vested (< 2 years)

• Only employee’s portion

• Leave as is

• Put into other pension

• Put into own RRSP

• Cash-Out

If vested (2 + years)

• Employer + employee portions

• Leave as is

• Put into other pension

• Locked in RRSP/Locked in Retirement Account (LIRRSP/LIRA)

Question 51

Justin has been contributing 4% of his income in a defined contribution plan for 12 months now. The Pension Plan has a 2 year vesting provision. However today, Justin learned that he will be terminated next month. Which of the following is true about what will happen to his Pension plan upon leaving the employer?

a. Justin may withdraw only his portion from his defined contributions plan as taxable income

b. Justin’s employer may recover their portions of contributions upon the termination of Justin’s employment

c. Justin can transfer the entire vested pension funds into his Locked in RRSP

d. A and B

Question 52

Colin was a member of his employer’s defined benefit pension plan (DBPP) for the past 10 years. He is now switching employers. Into which one of the following types of accounts could Colin transfer the vested funds?

a. He can only cash out his contributed amounts as taxable income

b. Locked-in Retirement Account

c. Registered Retirement Income Fund

d. Registered Retirement Savings Plan

Winding Up a Pension Plan

An employer (sponsor) may choose to end or wind up its pension plan.

• Reasons for a sponsor winding up a pension plan

º Sale of business to a new owner that does not offer a pension plan

º Business downsizing or closing or going bankrupt

º All / most members are not employed with the sponsor

Question 53

• The sponsor will need to file the necessary forms with the provincial pension regulator

• The value of the pension plan is held in trust for the members, and not accessible by the sponsor

Michael is a member of the pension plan offered by his employer, and has been employed there for more than 5 years. A few weeks ago, he learned that the company he is working in is going to be sold to another company that does not offer a pension plan, and he is concerned that the funds in the plan may be lost.

Which of the following is most correct?

a. Michael’s pension funds will be paid out to him, but would only be limited to the employee’s portion

b. Michael’s pension funds will be held in trust, but would only be limited to the employee’s portion

c. Michael’s pension funds will be held in trust, both employee and employer’s portions

d. Michael’s pension funds will be paid out to him, both employee and employer’s portions

LIRA/LIRRSP

• Locked in RRSP – Locked in Retirement Account

• “Parking lot of pension funds”

• Since it is individual, owner has control

• May be converted to LIF or Annuity at 55 years old

More on Defined Benefit Pension Plans

• Not a “Capital Accumulation Plan”

– Employer has control, not employee

• Pension Buy-in – Employer purchases a Life Annuity for retiree to transfer the risk of longevity

• Retirement Age may be defined by a number factor:

º Age + # of years in employment

LIF/LRIF

• Life (Retirement) Income Fund

• Provides pension income to planholder

• More flexible than annuity: could take more than the annual minimum withdrawal from the LIF

• Less flexible than RRIF (discussed later): LIF has a maximum annual withdrawal limit depending on age

Can You Cash Out Pension Funds?

• There are exceptions when pension members may cash out pension unlocking

• Depends on the province

For Example (Alberta):

• Financial Hardship (Low income, facing foreclosure/eviction, 1st month rent + deposit, medical costs, renovation)

• Shortened Lifespan

• Non-Residency in Canada

• Very small pension

• 50% Unlocking

Question 54

Janno recently started working with a new company at the age of 35 and was a member of the pension plan from then on. The plan will provide a full pension subject to the 85 factor. At what age would Janno be able to retire and receive a full pension?

a. 60 Years old

b. 62 Years old

c. 65 Years old

d. 70 Years old

Question 55

Banana Corp. has a defined benefit pension plan (DBPP) is required to provide $65,000 retirement income annually to an employee. The plan accomplishes this by purchasing a $65,000 life annuity for that employee. What is this referred to as?

a. Pension adjustment

b. Prescribed annuity

c. Pension buy-in

d. Insured life annuity

Question 56

Which one of the following is not a capital accumulation plan (CAP)?

a. DCPP

b. GRRSP

c. TFSA

d. DBPP

Target Date Funds

Default investment option for those who have pesion plan

Investor picks a target date of retirement (any date/ any age)

The asset allocation automatically shift from higher risk to lower risk

Group Savings

Group RRSP

• RRSP set up by employers

• Employer and employee could contribute, depending on setup

• Employees has fund selections

• Some employers allow withdrawals while employed, some do not allow withdrawal while employed

Deferred Profit Sharing Plan (DPSP)

• Employer contribution if there is profit

• Employee does not contribute (non-contributory)

• Employees has fund selections

• Usually used given to managers/executives, but not shareholders/owners and their immediate family members

• No pressure from employee and employer to fund the plan

Sponsor

• Plan sponsor is the employer

• Responsible for the plan design, benefit setup, establishment, amendment (or termination), compliance, and funding (if required)

Administrator

• Plan administrator is a firm or company who is responsible for plan management, investment policy, and document creation and distribution

• Smaller management fees and no sales charges

• Less investment options compared to individual RRSP

• Individual RRSP – Available until the year of 71st birthday

• GRRIF/RRIF

• Registered Annuity

• Cash Out – Taxable

Question 57

Which of the following are true regarding GRRSP?

a. GRRSP usually have higher fees than an individual RRSP

b. GRRSP usually have the same investment options as an individual RRSP have, and the employee has the option to select the investments of his/her choosing

c. GRRSP cannot be used for Home Buyer’s Plan

d. Upon resignation, a plan member can withdraw his GRRSP, or convert his/her GRRSP to an annuity, RRIF, or (if under age 71) transfer to his/her individual RRSP

Question 58

Which is true regarding Group Tax-Free Savings Account (GTFSA)?

a. The plan sponsor and member is obliged to contribute into the plan

b. All contributions of the plan sponsor are tax deductible

c. On leaving the group plan, GTFSA can be converted into an individual TFSA or cashed out

d. On leaving the group plan, GTFSA can be converted into an individual TFSA or LIRA/LIRRSP

Question 59

A company gives a list of these key people:

Mark: CEO/President/Major shareholder

Gerald: COO/Vice president

Cheryl: Executive manager, spouse of Mark

Among these, who can join in the Deferred Profit Sharing Plan (DPSP)?

a. Mark

b. Gerald

c. Cheryl

d. All of them can join the DPSP

Question 60

ABC Corporation took a group segregated fund from an agent so that employees can invest their savings with less fees. What is not true in this situation?

a. Agents will earn a large commission from this successful corporate group segregated fund

b. Unlike segregated funds offered to individuals, group segregated funds have no sales charges

c. MER on group-provided segregated fund is lower than an individual segregated fund

d. Group segregated fund does not offer maturity or death benefit guarantee nor group plan special rates and absence of such guarantees increases risk of investment loss for the group member

Registered Retirement Savings Plan (RRSP)

• Tax deductible contributions

• Taxable withdrawal

• ‘Enjoy now, pay later’

• RRSPs are best used to transfer income from periods of higher tax rate to periods of lower tax rates

• For retirement, but could also be used for first home and full-time studies

• For Registered Seg Funds, plan holder must be the annuitant

Question 61

Who would receive the best tax benefit from contributing to RRSP?

a. High income people

b. Low income people

c. Unemployed people

d. All of the above

• Home Buyer’s Plan (First Home)

º Maximum $35,000/person, 15 years equal repayment starting second year after the year of withdrawal

• Lifelong Learning Plan (Full-time Studies)

º $10,000/yr to $20,000 max., 10 yrs equal repayment

• Unpaid repayment balance for the year will be taxable income

Withholding tax on cash-outs & RRIF above minimum withdrawals

Question 62

Jo from Ontario requires $5,000 from his RRSP. How much does he need to withdraw from his RRSP?

a. $5,000

b. $5,263

c. $5,555

d. $6,250

Question 63

At what age could someone have an RRSP?

a. 18 years old – the year of 71st birthday

b. 16 years old – 71 years old

c. Birth – the year of 71st birthday

d. 15 days old – 71 years old

RRSP Contribution Room Formula:

Last year’s earned income (employment, rental, business income less expense, +/- alimony received or paid) x 18 Total Contribution Room for the year (this may be restricted by CRA limit for contribution set for the year) – Pension adjustment (employer + employee contributions in an employer sponsored plan)

RRSP Contribution Room for the year

(+$2,000 lifetime over-contribution limit, add only if mentioned) (Unused RRSP room carries over the following years)

Question 64

Simon earned $105,000 from his employment as a consultant, and an additional $15,000 from his rental suite. He paid his ex-spouse Bridget $2500/month as alimony. He also contributed $3000 to a Group RRSP with employer match up. Calculate the amount that he may contribute to his RRSP this year without paying the penalty on over contribution.

a. $10,200

b. $23,600

c. $12,200

d. $16,200

RRSP Contribution Room: Own/Spousal RRSP

• Contributor gets tax deduction (also basis for contribution room)

• Recipient is the owner, taxed on withdrawal (but tax attributed back to contributor if withdrawn within 2 calendar years of contribution)

• Used to balance tax burden between the couple

• Best practice is to have the higher income spouse contribute to the one with little or no savings

Question 65

Mateo and Sarah are a couple living as common-law partners and have 2 children each from their previous relationships. Mateo works as a triathlon trainer earning $54,000 while Sarah is a musician earning $123,000. Sarah has been regularly putting in contributions to her own RRSP before and has accumulated a sizable amount in registered funds. Mateo and Sarah have approached you to ask for advice and the topic came to RRSP’s. Which of the following would you recommend in Mateo and Sarah’s case?

a. Mateo should contribute equally to his own RRSP and Sarah’s spousal RRSP

b. Sarah should contribute more to Mateo’s spousal RRSP

c. Sarah should contribute equally to her own RRSP and Mateo’s spousal RRSP

d. They cannot have spousal RRSP if they’re common law partners, but Mateo contribute to his own RRSP with Sarah’s money

Registered Retirement Savings Plan (RRSP)

Death of RRSP Plan Holder

Death of RRSP Owner

Registered Retirement Income Fund (RRIF)

• Like annuity but more flexible

• No maximum withdrawal, requires a minimum annual withdrawal

• Can postpone first withdrawal until calendar next year

• Minimum withdrawal depends on age, percentage found in textbook (table 4.2)

• Withholding tax applies to withdrawals more than the minimum.

Death of RRIF Plan Holder

If there is a successor, annuitant, or beneficiary, funds bypass estate/probate

Spouse as beneficiary, funds, RRIF is terminated and proceeds rolled over

of RRIF Owner

Rollover to a Registered Annuity (Term-to-18) or RDSP or RRSP of financially dependent child/ grandchild (under 18 or infirm)

Question 66

Which is true regarding RRIFs?

a. RRIF’s must be established the RRIF after 71st birthday

b. RRIF withdrawals must begin in the same year it was established

c. RRIF’s have no maximum withdrawal limit, but requires a minimum annual withdrawal

d. All of the above

Question 67

What are the tax implications at death if the surviving spouse was named as the beneficiary on the deceased spouse’s RRSP?

a. The RRSP proceeds can be transferred tax deferred to the surviving spouse’s RRSP

b. The RRSP proceeds can be transferred tax-free to the surviving spouse’s RRSP

c. The entire amount will be fully taxable as death triggers a deemed disposition of the RRSP

d. Up to $25,000 can be withdrawn tax fee, but there is a 15-year repayment of the taken amount

Death

Question 68

Which one of the following types of accounts/products allows you to potentially bypass probate?

a. Life insurance

b. Segregated funds

c. RRSPs

d. All of the above

Question 69

Marty just celebrated his 71st birthday and has $250,000 in his RRSP. Which one of the following is not an RRSP maturity option available to Marty?

a. Purchasing a term certain annuity to age 100

b. Purchasing a life annuity

c. Transferring the funds to an RRIF and making minimum annual withdrawals

d. Withdrawing the entire amount and paying the applicable taxes

Life Income Fund (LIF)

LIF

• Pension funds

• Minimum required annual withdrawal

• Maximum annual withdrawal limit RRIF

• RRSP funds

• Minimum required annual withdrawal

• No maximum withdrawal limit

Question 70

What is the primary difference between an RRIF and an LIF?

a. Funds within a RRIF come from pension plans whereas funds within an LIF are from RRSPs

b. A RRIF has a minimum and maximum withdrawal amount, an LIF has only a maximum withdrawal amount

c. An LIF has a minimum and maximum withdrawal amount, a RRIF has only minimum withdrawal amount

d. An LIF is available only in Quebec

RRSP vs Pension

(G)RRSP

• Employee may cash out (NOT LOCKED IN)

• Employer contribution not mandatory

• Subject to Income Tax Act

Other Individual Savings

Registered Educations Savings Plan (RESP)

• Tax deferred

• Contributions are NOT tax deductible

• Withdrawals are taxed in the hands of the beneficiary

• Has a lifetime limit of $50,000/beneficiary

• Canadian Educations Savings Grant/CESG matches the contribution

º 20% - 40% based on annual contribution: income tested

• Types of RESP:

º Individual RESP

º Family RESP

RESP Withdrawals:

• Educational Assistance Payments (EAP) to beneficiary (Investment Growth, Government Grants (CESG/CLB), Principal

Registered Disability Savings Plan (RDSP)

Eligible beneficiary must be disabled:

• Eligible for the disability tax credit (disability amount)

• Canadian resident (with SIN)

• Less than 60 years old (if 59, the individual must apply be-

Question 71

Pension

• Employee may not cash out (If vested) - LOCKED IN

• Employer contribution mandatory

• Subject to Provincial Pension Legislation fore the end of the calendar year in which he/she turns 59)

• Not tax deductible contributions, lifetime limit of $200,000

• Only the beneficiary of the RDSP or his or her legal representative may receive payments.

