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Assessment >> Formal Assessment

Assessment: Risk Management and Estate Planning Web - Academic Partners Unit 3 Post-Assessment
(C117V13U3L0A25Q20)
Date Submitted: 05/28/2014 11:34:00 PM
Total Correct Answers: 18
Total Incorrect Answers: 2

Your Mark (total correct percentage): 90%

1 The aging of the Canadian population will strongly influence our economy. Social policies need to be
re-evaluated and insurance coverage needs to be properly addressed. Which of the following
statements regarding mortality and life expectancy statistics in Canada is FALSE?

Correct
The correct answer:Mortality rates are trending upwards for all age groups.
Your answer:Mortality rates are trending upwards for all age groups.
Solution:

Mortality rates are not trending upwards for all age groups.

(Concepts) The rate of mortality is the ratio of the number of deaths in a given group in a year's time to the total
number of individuals in that group. In Canada, mortality rates increase with age, but are trending downwards for
all age groups. This shows that people are living longer and that the average age for both women and men in
Canada continues to increase.

(Choice D is false.) So, mortality rates are not trending upwards for all age groups.

2 Sandy is a financial planner. She uses statistics to illustrate the importance of life insurance for her
clients. Which of the following statements on the rate of mortality of the Canadian population is
FALSE?

Correct
The correct answer:The total number of deaths per year among the Canadian population is decreasing.
Your answer:The total number of deaths per year among the Canadian population is decreasing.
Solution:

The total number of deaths per year among the Canadian population is not decreasing.

(Concepts) As an individual ages, his or her risk of death in a particular year increases. As the Canadian population
ages, there will be more deaths per year due to this increased risk of death.

(Choice C is false.) So, the total number of deaths per year is increasing, not decreasing, as the Canadian
population ages.

3 Victoria and Rafael are both in their late fifties. Victoria has a part-time retail job and Rafael is
currently employed as a carpenter and expects to get full CPP benefits when he retires. The couple
has only a small amount saved for retirement but they do own their own home. Rafael also does not
believe in any form of life insurance. They do not have any children and expect to rely on
government pensions once they reach the required age. If you were asked to evaluate their level of
risk with respect to Rafael's life, which of the following categories would you place them?

Correct
The correct answer:material
Your answer:material
Solution:

Their level of risk with respect to Rafael's life is material.

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Risk severity can be categorized as:

Critical: an occurrence would have very serious financial consequences, possibly leading to bankruptcy.
Material: an occurrence would have serious financial consequences, certainly resulting in a reduction in
standard of living.
Minor: an occurrence would have little financial consequence, other than some minor loss of income or
manageable expenses.
Insured: the risk has been transferred to an insurance company and insurance premiums are being paid.

Given this scenario, Rafael's premature death would have serious financial consequences on Victoria. Without the
protection of a life insurance policy or retirement savings, she would expect a serious reduction in her standard of
living as a result of Rafael's death, but because they own their own home and she would receive CPP survivor's
benefits in addition to her earnings, she should be able to avoid bankruptcy. So, their level of risk with respect to
Rafael's life is material.

4 Tyler and Suzie follow their financial planner's advice and implement some risk control strategies.
Which of the following strategies does not fall into this category?

Correct
The correct answer:Tyler and Suzie both purchase life insurance contracts.
Your answer:Tyler and Suzie both purchase life insurance contracts.
Solution:

A purchase by Tyler and Suzie of insurance contracts is not a risk control strategy.

Risk control strategies include risk reduction and risk avoidance. Risk financing strategies include risk retention
(living with the risk) and risk sharing, or insurance.

If Tyler and Suzie both purchase life insurance, this will be a form of risk sharing, which is a risk financing strategy,
not a risk control strategy.

5 Heather and Sean plan to retire in three years. They have contacted a financial planner to help them
plan their insurance needs during retirement. Even though income taxes are inevitable upon death,
they would like a policy that helps them at least minimize the impact of these taxes on their estate.
They own their home and cottage and have substantial savings in RRSPs that they plan to transfer
to a RRIF upon retirement. When determining the amount of life insurance that Heather and Sean
need during their retirement, their financial planner must do all of the following, EXCEPT:

Incorrect
The correct answer:note Sean's after-tax income.
Your answer:estimate the taxable capital gains in the year of death.
Solution:

When determining the amount of life insurance that Heather and Sean need during their retirement, their financial
planner does not need to note Sean's after-tax income.

(Concepts) In general, when people retire they should assess their financial and capital assets to determine their
exposure to tax liability upon death. Life insurance can be used to offset the taxes payable on these assets. In the
case of a retired couple with considerable assets, a life insurance needs analysis would estimate the taxable capital
gains in the year of death, as well as the amounts of RRSPs or RRIFs that must be taken into taxable income. By
calculating the present value of both the income taxes due upon death and the life insurance premiums, the planner
can determine whether or not insurance is a cost effective method of addressing the tax liability that arises upon
death.