• 2 types of payments from RDSP:

º Disability Assistance Payment (DAP)

– Single payment received if personal contributions exceeds government contributions

º Lifetime Disability Assistance Payment (LDAP)

– Annual (or shorter) series of payments to the beneficiary, that must start before beneficiar turns 60 years old

Tax Free Savings Account (TFSA)

• For tax free growth on investments

• No income requirement

• Annual contribution, depends on year, unused room carries forward

• Not tax deductible, tax free withdrawals

• May elect successor owner, to keep the TFSA tax free upon the death of the owner

• Not protected from creditor’s claims

You have a client couple whose child was born with a congenital heart disease. They want to set up a plan to help them save up for the child’s education. What would you recommend?

a. RRSP

b. RESP

c. RDSP

d. TFSA Question 72

Why are “registered” investments called as such?

a. They are registered with the government for tax purposes

b. Special tax rules apply for them

c. Except for TFSA, they are tax-deferred

d. All of the above

Registered Plans

Individual Savings

• RRSP, RRIF, TFSA, RESP, RDSP Group Savings

• GRRSP, GRRIF, GTFSA, DPSP Pension Plans

• DBPP, DCPP, LIRA, LIRRSP, LIF, PRPP

Income Splitting

Opening a Spousal RRSP

• The higher income spouse contributes to the plan of the lower income spouse Pension Income Splitting (for 65 and older)

• Done for tax purposes

• Up to 50% of the annual income received from the pesnion can be allocated to the spouse CPP benefits assignment

• CPP can be shared to spouse if only one contributed

• Prevents “claw back”

Pension Assignment

Example:

How much tax could be saved by pension split/assignment?

• Martin’s monthly pension is $1114.17 and in 37% tax bracket. His wife Regina’s monthly pension has a marginal tax rate or 25%. He could pay as much as $4,946.91 to taxes ($1114.17 x 12 x 37%)

• Martin splits his pension with Regina so they will declare $6,685.02 as income ($13,370÷2)

• David’s income tax payable becomes $2,473.45  ($6,685.02  x 37%). Regina’s tax payable becomes $1671.26 ($6,685.02  x 25%)

• Together they pay in taxes $4,144.70 ($2,473.45 + $1671.26)

• Their savings: $4,946.91  - $4,144.70 = $802.20

Question 73

Philipp, age 67, and Martina 66 are a retired couple that are looking for ways to reduce the taxes that they are paying. They learn from a discussion with you that they can split the Canada Pension Plan income. Because Philipp earned more than the Year’s Maximum Pensionable Earnings (YMPE) over the years he currently is receiving the maximum of $1067.32 per month from Canada Pension Plan. Martina who worked in lower income jobs all of her life is receiving $625.48 from Canada Pension Plan. Philipp is in a 40% tax bracket, (combined federal and provincial) and Martina is in the 26% tax bracket. Assuming that they remain in their respective tax brackets, how much will they save in taxes on a monthly basis by splitting their Canada Pension Plan pension?

a. $360.15

b. $420.20

c. $782.62

d. $720.30

Practice Bubble Answer Sheet

Student Name:

Student Number: Practice Bubble Answer Sheet

Student Name:

Student Number:

Practice Reviewer

Segregated Funds & Annuities

V5.0.0

DISCLAIMER:

Do not memorize the answers. Understand the rationale (why that’s the answer). The questions in the exam may be different from the questions here, worded differently, or different situation. Refer to the the answer key in the subfolder for the explanations.

QUESTION 1

Which of the following investments would most likely have the greatest potential return?

a. A bond mutual fund

b. An equity mutual fund

c. An equity segregated fund

d. A bond segregated fund

QUESTION 2

Jennifer invested $15,000 into a five-year compounded GIC, interest rate is 3% per annum. What would the amount of interest be in year 3?

a. $477.41

b. $338.36

c. $15,918.12

d. $300

QUESTION 3

Gary had invested $5,000 in an equity mutual fund and earned an 8% return in its first year. During that same time period, inflation (as measured by the CPI) was 3%. Gary was disappointed with the return that he received, comparing it to the 18% return generated by the overall stock market. What is Gary’s real return?

a. 11%

b. 15%

c. 5%

d. 3%

QUESTION 4

Which of the following could be a reason to invest in segregated funds?

a. Segregated funds allow investors to achieve diversification with a small capital

b. An investor will never lose his or her principal in a segregated fund

c. Investment income earned within a segregated fund is tax-sheltered

d. Assuris covers 100% of the principal if the contract is cancelled before the maturity

QUESTION 5

Becky wants to invest a lump sum today for her son’s education that will cost $95,000 in 20 years. Assuming a 3% investment return, how much will she need to invest?

a. $38,000

b. $59,375

c. $51,660.46

d. $52,599.20

QUESTION 6

Juris invested $20,000 today. How much would he have in 12 years if rate of return is 8%?

a. $50,363.40

b. $39,200

c. $19,200

d. $7,942.28

QUESTION 7

Kim won the lottery and would receive $1,000 per week for life. Which one of the following insurance products does her lottery winning most resemble?

a. Critical illness policy

b. Disability policy

c. Segregated fund

d. Annuity

QUESTION 8

Dale’s goal is to save $20,000 (which he believes will be enough) to buy a Chevrolet Impala in 2020. It is now 2016. How would you classify Dale’s goal?

a. A short-term goal

b. A medium-term goal

c. A long-term goal

d. A non-financial goal

QUESTION 9

Which one of the following investments would likely have the highest management fees?

a. An equity mutual fund

b. An equity segregated fund

c. A money market segregated fund

d. A money market mutual fund

QUESTION 10

Liverpool Equity Fund began operations on May 13, 2002. Luis decided to invest on August 1, 2014. The next valuation date was August 2 which was the date on which his transaction was processed.

What is the fund’s inception date?

a. May 13, 2002

b. August 1, 2014

c. August 2, 2014

d. None of the above

QUESTION 11

When must a segregated fund information folder be given to the investor?

a. Within the 10-day free-look period

b. Before the transaction is processed, which can be after the purchase date

c. Prior to purchase

d. Within two business days after the sale

QUESTION 12

Which one of the following statements regarding seg funds is false?

a. Funds that offer a 75% guarantee have a smaller MER than that of a 100% guarantee

b. More volatile funds usually have a higher MER

c. Seg funds have greater MER than a similar mutual fund

d. The cost of death benefit and the maturity guarantee is included in a front-end load

QUESTION 13

Which one of the following annuities would cost the most for young people?

a. A 30-year term certain annuity

b. A 30-year term annuity

c. A life straight annuity

d. A joint-and-last survivor annuity

QUESTION 14

What is the greatest risk that bonds possess?

a. Market risk

b. Inflation risk

c. Credit risk

d. Interest rate risk

QUESTION 15

TID Bond Fund has assets under management of $256,423,000 and liabilities of $85,265,000. The fund currently has 10,163,777 units outstanding. The fund has a front-end load of 2%.

What would the fund’s Net Asset Value Per Unit (NAVPU) be?

a. $12.25

b. $8.39

c. $16.84

d. $25.52

QUESTION 16

Tanya invested S4,500 into a Balanced Plus Mutual Fund. Over the next year, the value of her units increased to $6,200. Assuming that no distributions were made, what is Tanya’s annual return as a percentage?

a. 27.41%

b. 37.77%

c. 72.58%

d. 17.00%

QUESTION 17

What effect would rising interest rates have on a fixed coupon rate 10-year bond issued 1 year ago?

a. The value of the bond would likely go down

b. The value of the bond would likely go up

c. No impact on the bond value

d. The coupon rate would change

QUESTION 18

Which one of the following is a disadvantage of segregated funds from mutual funds?

a. Segregated funds are subject to probate fees upon death without exception

b. Mutual fund companies offer a much wider range of funds than segregated funds

c. Segregated funds not allow for withdrawal prior to the maturity date

d. Segregated funds typically have a higher MER than that of an otherwise similar mutual fund

QUESTION 19

Homer and Marge have 3 children. Homer is a nuclear plant controller who earns $64,000 per year. Marge stays at home, does not work. They have a house worth $326,000, with $124,000 remaining balance on the mortgage. They estimate final expenses of $50,000 to be due when either person dies. They spend $5,000 per month for their needs. They have emergency cash reserve of $40,000. Homer has a group term life insurance with a coverage of 1x his salary. Their 2009 Toyota Matrix is worth $8,000 and has $2,000 left on the car loan.

What is the net worth of Homer and Marge?

a. $202,000

b. $248,000

c. $450,000

d. $374,000

QUESTION 20

Which of the following types of investments features the most stability?

a. Treasury bills / Money Market

b. Common Stocks / Equity

c. Labor sponsored investment funds

d. Foreign Corporate Bonds

QUESTION 21

Which of the following types of mutual funds offers greatest opportunity for growth?

a. Income Funds

b. Balanced Funds

c. Global Index Funds

d. Canadian Index Funds

QUESTION 22

Nick had invested in a segregated fund 5 years ago, however he did not have a clue on what kind of investments it was invested in. You, Nick’s advisor met him in 2014 and reviewed his statements and see the following annual returns:

2010 = +6%

2011 = -12%

Which of the following funds could reflect this trend?

a. Bond fund

b. Income fund

c. Equity fund

d. Money market fund

QUESTION 23

Rommel Gievsen is a business owner and fishing enthusiast who lives in Kindersley, Saskatchewan. He is married, and has 3 children aged 18, 20, and 22, studying at the university. Aside from owning shares in his company, he has also a mutual fund worth $85,000 which the ACB is $43,000, and a registered segregated fund worth $75,000 which the ACB is $45,000. He also has a whol life insurance policy with a face amount of $250,000 which the cash value is at $101,000 and its ACB is $85,000. Rommel needed to fund his children’s education but wants to maintain his tax bracket.

Which of the following would accomplish this goal best?

a. Transferring shares of the business into an inter-vivos trust

b. Transferring the mutual fund to each of his children’s name

c. Partially withdrawing his registered segregated fund

d. Taking a collateral loan from the life insurance policy

QUESTION 24

Rommel Gievsen is a business owner and fishing enthusiast who lives in Kindersley, Saskatchewan. He is married, and has 3 children aged 18, 20, and 22 who are all living in Vancouver, studying at the university. Aside from owning shares in his company, he has also a mutual fund worth $85,000 which the ACB is $43,000, and a registered segregated fund worth $75,000 which the ACB is $45,000. He also has a whole life insurance policy with a face amount of $250,000 which the cash value is at $101,000 and its ACB is $85,000.

Which of the following actions could reduce the tax implication on Rommel’s death?

a. Naming the spouse as heir to his business shares

b. Naming the children as beneficiary of the non-registered segregated fund

c. Naming his estate as beneficiary of the registered segregated fund

d. All of the above

QUESTION 25

Which of the following are considered “tax-preferred”?

i. Dividends

ii. Capital gains

iii. Interest

iv. Foreign income

a. i, ii

b. i, ii, iii

c. ii only

d. All of the above

QUESTION 26

Enrique is a self-employed home security consultant who had purchased a segregated fund for $15,000 on his 20th birthday. The segregated fund he has features a 100% guarantee on death and maturity, as well as reset options four times every year. He has named his wife, Liza, as the beneficiary. He managed to reset the contract 5 years later when the value was $19,479, and reset again 3 years after when the value was $21,074. Unfortunately, Enrique died just when he turned 29 years old. The contract value at the time of his death is $18,502. Enrique has outstanding debt of $19,200.

How much would Liza receive from this contract after probate?

a. $0

b. $1,874

c. $18,502

d. $21,074

QUESTION 27

Michaela purchased a segregated fund for $15,000 on her 20th birthday. The segregated fund she has features a 100% guarantee on death and maturity, as well as reset options. She has named her spouse, Jackson, as the beneficiary. Michaela managed to reset the contract 5 years later when the value was $19,479, and reset again 3 years after when the value was $21,074. When Michaela turned 29 years old, she needed money for some expenses so she had to surrender the contract. The contract value at the time surrender is $18,502.

How much could Michaela receive from this contract on surrender?

a. $0

b. $1,874

c. $18,502

d. $21,074

QUESTION 28

Enrique is a self-employed home security consultant who had purchased a segregated fund for $15,000 on his 20th birthday. The segregated fund he has features a 75% guarantee on death and maturity, as well as reset options four times every year. He has named his wife, Liza, as the beneficiary. He managed to reset the contract 5 years later when the value was $19,479, and reset again 3 years after when the value was $21,074. Unfortunately, Enrique died just when he turned 29 years old. The contract value at the time of his death is $18,502. Enrique has outstanding debt of $19,200.

How much would the bank receive from this contract after probate?

a. $0

b. $1,874

c. $18,502

d. $21,074

QUESTION 29

Louis had invested $20,000 in a segregated fund today. Which of the following is TRUE?

a. A charge will be applied if the fund had a deferred sales charge and he died within 5 years

b. He would get nothing as the guarantee if the maturity value is $25,500

c. GIC’s are more suitable if he was looking to have growth in his portfolio

d. He would not be able to get mutual funds that invest in the same sort of investments as IVICs

QUESTION 30

Judy has an IVIC whose original investment of $75,000 and guarantee is 100%. If the contract matures and the market value is $50,000 but the insurer had declared insolvency, how much would Judy receive?

a. $85,000

b. $0

c. $75,000

d. $63,750

QUESTION 31

Which of the following types of sales charges would be recommended for long term objectives?

a. Front-end load

b. Deferred sales charge

c. No load

d. Both A and C

QUESTION 32

Mateo and Sarah are a couple living as common-law partners and have 2 children each from their previous relationships. Mateo works as a triathlon trainer earning $54,000 while Sarah is a musician earning $123,000. Sarah has been regularly putting in contributions to her own RRSP before and has accumulated a sizable amount in registered funds. Mateo and Sarah have approached you to ask for advice and the topic came to RRSP’s.

Which of the following would you recommend in Mateo and Sarah’s case?

a. Mateo should contribute equally to his own RRSP and Sarah’s spousal RRSP

b. Sarah should contribute more to Mateo’s spousal RRSP

c. Sarah should contribute equally to her own RRSP and Mateo’s spousal RRSP

d. They cannot have spousal RRSP if they’re common law partners, but Mateo contribute to his own RRSP with Sarah’s money

QUESTION

33

Simon had the following incomes last year:

$90,000 Employment Income

$25000 Commission

$5000 Rental Income

$3000 Mutual Fund Gains

$500 Stock Dividends

Simon paid his ex-spouse Bridget $2500/month as alimony. He also contributed $3000 to a Group RRSP with employer match up. Calculate the amount that he may contribute to his RRSP this year without paying the penalty on over contribution.

a. $10,200

b. $23,600

c. $12,200

d. $16,200

QUESTION 34

You met with your client Marvin Lyttle. Marvin tells you that he has house that is valued at $3,000,000 with no mortgage on it. He owns a cottage in New Brunswick currently valued at $310,000 and the purchase value was $259,000. He has shares in a trading company that is valued at $1,000,000 currently. He owns a RRSP with a combined value of $500,000 wholly invested in Segregated Funds and named his wife the beneficiary. Their combined savings in the bank is worth $450,000. In his will, he indicates his wife to receive the ownership of the cottage and his children the to receive the shares of the trading company.

On his Marvin’s death, which among his assets would be taxable?

a. Cottage

b. Savings

c. Segregated Funds

d. Shares/ stocks

QUESTION 35

Justin Wilson had just been hired by Magnatech Vision, a graphic designing company. Justin is contributing 4% of his income in a defined contribution plan for 25 months now. The DCPP has a 2 year vesting provision. However today, Justin learned that he will be terminated next month.

Which of the following is true about what will happen to his Defined Contribution plan upon leaving the employer?

a. Justin may withdraw his contributions from his defined contributions plan as taxable income.

b. Justin’s employer may recover their portions of contributions upon the termination of Justin’s employment.

c. Justin will not be able to access the funds anymore because he is leaving the plan before the pension funds are vested.

d. Justin can transfer the entire vested pension funds into his Locked in RRSP.

QUESTION 36

Mark and Josie Peters have extensive registered and non-registered assets. Mark is 68 and Josie is 60. Mark has a Registered Retirement Savings Plan (RRSP) with about $600,000 that he planning to transfer to Registered Retirement Income Fund (RRIF). Their non-registered assets are collectively about $1 million. They would like to secure a guaranteed income and to lessen the impact of taxes.

What would you recommend the couple?

a. Mark should convert his non-registered assets into a prescribed annuity immediately, and convert the RRSP to RRIF immediately, basing the minimum withdrawal on Josie’s age. He would then start withdrawals when he reaches 71.

b. Mark should convert his non-registered assets into a non-prescribed annuity immediately. His RRSP would be converted into an RRIF when he reaches 71.

c. Mark should convert his non-registered assets into a prescribed annuity immediately. His RRSP should be converted into a prescribed annuity when he reaches 71.

d. Mark should convert his non-registered assets into a prescribed annuity immediately. He should also convert his RRSP into RRIF when he reaches 71, basing the minimum withdrawal on Josie’s age.

QUESTION 37

Cassidy is 35 years old and a conservative investor. She always invests in Canada Saving Bonds. Cassidy is now thinking about her retirement has decided to take one step further on investing and would like to try other conservative investment options. She always picks an investment that would provide her liquidity on the funds should she ran into financial difficulty. Due to her financial status, Cassidy opts out on lump sum contribution but chooses regular contributions instead.

Which of the following investment would be most suitable for Cassidy?

a. 10-year term market linked Annuity at 7%

b. A fixed income GIC locked in at 5% for 20 years

c. A segregated fund that invests in income funds

d. An equity mutual fund to provide liquidity

QUESTION 38

Which of the following statements is/are true with regards to Accumulation annuity?

a. Can be creditor protected

b. A portion of the funds will be secured by Assuris in case of insurer insolvency

c. It can’t be used for estate creation

d. A & B

QUESTION 39

Peter Norton is 55 years old and divorced. Peter doesn’t have any plans of being remarried. Peter would like to invest the commuted value of his Segregated into an annuity. He doesn’t have any children. Peter wants to be sure that the annuity will start paying him out as soon as he retired at the age of 65.

What type of annuity would be most suitable for Peter?

a. Indexed Accumulation annuity

b. Deferred Single life annuity

c. Immediate Term annuity

d. Joint and last survivor annuity

QUESTION 40

Janet, 40 is the sole proprietor of a boutique. Janet’s monthly earnings for the shop must cover expenses of new inventory, space rental, utilities, advertising, part-time help, and provide an income for Janet that can support her, and her 2 school-aged children. Janet is always aware of her exposure to creditors because business can sometimes be fickle. She wants to start putting away monthly contribution to a plan that will provide her with a retirement income. Janet would describe herself as not being very risky with her money. She does, however, have a will in which she names her children as beneficiaries of her estate.

Which type of savings vehicle best suits Janet?

a. A cash accumulation annuity naming her estate as beneficiary

b. A registered mutual fund that invests in bonds

c. A registered segregated fund invested in bonds, naming her children as equal beneficiaries

d. A managed Registered Retirement Savings Plan that invests in GIC’s

QUESTION 41

Philipp, age 67, and Martina, 66 are a retired couple that are looking for ways to reduce the taxes that they are paying. They learn from a discussion with you that they can split the Canada Pension Plan income. Because Philipp earned more than the Year’s Maximum Pensionable Earnings (YMPE) over the years he currently is receiving the maximum of $1067.32 per month from Canada Pension Plan. Martina who worked in lower income jobs all of her life is receiving $625.48 from Canada Pension Plan. Philipp is in a 40% tax bracket, (combined federal and provincial) and Martina is in the 26% tax bracket.

Assuming that they remain in their respective tax brackets, how much will they save in taxes on a monthly basis by splitting their Canada Pension Plan pension?

a. 26.75

b. 30.93

c. 35.60

d. 371.23

QUESTION 42

Philipp, age 67, and Martina, 66 are a retired couple that are looking for ways to reduce the taxes that they are paying. Philipp has interest from a nonregistered Guaranteed Investment Certificate (GIC), Old Age Security, a Life Income Fund (LIF) and a Registered Retirement Income Fund (RRIF) that he set up from money that he had accumulated over the year’s in Registered Retirement Savings Plans. Martina has income from Canada Pension Plan, Old Age Security and a small income from a RRIF that she set up from a spousal Registered Retirement Savings Plan that Philipp contributed to over the years.

Which of the following income would roll over to Martina in case of Philipp’s death?

a. CPP, OAS, RRIF, LIF

b. CPP, OAS, RRIF

c. CPP, RRIF, LIF

d. CPP, OAS, LIF

QUESTION 43

Lorraine invested $50,000 in an IVIC today. Which of the following is/are true?

a. Lorraine would own 1000 units if each unit costs $50

b. The minimum maturity/death guarantee is 75%

c. Upon insurer insolvency, Assuris would cover 100% up to $60,000 or 85% of the guarantee, whichever is higher

d. All of the above

QUESTION 44

Which of the following is true about life annuities?

a. The older the annuitant is, the greater the income payout

b. Females would have a greater income payout from life annuities

c. A joint last-survivor annuity has greater income payout than that with a single annuitant

d. Smokers enjoy a greater income payout from life annuities

QUESTION 45

What are the tax implications at death if the surviving spouse was named as the beneficiary on the deceased spouse’s RRSP?

a. The RRSP proceeds can be transferred tax deferred to the surviving spouse’s RRSP

b. The RRSP proceeds can be transferred tax-free to the surviving spouse’s RRSP

c. The entire amount will be fully taxable as death triggers a deemed disposition of the RRSP

d. Up to $25,000 can be withdrawn tax fee, but there is a 15-year repayment of the taken amount

QUESTION 46

Which of the following types of accounts/products allows you to potentially bypass probate?

a. Life insurance

b. Segregated funds

c. RRSPs

d. All of the above

QUESTION 47

Jo from Ontario requires $5,000 from his RRSP. How much does he need to withdraw from his RRSP?

a. $5,000

b. $5,263

c. $5,555

d. $6,250

QUESTION 48

Marty just celebrated his 71st birthday and has $250,000 in his RRSP. Which one of the following is not an RRSP maturity option available to Marty?

a. Purchasing a term certain annuity to age 100

b. Purchasing a life annuity

c. Transferring the funds to an RRIF and making minimum annual withdrawals

d. Withdrawing the entire amount and paying the applicable taxes

QUESTION 49

What is true regarding pension adjustment (PA)?

a. It would increase RRSP contribution room

b. It would decrease RRSP contribution room

c. It does not affect RRSP contribution room

d. Pension adjustment come from CPP contributions

QUESTION 50

Which one of the following scenarios would not be an example of a “good debt” as per the definition provided in this course?

a. Using a line of credit to go on vacation, paying 5% interest instead of 20% credit card interest

b. Using a collateral loan against a permanent life insurance policy to start a business

c. Taking a mortgage from a bank to purchase a home

d. Using an RRSP loan from the bank

QUESTION 51

Which one of the following insurance products addresses longevity?

a. Life insurance policy

b. Segregated fund

c. Index-linked GIC

d. Life annuity

QUESTION 52

What statement best describes “leverage” in finance?