If the retirement assets are enough to support the surviving spouse and the couple is near retirement, there is no
need to consider insurance to provide a replacement income.

(Choice D) Heather and Sean are close to retirement and they have considerable retirement assets. So, they will
not need insurance to provide a replacement income, and there is no need to consider Sean's after-tax income
during the insurance needs analysis.

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6 Derek is very selective about the type of insurance company with which he does business. He asks
his financial advisor to explain the difference between a stock life insurance company and a mutual
life insurance company. Which of the following statements is TRUE?

Correct
The correct answer:Both stock life and mutual life insurance companies can issue dividends on policies.
Your answer:Both stock life and mutual life insurance companies can issue dividends on policies.
Solution:

Both stock life and mutual life insurance companies can issue dividends on policies.

(Concepts) A stock life insurance company is a corporation that has share capital and two classes of directors. A
mutual life insurance company is owned by its policyholders and has one class of directors. Both stock life and
mutual life insurance companies can issue dividends on policies.

(Choice B is true.) So, both stock life and mutual life insurance companies can issue dividends on policies.

7 Trevor purchased an insurance policy on the life of his son, Thor. The policy is payable to Thor's
wife, Helena, upon Thor's death. This means that:

Correct
The correct answer:Thor is the life insured and Helena is the beneficiary.
Your answer:Thor is the life insured and Helena is the beneficiary.
Solution:

Thor is the life insured and Helena is the beneficiary.

(Concepts) The individual who purchases a life insurance policy is referred to as the policyholder. The individual
whose life the policy is purchased to cover is referred to as the life insured. The individual who will receive the
death benefit of the policy is referred to as the beneficiary.

(Choice D) Trevor purchased the policy on the life of his son, Thor, and the death benefit is payable to Helena. So,
Trevor is the policyholder, Thor is the life insured and Helena is the beneficiary.

8 It is May 22. Laverne is currently 41 years of age and has a term insurance policy with a policy year
starting July 1. She was born on July 15. Her insurance company uses attained age based on the
nearest birthday. What is Laverne's attained age according to the life insurance company?

Correct
The correct answer:42
Your answer:42
Solution:

Laverne's attained age is 42.

The attained age of the life insured at the time of issue or renewal of the policy is one factor that determines the
amount of the premium to be charged. The method of determining attained age can vary among insurers depending
on their administrative policy; however, it is based on one of three options:

the actual age of the life insured at the time of his or her last birthday
the actual age of the life insured at the time of his or her next birthday
the actual age of the life insured at the time of his or her nearest birthday

Laverne's policy has a policy year that starts on July 1 with attained age based on her nearest birthday. Her nearest
birthday is two weeks from the policy's renewal date when she will be 42.

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9 Augusto owns a term life insurance policy that he purchased 5-years ago. He has been out of the
country for some time and the policy has lapsed. If he applies for reinstatement of the policy, which
of the following is he not required to do?

Correct
The correct answer:Resubmit the initial application for insurability purposes.
Your answer:Resubmit the initial application for insurability purposes.
Solution:

Augusto is not required to resubmit the initial application for insurability purposes.

(Concepts) When a term policy lapses, the insured individual can apply for reinstatement of the policy, provided
that he or she applies within a reasonable period of time after the lapse, pays all of the premiums due plus interest
since the policy lapsed, and provides proof of insurability. Although the initial application would provide the
insurance company with vital information, they still require more recent proof of insurability based on medical and
other criteria.

(Choice C) Augusto owns a term life insurance policy, but he has been out of the country for so long that the policy
has lapsed. So, if Augusto applies for reinstatement of his policy, he is not required to resubmit the initial
application for insurability purposes.

10 Doug purchased a term life insurance policy that his financial advisor recommended. He decided to
read through the entire policy last weekend. Which of the following statements regarding the
provisions of a term life insurance policy is FALSE?

Correct
The correct answer:A policy must be in effect for a minimum of 12 months before any living benefits are paid.
Your answer:A policy must be in effect for a minimum of 12 months before any living benefits are paid.
Solution:

A policy must be in effect for a minimum of 2 years, not 12 months, before any living benefits are paid.

(Concepts) The living benefit is designed to help pay for any increases in living expenses for a terminally ill insured
person. Although, in most cases, no additional premium is charged for a living benefit, the policy must be in effect
for at least two years prior to making a claim for this benefit.

(Choice C is false.) So, a policy must be in effect for a minimum of 2 years, not 12 months, before any living
benefits are paid.

11 With mortgage rates at very low levels, Annahita and Richard have decided to pool their savings
and purchase a home. While negotiating the mortgage at the local bank, the loan officer mentions
the benefits of a mortgage insurance policy. Neither Richard nor Annahita currently have any life
insurance coverage. After discussing the pros and cons of this type of policy, they accept the plan.
Which of the following statements with respect to mortgage insurance is FALSE?

Correct
The correct answer:The insurance plan is portable.
Your answer:The insurance plan is portable.
Solution:

Annahita and Richard's mortgage insurance plan is not portable.

(Concepts) Mortgage insurance is non-portable, which means that it expires when the mortgage is terminated.
When an individual transfers his or her mortgage to another lender or if sells his or her home and takes out a new
mortgage, he or she needs to apply for a new mortgage insurance policy if he or she still require coverage.

(Choice C is false.) If Annahita and Richard transfer their mortgage to another lender or sell the home, they will
need to apply for a new policy if coverage is still required. So, Annahita and Richard's mortgage insurance plan is
not portable.

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12 Stan, Charlie, Harvey, and Chris each have a child life insurance rider on their life insurance
contracts. Which of the following children are not covered as a "child of the principal life insured"?

Correct
The correct answer:Stan's daughter, who is 10 days old.
Your answer:Stan's daughter, who is 10 days old.
Solution:

Stan's daughter is not covered as a child of the principal life insured.

(Concepts) A child of the principal life insured must be over 14 days, but less than 21 years of age or under the age
of 23, if attending an accredited educational institution, college, or university full-time.

(Choice A) Stan's daughter is only 10 days old. So, Stan's daughter is not covered as a child of the principal life
insured.

13 Danielle asks her financial advisor how insurance companies calculate their premiums. Which of the
following statements is FALSE?

Correct
The correct answer:As a result of anti-discrimination laws, insurance companies are not allowed to consider the
effect of gender on mortality rates when setting their insurance premiums.
Your answer:As a result of anti-discrimination laws, insurance companies are not allowed to consider the effect of
gender on mortality rates when setting their insurance premiums.
Solution:

Insurance companies are allowed to consider the effect of gender on mortality rates when setting their insurance
premiums.

(Concepts) The mortality cost is calculated as the death benefit multiplied by the probability of death in the year.
This probability depends on the age, gender, health, etc. of the insured, so the mortality cost also reflects these
factors.

(Choice B is false.) So, insurance companies are allowed to consider the effect of gender on mortality rates when
setting their insurance premiums.

14 Alquin is a client of yours whose term life insurance policy expires at the end of the month. He
would like to either renew his current policy or purchase a new one, but does not know the process
involved. Alquin works as an economist. He is in his early forties and is in excellent health. When he
purchased the policy, interest rates were approaching double digits. Which of the following
statements about the renewal of his policy is FALSE?

Correct
The correct answer:If he purchases a new policy with the same company, the suicide and incontestability periods
are waived.
Your answer:If he purchases a new policy with the same company, the suicide and incontestability periods are
waived.
Solution:

If Alquin purchases a new policy with the same company, the suicide and incontestability periods are not waived.

A policyowner may be able to purchase a new policy on the renewal date at a much lower premium than the
renewal rate specified in the original policy. The renewable feature is very important in ensuring continued coverage
against the risk of death. However, it affects the premiums because those who become uninsurable retain their
policies with a higher risk of making claims than other policyowners. The insurance company has to take this into
account in setting the premiums. So, the premiums are set at a higher rate than would be the case if all
policyowners had to be insurable upon renewal. In addition, the premium upon renewal may have been set 20
years earlier when mortality rates were different. As a result, an insurable individual may be able to purchase new
insurance at a much lower premium than the premium charged upon renewal of an existing policy. When a client
purchases a new policy, the suicide period and two-year incontestability period applies.

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15 Luigi works as a trader on the Toronto Stock Exchange. He is in his mid-forties, slightly overweight
and finds the job of trading penny-mining stocks increasingly stressful. His family also has a history
of heart problems. Consequently, he has decided to purchase a 10-year $100,000 term life
insurance policy. Which of the following statements, with respect to the calculation of the mortality
cost on Luigi's policy is FALSE?

Correct
The correct answer:The monthly premium that Luigi pays will increase in each year of the policy.
Your answer:The monthly premium that Luigi pays will increase in each year of the policy.
Solution:

The monthly premium that Luigi pays will not increase in each year of the policy.

(Concepts) A rated policy is designed for those individuals whom the insurance company deems as possessing
greater risk due to occupation or health. A higher monthly premium is charged on such a policy to reflect this risk.
In the case of term life policies, the premiums will only change at the end of the term of coverage to reflect an
increased probability of death at an older age.