a. Creating an increase of demand by lowering supply

b. Living longer, outliving retirement income

c. Borrowing capital to achieve a financial goal

d. Lowering price due to more sales

QUESTION 53

Which of the following would be greatest benefit to a tax-payer?

a. $500 refundable tax credit

b. $450 non-refundable tax credit

c. $450 refundable tax credit

d. $500 non-refundable tax credit

QUESTION 54

Which of the following is a basis of calculating Old Age Security (OAS) eligibility?

a. Citizenship status

b. Amount of pensionable earnings over one’s lifetime

c. Number of years of residency in Canada

d. All of the above

QUESTION 55

Who of the following individuals below could potentially be eligible for OAS benefits as of today?

a. Joseph, age 65, who resided in Canada his entire adult life but then at the age of 60 decided to return to England, where he plans to spend his retirement

b. Sonya, who moved to Canada at the age of 60 and now retiring

c. Kurt, who lived in Canada his entire life and is retiring at the age of 60

d. Sofia, who immigrated to Canada at age 60, retiring at the age of 67 to remain in Canada

QUESTION 56

Eman is receiving an OAS pension of $564.87 per month. For the current tax year, the threshold for an OAS pension is $72,809. If Eman earns a salary of $100,000, how much would the claw-back (or repayment) be?

a. Eman would actually receive an additional payment of $4,078.65

b. Eman would have to repay $4,078.65

c. The amount of the claw-back would be $21,919

d. The earnings exceed the threshold: All of the OAS pension is clawed back

QUESTION 57

Which government retirement benefit is tax free?

a. GIS

b. CPP

c. OAS

d. None of the above

QUESTION 58

Seo-jun works as a IT technical manager for a telecom company. His net employment income for the 2022 tax year was $63,000 The YBE is S3,500, and the YMPE IS $64,900. Assume that the employer and the employee each contribute 5.25% of pensionable earnings.

Based on the above information, how much would Seo-jun have to contribute to the CPP?

a. $3,123.75

b. $3,223.50

c. $3,307.50

d. $3,407.25

QUESTION 59

Jim would normally be entitled to $836.06 per month in CPP benefits if he retires at age 65. However, he has requested to start receiving CPP on his 62nd birthday.

How much would Jim’s monthly CPP retirement benefit be? (Assuming it’s 2016)

a. $685.57

b. $655.47

c. $625.37

d. CPP pension benefits can only be taken at age 60

QUESTION 60

Samantha would normally be entitled to $586.25 per month in CPP benefits if she were 65 years of age. However, she is planning to delay the receipt of CPP benefits until she reaches age 70.

How much monthly CPP retirement benefit she get if she does this? (Assume it’s 2016 now)

a. CPP benefit will to increase to $832.47 per month for five years, after which it will revert back to the usual benefit of $586.25 per month.

b. CPP benefit will increase to $832.47 and remains that amount.

c. CPP benefit will increase to $797.30 per month for five years, after which it will revert back to the usual benefit of $586.25 per month.

d. CPP benefit will be $797.3 and remains that amount.

QUESTION 61

What is the maximum age at which you can contribute to the post-retirement benefit (PRBP)?

a. 70

b. 60

c. 65

d. There is no maximum age.

QUESTION 62

What is the primary difference between an RRIF and an LRIF?

a. Funds within a RRIF come from pension plans whereas funds within an LRIF are from RRSP’s

b. A RRIF has a minimum and maximum withdrawal amount, an LRIF has only a maximum withdrawal amount

c. An LRIF has a minimum and maximum withdrawal amount, a RRIF has only minimum withdrawal amount

d. An LRIF is available only in Quebec

QUESTION 63

Which of the following plans is the employer at most risk?

a. Group RRSP

b. DPSP

c. DBPP

d. DCPP

QUESTION 64

Eva used $15,000 with RRSP home buyer’s plan to help her buy her home. Which of the following statements are true?

a. If she does not repay the annual amount owed, the full amount owed under the plan would be added to Eva’s taxable income that year and the entire balance is cleared

b. $1,000 would be added to Eva’s taxable income if she does not repay the amount owed under HBP repayment

c. Eva’s RRSP contribution room would be reduced by the amount of missed payment of that year

d. Eva would have to pay interest on the amount owed that year under HBP repayment

QUESTION 65

Colin was a member of his employer’s defined benefit pension plan (DBPP) for the past 10 years. He is now switching employers. Into which one of the following types of accounts could Colin transfer the vested funds?

a. He can only cash out his contributed amounts as taxable income

b. Locked-in Retirement Account

c. Registered Retirement Income Fund

d. Registered Retirement Savings Plan

QUESTION 66

Serrano runs his own business, which is structured as a sole proprietorship. Unfortunately, a recent lawsuit against his company is putting much of his personal assets at risk.

Which one of the company’s group plans are not protected against claim?

a. Group RRSP

b. DCPP

c. Group TFSA

d. DPSP

QUESTION 67

Which one of the following is not a capital accumulation plan (CAP)?

a. DCPP

b. GRRSP

c. TFSA

d. DBPP

QUESTION 68

Which of the following plans provides the greatest flexibility in terms of investment choice?

a. Group RRSP

b. Individual RRSP

c. DCPP

d. DBPP

QUESTION 69

Banana Corp. has a defined benefit pension plan (DBPP) is required to provide $65,000 retirement income annually to an employee. The plan accomplishes this by purchasing a $65,000 life annuity for that employee.

What is this referred to as?

a. Pension adjustment

b. Prescribed annuity

c. Pension buy-in

d. Insured life annuity

QUESTION 70

Janno recently started working with a new company at the age of 35 and was a member of the pension plan from then on. The plan will provide a full pension subject to the 85 factor.

At what age would Janno be able to retire and receive a full pension?

a. 60 Years old

b. 62 Years old

c. 65 Years old

d. 70 Years old

QUESTION 71

Andres just turned 65 and is eligible to receive Old Age Security (OAS) benefits. Since he plans to continue working, he would like to defer his OAS benefits until age 70.

By what percentage would Andres’ OAS benefits increase as a result of the delay?

a. 36%

b. 42%

c. 39%

d. 32%

QUESTION 72

Julius was just laid off at the age of 45. His company pension will not provide him with benefits until he reaches age 65. Julius has decided to take two to three years off in order to travel the world. He will fund his travels by using a portion of his RRSP He currently has $400,000 in his RRSP.

What would you recommend?

a. Withdraw from the RRSP only the needed amounts

b. Convert his RRSP into a RRIF and withdraw only the needed amounts

c. Use the funds to purchase an annuity to receive the needed amounts

d. Cash out the entire RRSP, and deposit the unused money back to the RRSP after vacation

QUESTION 73

Which type of plan does not require earned income as basis for contribution amount?

a. RRSP

b. DCPP

c. DBPP

d. TFSA

QUESTION 74

Which of the following is true regarding GRRSP?

a. GRRSP usually have higher fees than an individual RRSP

b. GRRSP usually have the same investment options as an individual RRSP have, and the employee has the option to select the investments of his/her choosing

c. GRRSP cannot be used for Home Buyer’s Plan

d. Upon resignation, a plan member can withdraw his GRRSP, or convert his/her GRRSP to an annuity, RRIF, or (if under age 71) transfer to his/her individual RRSP.

QUESTION 75

Which of the following statements is/are true for both Individual Variable Insurance Contracts and mutual fund products?

a. They must be approved by provincial regulators

b. They cannot be registered as Registered Retirement Savings Plans

c. Sales people must be licensed by provincial regulators

d. A and C

QUESTION 76

Neil received a graduation gift of $9000 and he wants to invest it in a segregated fund. What is the interest rate needed for the fund to be match $15,000 in four years?

a. 9%

b. 18%

c. 14%

d. 16%

QUESTION 77

What is the risk involved in a fixed-rate GIC?

a. Liquidity risk

b. Inflation risk

c. Industry risk

d. Market risk

QUESTION 78

Anna has $122,000 in her savings account. She has no children. She wants to invest it in a tax-advantaged account. Which of the following would you recommend for her?

i. RRSP

ii. RESP

iii. RDSP

iv. TFSA

a. i, iv

b. ii, iii, iv

c. i, ii

d. ii, iv

QUESTION 79

A DBPP can be:

a. Transferred to LIRA

b. Transferred to RRSP

c. Transferred to PRPP

d. Transferred to DPSP

QUESTION 80

Which of the following statements are true of GIC’s?

a. Cashable GIC’s would have greater returns over non-redeemable GIC’s

b. GIC’s are only offered at a guaranteed interest rate

c. GIC pays distributions that consist of interest, dividends, and capital gain

d. GIC’s rates can be linked to the performance of the equity market or an index

QUESTION 81

A client has invested in segregated funds. She read something about having guaranteed income in the information folder. You have pointed out to her the benefit of GMWB.

Which of the following is true regarding Guaranteed Minimum Withdrawal Benefit (GMWB)?

a. Withdrawals can be made only when payout phase begins. Withdrawals of any amount can be made to any amount since withdrawal is guaranteed

b. Withdrawals can be made only when payout phase begins, however withdrawals cannot be made more than the prescribed amount

c. Withdrawals can be made during the savings and payout phase, however excess amounts over the prescribed amount may reduce future payment guarantees

d. Withdrawals within the savings phase reduce the final minimum guarantee, while excessive withdrawals during payout phase reduce future payment guarantees

QUESTION 82

Which is true regarding Group Tax-Free Savings Account (GTFSA)?

a. The plan sponsor and member is obliged to contribute into the plan

b. All contributions of the plan sponsor are tax deductible

c. On leaving the group plan, GTFSA can be converted into an individual TFSA or cashed out

d. On leaving the group plan, GTFSA can be converted into an individual TFSA or LIRA/LIRRSP

QUESTION 83

P.F. Chang, one of your clients who has recently immigrated to Canada, is planning to deposit a very large amount of money into a universal life policy.

Which of the following is false regarding reporting this to FINTRAC?

a. You have 30 days to determine whether P.F. Chang is a Politically Exposed Foreign Person if he is depositing more than $100,000

b. You have to report the identity of PF Chang to FINTRAC if the cash deposit is $10,000 or more within a 24 hour period

c. Certain provinces do not accept health card as an identification document

d. You are not required to report the identity of PF Chang if he was depositing $10,000 cash into a registered segregated fund

QUESTION 84

What is required in when applying for segregated funds?

i. Identification of investor

ii. Account funding

iii. Proof of medical insurability

iv. Rider selections

v. Annuitant and Beneficiary

a. i, ii, iv, v

b. i, ii, iii, v

c. i, ii, v

d. All of the above

QUESTION 85

Helena is an investor looking for guaranteed returns, and at the same time wants to get her full principal back on maturity. What type of fund would you recommend?

a. Income Fund

b. Bond Fund

c. Dividend Fund

d. Segregated Fund because the guarantees on the principal

QUESTION 86

You have a client couple whose child was born with a congenital heart disease. They want to set up a plan to help them save up for the child’s education. What would you recommend?

a. RRSP

b. RESP

c. RDSP

d. LIRA

QUESTION 87

Tracy is 60 years old was recently disabled. She is relying on her savings to get her through. She needs to have a steady cash flow to support her until age 65 when she can start receiving her pension. What product should Tracy get?

a. 5 year term annuity

b. Deferred annuity

c. Life annuity

d. Life annuity with 5 year guarantee

QUESTION 88

In setting up a group savings or pension plan, which of the following describes the the role of the agent?

a. Designing and establishing the plan and benefits

b. Recommending and reviewing the plan and benefits

c. Managing investments within the plan, providing account statements

d. All of the above

QUESTION 89

Jack and Diane are best friends who were employed at the same time, same department, working the same number of hours. The employer offers a Deferred Profit Sharing Plan (DPSP) and contributory Defined Contribution Pension Plan (DCPP), both of which do not have a waiting period, and have a 2 year vesting period. Jack and Diane both enrolled into the DPSP and DCPP.

After 18 months of employment, however, Diane resigned after she was offered a higher paying position in another company. Jack followed suit 6 months later, joining Diane with her new employer.

Would Jack and Diane receive anything from their group savings and pensions?

a. Yes, Jack and Diane can receive the vested funds from their DPSP and DCPP, transferring them into their respective individual RRSP’s.

b. Yes, Jack would be able to receive the vested funds from his DPSP and DCPP, transferring them into his RRSP and LIRRSP, respectively. Diane can withdraw her DPSP and DCPP contributions.

c. Only Jack would be able to receive the vested funds from his DPSP and DCPP, transferring them into his RRSP and LIRRSP, respectively. Diane can withdraw her DCPP contributions.

d. Neither Jack nor Diane can get any funds from the DPSP and DCPP.

QUESTION 90

Jane was offered early retirement with attractive lump sum package at 60. However, pension payment will start at age 65. What do you advise Jane?

a. Purchase an Immediate 5 Year Term Annuity

b. Purchase a GMWB for 5 Years

c. Purchase a Segregated Fund with GMWB rider

d. Purchase a Universal Life policy with an Income Fund

QUESTION 91

A Canadian resident who is the son of a congressman in the United States invests $50,000 into his RRSP. What statement is true?

a. Agent should file a report of PEFP to FINTRAC within 14 days

b. Agent should report third party connection to FINTRAC within 14 days

c. Agent should report the transaction to the insurer under FATCA

d. Agent does not need to report this transaction to FINTRAC

QUESTION 92

ABC Corporation took a group segregated fund from an agent so that employees can invest their savings with less fees. What is not true in this situation?

a. Agents will earn a large commission from this successful corporate group segregated fund

b. Unlike segregated funds offered to individuals, group segregated funds have no sales charges

c. MER on group-provided segregated fund is lower than an individual segregated fund

d. Group segregated fund does not offer maturity or death benefit guarantee nor group plan special rates and absence of such guarantees increases risk of investment loss for the group member

QUESTION

93

Dom and Jackie are a retiring couple who have both applied for CPP pension benefits. Jackie is receiving $1,200 per month with a tax rate of 35% while Dom is receiving $350 per month with a tax rate of 20%. They are deciding whether to transfer $400/mo from Jackie to Dom, and, as a result, Jackie’s tax rate will drop to 32% while Dom’s tax rate went up to 25%.

Which of the following is the most correct if they decided to push through with their decision?

a. There will be a tax savings of $46.50 / mo

b. There is no effect in the tax paid

c. There will be an increased tax of $7.75 / mo

d. There will be a tax savings of $63.75 / mo

QUESTION 94

How much must an annuitant need to declare on the annual tax return from the income of a prescribed annuity that pays $2,000 monthly, of which $300 is the interest portion?

a. $300

b. $2,000

c. $3,600

d. $24,000

QUESTION 95

A person wants to buy a house in 6 months, wants to invest money with a guaranteed principal.

Which of the following would you recommend?

a. Canada Premium Bond

b. Exchange Traded Fund

c. Segregated Fund

d. Savings

QUESTION 96

A company gives a list of these key people: Mark: CEO/President/Major shareholder

Gerald: COO/Vice president

Cheryl: Executive manager, spouse of Mark

Among these, who can join in the Deferred Profit Sharing Plan (DPSP)?

a. Mark

b. Gerald

c. Cheryl

d. All of them can join the DPSP

QUESTION 97

How much must an annuitant need to declare on the annual tax return from the income of a registered annuity that pays $1,500 monthly, of which $150 is the interest portion?

a. $150

b. $1,800

c. $16,200

d. $18,000

QUESTION 98

Hans, a resident of New Brunswick, has a sizable investment portfolio in his RRSP and TFSA. He has a house with a mortgage which is insured through the lender. He supports a family with his wife. He has a car which is financed through a loan and some credit card debts. He is looking for additional insurance coverage.

What would you prepare to know his financial position?

a. Net Worth Statement

b. Cash Flow Statement

c. Income Tax Return

d. Bank Statement

QUESTION 99

Augustus is a 65 year old resident of Manitoba who is planning to retire soon. His OAS pension is only $1,200/mo. He is contemplating working more to increase his Old Age Security pension. Which of the following is true?

a. Delaying his OAS payment has no positive benefit and does not increase the payment amount

b. If he starts the OAS pension on his birthday next year, he would get $1,286/mo

c. If he starts the OAS pension on his 70th birthday, he would get $1,704/mo

d. If he started the OAS pension one year early (64th birthday), he would have been receiving $1,113.60 /mo

QUESTION 100

Sherman and Lily are a married couple. They have been married for 40 years and now they are retiring, they are looking into getting their CPP retirement pensions. Lily’s CPP retirement benefit is $1,000 per month, while Sherman’s CPP retirement benefit is only $400 per month. Lily is in the 25% tax bracket, while Sherman is in the 15% tax bracket. In order to save on taxes, they would like to transfer $250 of Lily’s income to Sherman. If they do that, Lily would be in the 20% tax bracket while Sherman would be in the 18% tax bracket.

How much will they save by transferring the CPP income?

a. $43.00

b. $30.00

c. $25

d. $13

QUESTION 101

Michael is a member of the pension plan offered by his employer, and has been employed there for more than 5 years. A few weeks ago, he learned that the company he is working in is going to be sold to another company that does not offer a pension plan, and he is concerned that the funds in the plan may be lost.

What will happen to the Michael’s funds in the pension plan?

a. Michael’s pension funds will be paid out to him, but would only be limited to the employee’s portion

b. Michael’s pension funds will be held in trust, but would only be limited to the employee’s portion

c. Michael’s pension funds will be held in trust, both employee and employer’s portions

d. Michael’s pension funds will be paid out to him, both employee and employer’s portions

QUESTION 102

Marco is 50 years old and has accumulated $450,000 from a Defined Benefit Pension plan with ABC Tool and Die company, where he worked for 25 years. He would like to transfer the accumulated value into a Locked-in Account with a life insurance company and found out that a segregated fund would be an attractive investment option. Andrea, the life insurance advisor, was able to determine that Marco is a conservative investor and has plans of an early retirement. Andrea came up with several fund options but Marco is concerned with the cost.

Which of the following has the least cost?

a. Government short-term bond fund with 75% guarantee

b. Money Market Fund with 100% guarantee

c. Fixed Income Fund with 75% guarantee

d. High-Yield Bond with 75% guarantee

QUESTION 103

While the use of gold has decreased in dental applications, some new markets such as pharmaceutical drugs have emerged. It is projected that price for this precious metal will continue to rise.

What is the associated risk when investing in precious metal?

a. Market risk

b. Industry risk

c. Default risk

d. Inflation risk

QUESTION 104

Mike and Ana are married. Mike earns $150,000 and is in a 47% MTR while Ana earns $20,000 as a part-time Yoga instructor and a 25% MTR. Mike decided to contribute towards a spousal RRSP under Ana’s name. He made the following contributions:

In year 2022, Ana withdrew $30,000 from the Spousal RRSP. How much of this withdrawn amount will be added to Mike’s taxable income for Year 2022?

a. $20,000

b. $20,650

c. $30,000

d. $0

QUESTION 105

Mike just turned 71 this year. Which is true regarding his ability to contribute towards an RRSP account?

a. He can no longer contribute to an RRSP account since an individual can only hold an RRSP account until December 31 on the year the individual turns 71

b. He can contribute towards a spousal RRSP if he has a contribution room, and the spouse is less than 71 years old

c. He can still contribute towards his RRSP as long as he has contribution room

d. He can contribute towards a spousal RRSP if his spouse has a contribution room, and the spouse is less than 71 years old

QUESTION 105

Mike just turned 71 this year. Which is true regarding his ability to contribute towards an RRSP account?

a. He can no longer contribute to an RRSP account since an individual can only hold an RRSP account until December 31 on the year the individual turns 71

b. He can contribute towards a spousal RRSP if he has a contribution room, and the spouse is less than 71 years old

c. He can still contribute towards his RRSP as long as he has contribution room

d. He can contribute towards a spousal RRSP if his spouse has a contribution room, and the spouse is less than 71 years old

QUESTION 106

What is the advantage of having a group RRSP?

a. Members can invest with less management fees

b. Group death benefits are usually higher than in an individual RRSP

c. Contributions by the employer are not taxable as income to the employees

d. GRRSP generally permit purchase of individual securities like stocks

QUESTION 107

In 2014, Helena decided to defer receiving her OAS pension for one year because she is still working and has no need for the additional income. If she were to receive OAS at age 65, her OAS will be $615.

What will be her new OAS if she proceeds with deferring her OAS?

a. $600

b. $659.28

c. $655.30

d. $670.59

QUESTION 108

John had group coverage that offered him a DCPP. He named his mother Rosa as his beneficiary to his pension plan. He later married Leah and together had 3 children. John was planning on retiring at age of 65 but unfortunately John died at age 64 old due to a stroke.

To whom will the pension benefits be paid?

a. Leah

b. Rosa

c. John’s estate

d. The children

QUESTION 109

Anna has investments that include a registered GIC, Stock, Bonds and Income fund. Which of the following will result in less taxes if Anna decides to dispose of her investments?

a. Registered GIC

b. Bonds

c. Income Fund

d. Stocks

QUESTION 110

Julie Ann is the annuitant of a life annuity. She has a shortened life expectancy due to poor health because of her serious disease. The payment of her annuity is based on underwriting of his medical condition. Once her substandard health is proven, then the annuitant receives higher payment or pays less as premium than someone of the same age and gender who does not have a deteriorating medical condition.

What type of annuity does Julie Ann has?

a. Term Annuity

b. Deferred Annuity

c. Immediate Annuity

d. Impaired Annuity

QUESTION 111

Which of the following statements is FALSE regarding Deferred Profit Sharing Plan (DPSP)?

a. Offered by companies to share a portion of their business profits with employees who are plan members

b. The sponsor of the DPSP decides which employees are eligible for plan membership in which the shareholders and close family relatives are eligible

c. The contribution has no minimum but has a maximum limit, which is less than 18% of a member’s annual compensation or 50% of the DCPP Limit

d. The DPSP is vested maximum of 2 years and the plan member may withdraw while the plan member is still employed

QUESTION 112

If DPSP withdrawal is allowed while the plan member is still employed at the company, what is the tax treatment of the withdrawal?

a. Tax free

b. Pay Capital Gains Tax

c. Taxable same as rate of regular income

d. Pay only interest, No tax

QUESTION 113

Individual Registered Savings Plans are personal investment accounts that are registered with CRA that enables the plan owner to receive tax benefits that are not available in non-registered accounts.

What is a registered plan below that you can use to save for retirement?

a. RRSP and RRIF

b. TFSA

c. RESP

d. RDSP

QUESTION 114

What is the type of risk faced by specific industries such as technology or mining?

a. Default risk

b. Inflation risk

c. Industry risk

d. Market risk

QUESTION

115

How will you recognize if your young client Roby is ready to start investing?

a. If Roby has some savings and enough disposable income

b. If Roby knows he is aggressive and has high risk tolerance to meet his objective

c. If Roby is at least 18 years old

d. If Roby wants to be financially secure

QUESTION 116

The 3 types of returns of all investments are:

a. Positive returns, neutral returns, negative returns

b. Income earnings, dividend earnings, capital gains

c. Mutual funds, seg funds, ETFs

d. Short term, medium term, long term

QUESTION 117

The first requirement for a speculative investor is to understand that:

a. It is possible to lose investment capital

b. The investment vehicle chosen may impact taxation

c. Investments have guaranteed returns

d. Investments do not have maturity date

QUESTION 118

Which of the following fall under the 3 categories of asset classes?

a. Fixed Income funds, Foreign equities, GICs

b. Canadian Stocks, Federal bonds, Cash deposits

c. Debt, Money market, American Equities

d. All of the above

QUESTION 119

Which are considered liquid investment?

a. An investment that can be converted to cash easily and does not usually affect its current value

b. An investment that can be converted to cash easily regardless of the cash value

c. An investment that can be converted to cash irrelevant of how quickly nor its current value

d. An investment that can be converted to cash easily without considering its cost

QUESTION 120

Jerick is a healthy employee of 30 years of ABC Co. with average earnings $71,000 for the past 5 years. He is 62 and about to retire and sees that his retirement income needs would be $46,000 a year. As a DBPP member with ABC Co, his pension states that his entitlement is equal to 1.75% of his average earnings of the past five years, per year of service, with an 85 factor. He is entitled to CPP benefits of $9,000 if he were to apply now. He will be entitled for OAS in 2 years at $6,000 annually.