(Choice D is false.) Luigi has purchased a 10-year term policy. Luigi's premiums will only change at the end of the
term of the coverage to reflect an increased probability of death at an older age. So, the monthly premium Luigi
pays will not increase in each year of the policy.

16 Tim is trying to choose between purchasing an individual life insurance contract or a contract
through the trade association to which he belongs. Which of the following statements concerning
group life insurance plans is FALSE?

Correct
The correct answer:The insurance company can cancel the master policy for the association, but it must make
provisions for continuing coverage of the insured individuals.
Your answer:The insurance company can cancel the master policy for the association, but it must make provisions
for continuing coverage of the insured individuals.
Solution:

The insurance company can cancel the master policy for the association and no provisions are required.

(Concepts) While the premium is attractive, there are limitations to group plans.

There is usually no guarantee of renewability and no guarantee as to the amount of premiums in future
years.
The master policy governing the plan may be cancelled by the insurance company without any provision for
continuing coverage after termination. An uninsurable individual may not be able to obtain other insurance
at reasonable rates.
The master policy may be revised through discussions between group representatives and the insurer
without the consent or consultation of members. This could result in lower coverage, higher rates, or both.
The life insured must maintain membership in the association or continue with the employer in order to
maintain coverage.

(Choice B is false.) So, the insurance company can cancel the master policy for the association and no provisions
are required.

17 Gideon decided to have his financial advisor review the whole life insurance policy that he is
considering for an investment. Some of the terms contained in the policy are not very clear and
Gideon does not have the inclination to read the policy himself. Which of the following statements
about his whole life insurance policy is FALSE?

Correct
The correct answer:Only non-participating policies pay dividends.
Your answer:Only non-participating policies pay dividends.
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Solution:

Non-participating policies do not pay dividends.

(Concepts) For a whole life policy, only participating policies pay dividends. However, these dividends represent
only a refund of premiums and not a share of the company's profits. The cash surrender value of a participating
policy includes a guaranteed portion and a variable amount. The cash surrender value of a non-participating policy
only includes a guaranteed, fix amount.

(Choice C is false.) Only participating whole life insurance policies pay dividends. So, non-participating policies do
not pay dividends.

18 Belinda pays a fixed monthly premium on her whole life insurance policy. The premiums are payable
for her entire lifetime. Which of the following types of whole life insurance does Belinda have?

Incorrect
The correct answer:a straight whole life policy
Your answer:an endowment policy
Solution:

Belinda has a straight whole life policy.

(Concepts) "Limited payment" and "endowment" life policies both have a premium payment period that is limited to
a specific number of years. With "vanishing premiums" policies, the dividends are supposed to eventually pay for
the premiums, so the premiums "vanish" after a certain period of time. In the case of a straight whole life policy,
the premiums are payable for the life of the insured.

(Choice C) Belinda pays a fixed monthly premium on her whole life insurance policy. The premiums are payable for
her entire lifetime. So, Belinda has a straight whole life policy.

19 One month, Stuart forgot to pay the premium of $56 on his whole life policy. After 30 days, the
insurance company deducted $56 from the cash surrender value (CSV) as a policy loan. What type
of provision did Stuart have on his policy?

Correct
The correct answer:automatic premium loan
Your answer:automatic premium loan
Solution:

Stuart has an automatic premium loan provision on his policy.

(Concepts) A guaranteed-issue policy requires no medical screening. Nonforfeiture values are benefits that, by law,
the insured does not forfeit if premiums are discontinued. A paid-up policy does not require the payment of
premiums. A policy with an automatic premium loan provision will deduct the cost of any missed premiums from the
CSV of the policy as a loan

(Choice A) Stuart's policy automatically deducted the cost of his missed premium from the CSV of his policy. So,
Stuart has an automatic premium loan provision on his policy.

20 Luigi would like to purchase a permanent life insurance policy but cannot decide between a whole
life and a Term-100 policy. Which of the following statements about a Term-100 policy is FALSE?

Correct
The correct answer:The premiums are higher than on a comparable whole life policy.
Your answer:The premiums are higher than on a comparable whole life policy.
Solution:

The premiums are not higher than on a comparable whole life policy.

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(Concepts) A Term-100 policy is a form of permanent insurance. Unlike whole life, a Term-100 policy usually does
not build up any cash value. Thus the premiums are lower than on a whole life policy. Furthermore, a Term-100
policy is non-participating, meaning that it does not pay dividends to the insured. When purchased on a joint life
basis, the benefits would likely go towards paying income taxes on registered plans or capital gains.

(Choice B is false.) A Term-100 policy usually does not build up any cash value, so its premiums tend to be lower
than a whole life policy. So, the premiums are not higher than on a comparable whole life policy.

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