He asks you if he has enough for retirement. After looking at his numbers you will advise him to:

a. Work 3 more years to be eligible for OAS

b. Work 5 more years to meet the 85 factor

c. You have enough for a comfortable retirement now

d. Learn to live according to your means

QUESTION 121

Your client asks about Present Value (PV and Future Value (FV). You must explain the Time Value of Money (TVM) to your client. What will you tell him?

a. Since cost of living increases yearly; money loses value yearly too

b. The PV (present value) and FV (Future value) principles mean that you should put in more money now, and the value will increase in the future.

c. There is a need to factor in inflation in order in order to increase money yearly

d. The Time Value of Money is used to see how invested money may increase in value over time based on the principles of present value and future value of money

QUESTION 122

Lyndon and Gina are a couple with the following investments:

Lyndon’s Investments

Non-Registered IVIC

FMV: $340,000

Guaranteed at $280,000

ACB: $200,000

Lyndon is the annuitant, Gina is the beneficiary

Registered Mutual Fund

FMV: $140,000

ACB: $60,000

Beneficiary is Gina

Business shares worth $250,000

Acquired for $50,000

On Lyndon’s death, spouse will receive shares

Principal residence is valued at $540,000

Purchased at $180,000

Gina’s Investments

Collection of porcelain dolls currently valued at $160,000, Purchase price is $50,000

Last will and testament places Lyndon as recipient on death

Registered GIC

FMV: $310,000

ACB: $290,000

Beneficiary is Lyndon

Stock portfolio in TFSA FMV: $14,000

Purchased for $10,000

No beneficiary named

Co-owns principal residence as joint tenant

They went on vacation and were both killed in a plane crash. Will there be taxable income in their estate? How much?

a. $0

b. $675,000

c. $939,000

d. $579,000

QUESTION 123

A couple who has low risk tolerance is with 2 kids. They just have enough budget for daily needs. What should they prioritize?

a. Talk to agent to get RESPs for their kids

b. Borrow from bank and ask advice to get credit line

c. Borrow from bank to stabilize financial capability

d. Continue doing what they are doing

QUESTION

124

Jove wants to invest in your SEG offer and would like to let the funds stay until maturity. What kind of sales load is best for him?

a. Deferred sales load

b. Front end sales load

c. No load

d. Any of the mentioned choices

QUESTION 125

Josh and Marian are a couple living in a fast developing and growing residential village. Their home is valued at $1,600,000 from the original cost of $330,000. They have used up all their line of credit. They own a $400,000 cottage with $350,000 mortgage balance. Marian‘s assets are valuable collector’s items of paintings for which she paid on credit for $220,000 and have current valuation of $450,000 but interest on her credit card continues to increase. Their combined income of $128,000 is not enough to meet their current needs.

As their financial advisor what advice can you give to ease their financial burden?

a. Use their equity line of credit on their cottage to pay off debts

b. Sell their assets to pay off debts

c. Save as much as they can to pay their debts

d. Advise them to find a higher paying job

QUESTION 126

James and Janet are a married couple. They both have RRIFs. They also have a disabled adult son who is dependent on the parents. James and Janet named each other and the son as beneficiaries on their RRIF’s.

If James dies, what will happen to the funds in the RRIF?

a. James’ estate will be taxed, while Janet and the son will receive the RRIF funds tax free

b. James’ estate will not be taxed, while Janet and the son will receive the RRIF funds tax free

c. James’ estate will not be taxed, while Janet and the son will receive the RRIF funds tax-deferred

d. James’ estate will be taxed on the amount the son receives. Janet receives the RRIF funds tax-deferred, and the son receive the RRIF funds tax free

QUESTION 127

James and Janet are a married couple. They both have RRIFs. They also have adult son who lives on his own and has his own family. James and Janet named each other and the son as beneficiaries on their RRIF’s.

If James dies, what will happen to the funds in the RRIF?

a. James’ estate will be taxed, while Janet and the son will receive the RRIF funds tax free

b. James’ estate will not be taxed, while Janet and the son will receive the RRIF funds tax free

c. James’ estate will not be taxed, while Janet and the son will receive the RRIF funds tax-deferred

d. James’ estate will be taxed on the amount the son receives. Janet receives the RRIF funds tax-deferred, and the son receive the RRIF funds tax free

QUESTION 128

Felix is 67 years old who has a defined contribution pension plan (DCPP). He would like to retire and is considering taking his pension to support himself and his spouse. He wants to get as much monthly income as possible, for at least 20 years for himself and his spouse. The children are all independent.

Which annuity will give him the highest monthly income and respect his goals?

a. Joint and last survivor life annuity, 20 year guarantee, 50% survivor benefit

b. Joint and last survivor life annuity, 20 year guarantee, 100% survivor benefit

c. Joint and last survivor life annuity, 100% survivor benefit

d. Joint and last survivor life annuity, 50% survivor benefit

QUESTION 129

Jackson bought a deferred annuity contract 6 months ago for $100,000 for a 10-year term at 3%. According to the contract, early redemption may be made after 2 years with a market value adjustment. Recently, prevailing interest rates rose to 4%. Jackson now needs $10,000.

How would Jackson take the funds from the deferred annuity?

a. Jackson cannot withdraw money from the deferred annuity at this time.

b. Jackson can withdraw $10,000 and continue to earn 3% on the remaining funds.

c. Jackson can withdraw $10,000 with a market value adjustment. The remaining funds will continue to grow at 3% for 234 months.

d. Jackson can withdraw $10,000 with a market value adjustment. The remaining funds will continue to grow at 4% for 234 months.

QUESTION 130

Jackson bought a deferred annuity contract 24 months ago for $100,000 for a 10-year term at 3%. According to the contract, early redemption may be made after 2 years with a market value adjustment. Recently, prevailing interest rates rose to 4%. Jackson now needs $10,000.

How would Jackson take the funds from the deferred annuity?

a. Jackson cannot withdraw money from the deferred annuity at this time.

b. Jackson can withdraw $10,000 and continue to earn 3% on the remaining funds.

c. Jackson can withdraw $10,000 with a market value adjustment. The remaining funds will continue to grow at 3% for 216 months.

d. Jackson can withdraw $10,000 with a market value adjustment. The remaining funds will continue to grow at 4% for 216 months.

Answer Key

1 B

2 A

3 C

Equity Mutual Funds have higher risk, and higher returns than bond funds. Mutual funds have lower management fees than segregated funds because of the lack of death and maturity guarantees, thus a higher return.

Use Future value formula for two years: PV x (1+rate)number of years = FV

15,000 x 1.03 2 = 15,913.50 (value after 2 years)

$15,913.50 x 3% = $477.41 (interest on third year)

Real rate of return = nominal rate – inflation rate 8% nominal rate – 3% inflation rate = 5%

The 18% is just the benchmark, not Gary’s nominal rate

A is true = Seg funds are pooled investments, because small investors pool their money together, this reflects a big fund and can be used to invest diversely.

B is false = If seg funds are surrendered before maturity, there are no guarantees

4 A

C is false = If seg funds are non-registered, allocations (investment income) are taxed on the year they are received.

D is false = Assuris does not cover pre-mature surrenders.

5 D Present Value Formula: 95,000 ÷ 1.0320 = 52,599.20

6 A Future Value Formula: 20,000 x 1.088 = 50,363.40

7 D Annuities are insurance investments that provide a guaranteed income stream

8 B Short: less than 3 years, Medium: 3 – 10 years, Long: is more than 10 years

9 B

Segregated funds have higher management fees than mutual funds funds because of the death and maturity guarantees. Volatile investments need more attention to, thus would have higher management fees. Equity is higher risk compared to money market

10 A Inception date is the “birthday” of a fund – when it started operations.

11 C Seg Fund information folders are given upon or before purchase. Mutual fund prospectus, on the other hand, are mailed within 2 business days.

12 D D is false, the guarantees are taken from the MER are not from sales charges

13 D The more lives in an annuity, the lesser the income payout (more cost).

Since the joint last survivor annuity is based on age and life expectancy of annuitants and the annuitants are young, this means a longer time for payout, which would result in lesser income payout (more cost).

14 C Credit Risk. Bonds are debts owed to you, but if the invested company becomes bankrupt, the bondholder may not get the investment back.

15 C NAVPU formula (Total assets – total liabilities) ÷ total units ($256,423,000 - $85,265,000) ÷ 10,163,777 16.84

16 B Rate of return formula — Return ÷ Principal = %return (6200 – 4500) ÷ 4500 = % return

17 A Rising prevailing rates would make existing bonds appear less attractive (because they were purchased at a lower rate), thus be worth less than previously.

18 D

19 B

20 A

A, B, and C are false, seg funds bypass probate (as insurance products), seg funds can offer funds similar to mutual funds, are are just as liquid as mutual funds. D is true and is a disadvantage: because of the guarantee, seg funds have more MER.

Net worth = total assets – total liabilities.

Assets: 326,000 House + 40,000 savings + 8,000 car = 374,000

Liabilities: 124,000 Mortgage + 2,000 car loan = 126,000

374,000 – 126,000 = 248,000

Treasury bills are short term investments issued by the government. These are usually the investments within money market funds. Bonds have more risk. Stocks/Equities have more risk than bonds. Labor sponsored funds have the highest risk of all.

21 C Index funds are riskier than income and balanced funds. Foreign investments carry more risk than local investments.

22 C The returns show ups and downs – big swings and volatility – found in equity funds

23 D Collateral loans are not considered taxable income. Transferring property into a trust, to other people, or withdrawing funds is a taxable disposition.

Key information for assets on death:

Non-registered assets can be rolled over to spouse on death

24 A

Registered assets can be rolled over to spouse, dependent child/grandchild on death

Otherwise, there would be a taxable disposition of the assets.

25 A Tax preferred means paying less tax. Dividends have a tax credit (thus less tax) and capital gains is only half taxable. Interest and foreign income is 100% taxable.

26 D

27 C

28 A

29 B

On death or maturity, choose whichever is higher (account value vs guarantee). Account value is $18,502. Guarantee is $21,074 (100% of $21,074 reset).

On death or maturity, choose whichever is higher (account value vs guarantee)

Account value is $18,502. However, Michaela did not die, nor was the maturity reached: she was 28 years old when she reset the contract, and she is 29 years old. Seg fund maturity is 10 years.

Seg funds bypass the estate, thus is protected from creditors on death if there is a beneficiary (unless if used as collateral)

Since the account value is bigger than the guarantee, there is nothing to give more as guarantee. A is false, deferred sales charge only applies on early surrender, not death. C is false, GIC does not provide great growth. D is false, mutual funds and seg funds can have similar investments.

30 D Assuris covers up to 85% of the guarantee (75,000 x 100% x 85% = 63750). If account value is greater, Assuris coverage is not needed, the seg fund pays out that amount.

31 B Deferred sales charge would only have a sales charge on early surrender, so keeping a seg fund with this charge for long term would eventually not charge anything on surrender.

32 B Spousal RRSP: the best way to structure this is to have higher income spouse contribute to the RRSP of the spouse with smaller income.

90,000 employment income + 25000 commission + 5000 rental income – 30000 alimony) X 18%

33 C

- (3000 GRRSP contribution x 2 employer matchup) + 2000 lifetime over contribution room =12200

34 D

Key information for assets on death:

Non-registered assets can be rolled over to spouse on death

Registered assets can be rolled over to spouse, dependent child/grandchild on death

Otherwise, there would be a taxable disposition of the assets.

35 D Justin satisfied the vesting period. This means he is eligible to the employer portion as well however funds are locked in and can only be put into a locked in retirement acc’t

36 D

37 C

Non-registered assets would be best put into annuity to provide guaranteed income, with it being prescribed to lessen the up front taxes. He does not need to convert his RRSP to RRIF right away, doing so will make it mandatory to withdraw the minimum amount. He would do so at age 71 (maximum age to hold RRSP), and use the younger spouse’s age to lessen the minimum withdrawal amount, thus lessening the tax.

She is looking for the following criteria: a conservative and liquid investment. Annuity (a) and GIC (b) entail locking in, while equity investments (d) are volatile. C is the best choice, seg funds are liquid, and income funds are conservative

38 D (a) Annuities, as offered by insurers, can be structured to be creditor protected (b) Assuris covers up to $100,000 of accumulation annuities (c) is false, it can

39 B Two clues here: he is divorced, no children, so it’s just a single annuity. Another clue is he is 55 now, and would like to retire at 65, thus a deferred annuity.

40 C Segregated funds would allow her to name her children (preferred beneficiaries) as beneficiaries, thus protecting her investment from creditor seizure.

CPP Splitting

Tax when not splitting:

Philipp: 1067.32 x 40% = 426.93

Martina: 625.48 x 26% = 162.62

Total tax = 589.55

41 B

Split (average income) = (1067.32 + 625.48) ÷ 2 = 846.40

Tax when splitting:

Philipp: 846.40 x 40% = 338.56

Martina: 846.40 x 26% = 220.06

Total tax = 558.62

Difference: 589.55 – 558.62 = 30.93

42 C CPP, RRIF, LIF can transfer to the spouse, not OAS

43 D

44 A

45 A

46 D

As a general rule: the longer the life expectancy, the smaller the annuity payout. Thus an older person (having short life expectancy) will have bigger annuity payout

A female (having longer life expectance) should have smaller annuity payout

A joint annuity (basing on 2 lives) should have a smaller annuity payout

Smoking has no effect on annuity payout

Key information for assets on death:

Registered assets can be rolled over to spouse, dependent child/grandchild on death

Otherwise, there would be a taxable disposition of the assets.

TAX DEFERRED is the right term, not tax-free because eventually tax would be due.

Insurance products with beneficiaries, Registered investments with named beneficiaries, and properties owned by joint tenancy are assets that bypass probate

47 D If Jo needs $5,000, he has to withdraw more because of the withholding tax. Withdrawals more than $5,000 up to $10,000 would be 20%. 5,000 ÷ (100% - 20%) = 6250

48 A Annuity option for RRSP conversion should be a life annuity or up to term-90 annuity

49 B

50 A “Good Debt” is debt for investment purposes, or to pay down a higher interest debt

51 D Life Annuity provides income for life, regardless of how old the annuitant lives up to

52 C Leveraging - borrowing to invest

53 A A bigger tax credit is always better, and a refundable one is always better

54 C OAS requires at least 10 years of residency in Canada, and at least 65 years old

55 A Joseph has lived for more than 10 years in Canada, and is at least 65 years old. Sonya and Kurt are still 60 years old, not yet 65. Sofia has not yet reached 10 years in Canada.

56 B OAS Repayment Formula 15% of the income excess over threshold = OAS claw-back 15% x (100,000 – 72809) = $4,078.65

57 A GIS is for low income OAS recipients, and is tax free

58 A

59 B

Contribution is based on his income. His 63,000 income is within the 64,900 maximum (YMPE), use the lesser value 63,000 (Lesser of income and YMPE – 3,500 exemption) x 5.25% = CPP Contribution of employee and employer each (63,000 income – 3,500 exemption) x 5.25% = $3,123.75 CPP Employee Contribution.

CPP early retirement (earliest is 60 years old) has a reduction of .6% per month

.6% reduction x 12 months x 3 years early = 21.6% reduction

836.06 normal CPP – 21.6% reduction = $655.47

60 B CPP late retirement (latest is 70 years old) has an addition of .7% per month

.7% addition x 12 months x 5 years = 42% addition

586.25 + 42% = 832.47

61 A PRBP is used if you are receiving CPP (between 60 and 70 years old) and still working. Contributions here will become additional retirement pension.

62 C Since LRIF/LIF come from pensions, they are more restricted than RRSP/RRIF such that you cannot withdraw as much as you can from pension funds, where as you can with RRSP/RRIF

63 C Since benefit is defined in a DBPP, the employer has to fund shortfalls in the fund

64 B Home Buyer’s Plan repayment is 1/15th of the withdrawn amount per year for 15 years. Non-repayment of that amount due that year would be counted as additional taxable income.

65 B Vested pension funds are locked in

66 C TFSA’s are not designated as “retirement” money, thus are not protected from claims

67 D Capital accumulation plans are plans that allow the member to select investments in. This is not possible in a defined benefit plan.

68 B RRSP’s are more flexible than pension plans in a way you can withdraw funds even before retirement. You have more flexibility if it is not sponsored by the employer.

69 C Pension buy-in = Pension conversion into an annuity

A modification of the formula (Factor = age + no. of years of work) can be used Since we are starting at age 35 with 0 years of work at that point, we will use variable “x” for how many more years of work to be added to the addends of the formula.

85 = (35 + x) + (0 + x)

85 = 35 + 2x

70 A

85 – 35 = 2x

(85 – 35) ÷ 2 = x

25 = x, which is number of years of work. Add this to current 35 years old, you get 60. This means at starting 35 years old, work for 25 years to reach 60.

60 years old + 25 years of work = 85 factor IN SHORT, the modified formula is (FACTOR – STARTING AGE) ÷ 2 = # of years work

71 A OAS can be delayed for additional .6% per month up to age 70. .6% x 12 months x 5 years = 36%.

72 A Just withdraw as needed. Converting to RRIF and Annuity would mean the owner is set to retire: he would be receiving income continuously even past the 2-3 years vacation, which is not what is intended. D is not a good choice, this is a big tax if withdrawn!

73 D TFSA contributions are currently at $5,500 per year, regardless of income level

74 D

A is false, GRRSP have lower management fees. B is false, GRRSP have less investment options that individual RRSP. C is false, GRRSP can be used for HBP. D is true.

75 D Segregated funds (IVICs) are regulated by the provincial insurance council, and are sold by life licensed agents/brokers.

76 C

Trial and error can be used here for simplicity. 14% is correct here. Use formula for future value Future Value = Present Value x (1+rate)years 9000 x 1.14 4 = 15,200, which is the closest answer to 15,000

77 B GIC’s are low risk, low return investments.

But as with these guarantees and low returns, it is at risk to inflation eating up its value

78 A

79 A

Tax-advantage means paying less tax. All of these accounts have tax advantages, but the ones that are applicable in this situation is only RRSP and TFSA. RRSP – has tax deduction on contribution, tax deferred withdrawal TFSA – tax-free growth and withdrawal RESP and RDSP are not suitable for these situations as the objectives are not for education and disabled dependent

Pension Plans, once vesting is satisfied, are considered locked in and can be converted into the following: - LIRA (Locked in Retirement account)/LIRRSP (Locked in RRSP)

- Registered Annuity (for DBPP)

- New employer’s Pension Plan

- Otherwise it can be left in the same pension until retirement

80 D

A – False – A cashable option would be more expensive, thus lower returns

B – False – GIC’s can be fixed rate, variable rate, escalating rate, or index-linked rate

C – False – GIC’s only pay interest

D – True – GIC’s can be fixed rate, variable rate, escalating rate, or index-linked rate

81 D

82 C

Guaranteed Withdrawal Benefits guarantee a certain payout by giving extra credit for not withdrawing. However, withdrawing money during saving phase will reduce principal and reducing overall withdrawal amount. On Payout Phase, there is a guaranteed income, but if more is withdrawn, there will be penalty and a smaller future income.

A: False: Employer is not obliged to contribute

B: False: Employer contribution is not tax deductible. It’s taxable to the employee

C: True: GTFSA is not locked in and can be withdrawn or converted to own TFSA

D: False: GTFSA is not locked in. LIRA/LIRRSP is for Pension Funds (Locked In)

83 A A is false: An agent has 14 days, not 30 days, to report PEFP for deposits $100,000+. The others are true.

84 C Proof of medical insurability is not requested and riders are optional, not required

85 B Bond funds invest in bonds which are debt investments that pay a steady interest, and has a maturity in which the investor receives the purchase value of the bond back.

86 B The objective is for education of the child, thus RESP would be the recommendation.

87 A Only 5 years of cash flow is needed, thus only term annuity is required.

A (incorrect) Designing and establishing group plans is responsibility of the sponsor

88 B

B (correct) The agent is there to guide the creation and annual review of the plan

C (incorrect) Management and administration is responsibility of the administrator

In this situation, Diane left the company before 2 years (18 months), thus not completing the vesting period, which makes her only eligible to take her own contributions back. Jack left the company after 2 years (24 months), completing the vesting period which makes him eligible to receive the employer portion of the contributions.

89 C

A (incorrect) Diane has not completed the 2 years vesting

B (incorrect) First statement for Jack is correct, Dianne cannot get the DPSP funds, because DPSP is a non-contributory plan - employer only contributions, which she cannot get as she did not pass 2 years

C (correct) First statement is correct, and Diane can only get her own contributions

D (incorrect)

90 A

Annuities can be used as a stop-gap for early retirees until pension begins. Jane can purchase immediate annuity Term for 5 years using part of attractive package upon accepting early retirement while waiting for Retirement Pension to kick in at age 65.

91 D FINTRAC action is not required Registered investments

92 A A is false. B, C, D are true.

93 A

For this calculation, there are 2 things you will need to find:

>> TAX before split / transfer and >> TAX after split / transfer

First, let’s find the tax BEFORE transfer.

Jackie: 1,200 income x 35% rate = 420

Dom: 350 income x 20% rate = 70

Total = 420 + 70 = $490 tax before transfer

Since the $400 income will transfer to Dom from Jackie, Dom’s income is 350 + 400 = 750, while Jackie’s income is 1200 - 400 = 800. The new tax rate would be 32% for Jackie, 25% for Dom.

Now let’s find the tax AFTER transfer.

Jackie: 800 income x 32% = 256

Dom: 750 income x 25% = 187.50

Total = 256 + 187.50 = $443.50 tax after transfer

490 - 443.50 = $46.50 tax saved

Prescribed annuity is a non-registered annuity, which only the interest is taxable.

94 C

95 D

$300/mo interest x 12 = $3,600 taxable income.

For short term, we would need low volatility investment (low risk). Since they are looking for a 6 month term, we would need something liquid.

A Canada Premium bonds are not liquid, B ETF’s are too risky, C Seg Funds may have volatility, D is low risk and is liquid thus fits the situation.

96 B Shareholders and their close relatives may not join the DPSP

In a Registered Annuity, similar to RRSP, all income received is taxable.

97 D

98 B

$1,500/mo x 12 = $18,000 taxable income.

There are two statements which determine a client’s financial position:

Net Worth Statement – this is a balance sheet which outlines the assets and measures it against the liabilities (debts) Cash Flow Statement – this is used to determine how the income (inflow) balances against the expenditures (outflow) on a periodic basis

In this situation, the assets and liabilities are already stated as indicated the person has investments and debt, however it is missing the person’s income and expenses, which are elements of the cash flow statement

99 B It is possible to delay OAS payments, in which the income would increase by .6% per month of delay.

If the delay was 1 year (12 months), the increase will be 0.6% x 12 months = 7.2% increase

$1,200 + 7.2% = $1,286/mo

If the delay was 5 years (60 months) the increase will be 0.6% x 60 months = 36% increase

$1,200 + 36% = $1,632/mo

Note: While it is possible to take CPP retirement pension early (as early as 60) with a decrease of .6% per month decrease, this is not possible for OAS.

Note: CPP retirement pension increases by .7% per month delay, OAS pension increase is .6% per month delay

100 A

Tax before income transfer:

Lily: $1000 x 25% = $250

Sherman: $400 x 15% = $60

Total tax = $310

They will transfer $250 income from Lily to Sherman.

Lily’s new income is $750, Sherman’s new income is $650

Lily’s new tax rate is 20%, Sherman’s new tax rate is 18%

Tax after income transfer:

Lily: $750 x 20% = $150

Sherman: $650 x 18% = $117

Total tax = $267

Difference: $310 – $267 = $43

Winding up a Pension Plan

The value of the pension plan is held in trust for the members, and not accessible by the sponsor

Learning Notes:

An employer (sponsor) may choose to end or wind up its pension plan.

101 C

Reasons for a sponsor winding up a pension plan

• Sale of business to a new owner that does not offer a pension plan

• Business downsizing or closing or going bankrupt

• All / most members are not employed with the sponsor

The sponsor will need to file the necessary forms with the provincial pension regulator.

The value of the pension plan is held in trust for the members, and not accessible by the sponsor.

75% guarantee would cost less compared to 100% guarantee

Government short term bonds are classified as money market, thus is less expensive to manage

102 A

103 A

Fixed income funds and high yield bond funds are of have slightly higher volatility compared to money market and government bonds, thus would be more expensive to manage.

Market risk is when asset price is influenced by supply and demand. Precious metal is a traded commodity and is subject to supply and demand, hence subject to market risk

Industry risk is the risk a certain industry could face due to certain events, but not likely that the event will affect the entire market. Example: Investing in Pharmaceutical company funds

Default risk is the risk when debt issuers are unable to meet payments. Example: Investing in corporate bonds

Inflation risk is the risk when inflation devalues the fund faster than the fund growth. Example: Investing in money market funds or certain GIC’s

Spousal RRSP – 2 year rule

104 C

105 B

A person may contribute to the spouse’s Spousal RRSP, however if any withdrawals are made within the next 2 calendar years, the amount of withdrawal (only the contributed amount) will be added to the contributor spouse’s taxable income for the year of the withdrawal.

In this scenario, the withdrawal is made in 2022. Therefore, the contributions from 2020 and 2021 (up to 2 calendar years prior) would be taxable (not including growth).

Spousal RRSP

While the maximum age limit to have an RRSP is 71, if a person has a spouse below 71, he/she may still contribute to the spousal RRSP and claim tax deduction as contributor. When that spouse turns 71, then the RRSP is matured by the end of the year

106 A

107 B

A is true, management fees for a GRRSP are usually lower than an individual RRSP

B is false, death benefits depend on the amount of accumulated funds

C is false, Contributions by the employer are taxable as income to the employee

D is false, GRRSP generally does not permit purchase of individual securities like stocks

Old Age Security

Delaying OAS payment would result in an increase of 0.6% per month delay from 65th birthday

Solution:

Estimated OAS at age 65 = $615

If she retires one year later = 12 months x 0.6% = 7.2% increase

7.2% x $615 = $44.28 increase

New OAS = $615 + $44.28 = $659.28

Registered Pension Plans – Death Benefit

For Pension Funds (Pension plans / Locked in retirement account), the spouse would, by default, receive the benefits if the planholder dies.

108 A

Exception:

If the spouse signs a spousal waiver form or pre-deceases the planholder, the beneficiary would receive the benefit

Tax Preferred Investments

The following investment income result in less tax (tax-preferred)

• Dividends

• Capital gains

109 D

110 D

Interest and foreign income, as well as withdrawal from registered investments (RRSP and pensions) are taxed fully.

Stocks are capital investments that are taxed at a rate lower than interest. Stocks may also generate dividends, which have a tax advantage compared to interest.

Registered GICs are fully taxable.

Bond and Income funds generate interest that are fully taxable

Impaired Annuity

In case the annuitant is diagnosed of a condition which would shorten life expectance (e.g. Terminal illness), an impaired annuity may be purchased. These annuities cost significantly less and could have higher annuity income payout.

111 B B is False

Major shareholders and their close relatives are not eligible to participate in a Deferred Profit Sharing Plan (DPSP)

Other choices are True

112 C Withdrawals from registered plans (RRSP, RRIF, DPSP, Pensions) are taxable as income

RRSP and RRIF are plans designated for retirement

TFSA is not designated for retirement

113 A

114 C

RESP is designed for education savings

RDSP is designed for saving plan for a person with disability

Industry risk is the risk a certain industry could face due to certain events, but not likely that the event will affect the entire market. Example: Investing in Pharmaceutical company funds

Market risk is when asset price is influenced by supply and demand. Example: Investing in stocks, real estate, and particular commodities

Default risk is the risk when debt issuers are unable to meet payments. Example: Investing in corporate bonds

Inflation risk is the risk when inflation devalues the fund faster than the fund growth. Example: Investing in money market funds or certain GIC’s

115 A If the individual has the ability to set aside money and is willing, then the person can invest.

Three types of returns for all investments:

• Positive return – investment is earning profit

116 A

117 A

• Neutral return – investment is not earning nor losing

• Negative return – investment is losing capital

Speculation literally means guessing – this type of investing strategy is akin to “timing the market”, which is high opportunity but high risk of losing capital. This is true at least to the “speculative investor”.

Other choices’ explanations

B – Taxation is a general concern whether the investment is guaranteed or speculative

C – Not all investments have guaranteed returns, many investments have risk of losing capital

D – Some investments like GIC’s and bonds have maturity dates, when the investor could get their principal back.

Learning notes:

Some investments are guaranteed or conservative (low volatility, low opportunity). Some investments are speculative or aggressive (high volatility, high opportunity).

Some investments may be in between to create a moderate, balanced risk and opportunity.

118 D

119 A

120 C

All of these choices contain one of each in the general categories of equities (stocks); fixed income (bond); cash (money market instruments)

Liquidity refers to the capability of easily and quickly converting an investment to cash, without losing value. Primary example of a liquid investment is a savings account – it is quick and easy to withdraw the funds without penalty. An example of what is a liquid investment would be Real Estate – it is a lengthy process which involves lots of procedures, and in some cases, a property may sit in the market for many days to weeks and months.

Jerick requires $46,000 per year

If he was to take his pension now, he would meet the 85 factor (30 years of service + 62 years old = 92, which is more than enough for 85)

Pension entitlement (DBPP) = Earnings x Rate x Years of service

Pension entitlement (DBPP) = $71,000 x 1.75% x 30

Pension entitlement (DBPP) = $37,275 / yr

Jerick’s CPP retirement benefit is $9,000 / yr

$37,275 / yr DBPP benefit + $9,000 / yr CPP benefit = $46,275 / yr retirement income

This is enough to satisfy the need of $46,000 / yr

Learning notes:

The # Factor is stated in the pension which determines if a person is eligible for the full pension benefit, if the age and number of years of service combined meets the # factor.

Defined Benefit Pension plans are based on a formula given by the pension document, which generally takes the earnings, multiplies it by a rate and the number of years of service, in order to get the pension entitlement amount.

Pension entitlement (DBPP) = Earnings x Rate x Years of service

Time Value of Money is described as the effect of time over invested money, as well as anything compounding such as loan interest and inflation. This may be solved by one of these formulae:

FV = PV ÷ (1+rate)number of years

PV = FV x (1+rate)number of years

121 D

Other choices’ explanations:

A – This explains inflation

B – This is an application of TVM, a good answer but not the best.

C – This is true but does not explain TVM

122 B

Since both Lyndon and Gina have passed away, these would be going to the estate.

Note:

If non-registered, calculate capital gains which is 50% taxable. Roll-over is possible to the surviving spouse (but in this case, the spouse also died)

If registered, the entire amount is 100% taxable

For Lyndon:

Non Registered IVIC

Capital Gain = $340,000 FMV - $200,000 ACB = $140,000

$140,000 Capital Gain x 50% inclusion rate = $70,000 taxable

Registered Mutual Fund

$140,000 FMV x 100% taxable = $140,000 taxable

Business shares (non-registered)

Capital gain = $250,000 FMV - $50,000 ACB = $200,000

$200,000 Capital Gain x 50% inclusion rate = $100,000 taxable

Principal residence

Exempt from capital gains tax = $0 taxable

TOTAL TAXABLE INCOME FOR LYNDON = $310,000

For Gina:

Collection of dolls (non-registered)

Capital Gain = $160,000 FMV - $50,000 ACB = $110,000

$110,000 Capital Gain x 50% Inclusion Rate = $55,000 Taxable

Registered GIC

$310,000 FMV x 100% taxable = $310,000 taxable

Stocks (in Tax Free Savings Account)

TFSA is tax free = $0 taxable

Principal residence

Exempt from capital gains tax = $0 taxable

TOTAL TAXABLE INCOME FOR LYNDON = $365,000

123 A

124 A

Since the couple has a stable budget, they may want to start considering saving for children’s education in a RESP, in order to take advantage of government grants. RESP contributions may be flexible (depending on the financial institution), and possibly very low starting capital is needed.

Borrowing would not be necessary. “Bad debt” (borrowing to purchase things that do not increase in value) is not sound financial advice.

Deferred sales load or back-end load is best for long term investment and postponing load till maturity will allow client’s fund to grow without diminishing the capital.

Sell Marian’s collections for $450,000 to pay off her credit card debt for those paintings and keep pace with their mortgage payments and they will be fine. Credit card interest rates of 19% will just bring them down to bigger accumulating debts.

Other choices’ explanations:

125 B

A – The cottage has a big mortgage balance remaining, so the equity is small. Lenders would not agree to provide an equity line of credit. Also, even if they could, an equity line of credit involves risk if the real estate market declines and the lender recalls the loan. The couple is already in a vulnerable position and has some existing assets aside from real estate.

C is false – this is not sound advice. Saving and waiting will only let the interest accumulate.

D - While it is possible to provide this advice, this will not be the primary solution to their debt problem

RRSP and RRIF funds may rollover tax-deferred if beneficiary is spouse, or financially dependent child / grandchild. They are considered Qualified Beneficiaries.

Additional Learning:

126 C

127 D

A is false. The beneficiaries are Qualified Beneficiaries. Only if the beneficiary is not a Qualified Beneficiary, then the estate of the deceased RRSP / RRIF planholder would be taxed for that amount, then that beneficiary does not pay tax (because it is taxable to the estate of the deceased)

B could be true, but not the best answer. Note that For RRSP / RRIF Rollovers, “tax-deferred” is a more accurate term than “tax-free”

D is false. RRSP and RRIF funds may rollover tax-deferred if beneficiary is spouse, or financially dependent child / grandchild. They are considered Qualified Beneficiaries. This would be true if the child is not disabled and dependent on the parents.

RRSP and RRIF funds may rollover tax-deferred if beneficiary is spouse, or financially dependent child / grandchild. They are considered Qualified Beneficiaries. However the son is not dependent and not disabled, which makes the son not a qualified beneficiary. Therefore if the beneficiary is not a Qualified Beneficiary, then the estate of the deceased RRSP / RRIF planholder would be taxed for that portion, then that beneficiary does not pay tax (because it is taxable to the estate of the deceased).

The spouse Janet is a Qualified Beneficiary, so she will enjoy tax-deferral for her portion, so there will not be any immediate tax consequences.

Additional Learning:

A is false. The spouse is a Qualified Beneficiaries, so there will be tax deferral on the benefit for the spouse. For the benefit amount for the son (who is not a Qualified Beneficiary because he is not financially dependent), the estate of the deceased RRSP / RRIF planholder would be taxed for that amount, then the son does not pay tax (because it is taxable to the estate of the deceased)

B and C are false. RRSP and RRIF funds may rollover tax-deferred if beneficiary is spouse, or financially dependent child / grandchild. They are considered Qualified Beneficiaries. While the spouse is a qualified beneficiary, the son is not financially dependent, so there is no roll-over for the son. Note that For RRSP / RRIF Rollovers, “tax-deferred” is a more accurate term than “tax-free”

Felix needs an annuity to support himself and the spouse but at the same time try to get the highest possible monthly income from the annuity. Therefore we need to reduce the cost.

Having a higher survivor benefit will cost more, leading to a lower monthly annuity income Having a guarantee (guaranteed period or guaranteed capital) will cost more, leading to a lower monthly annuity income.

A and B are incorrect: Since the children are already independent, only Felix and the spouse needs the annuity income, therefore a joint and last survivor annuity will be sufficient (payout until the last spouse dies). Thus a guaranteed period is not needed. Having a guarantee (guaranteed period or guaranteed capital) will cost more, leading to a lower monthly annuity income.

C is incorrect: Having a higher survivor benefit will cost more, leading to a lower monthly annuity income.

Therefore D is the correct answer because the joint and last survivor annuity will payout until the last spouse dies. A guaranteed period is not needed because the children are independent and no other benefit is needed when Felix and the spouse passes away.

129 A

130 C

Deferred Annuities are annuities which start payout sometime in the future, as opposed to immediate annuities. Depending on the contract, deferred annuities may allow early redemption. However in this scenario, the contract allows early redemption after 2 years, but it has only been 20 months (not yet 2 years), hence Jackson cannot access these funds at this time.

Deferred Annuities are annuities which start payout sometime in the future, as opposed to immediate annuities. Depending on the contract, deferred annuities may allow early redemption. In this scenario, the contract allows early redemption after 2 years, and it has been 24 months, hence Jackson can access these funds.

There will be a market value adjustment for the withdrawal as stipulated in the contract. Market value adjustment (MVA) is a penalty which factors in the differential between the contract interest rate and the prevailing rate, as well as how much time left on the term.

The since the contract term (10 years) is not yet over, the remaining funds will grow at the contract interest rate (3%) for the remainder of the time (10 years – 24 months = 216 months)

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