CIC, Workbook Ch 2

When comparing the three common business structures, which of the following statements is incorrect? a) If a sole proprietor suffers a serious disability, the business enterprise could potentially cease operations. b) If a partner becomes disabled, the disabled partner may continue to receive distributions from the partnership under the partnership agreement. c) Upon the death of a shareholder of a corporation, the shares become part of the deceased's estate. d) Under a partnership buy-sell agreement, the usual arrangement is the "cost of replacement" method.

3.(d) is incorrect. Under a partnership buy-sell agreement, the usual arrangement is the criss-cross method.

List THREE ways Critical Illness insurance differs from life and disability coverage.

(b) Differences include the following: [1] life insurance death benefit is payable to beneficiaries whereas CII is payable directly to the insured. [2] disability insurance is based on the insured's ability to work, CII is not. [3] CII is not based on the severity of the condition, unlike disability insurance which considers whether the insured is "totally disabled".

22. True or false - If a universal life insurance policyowner takes out a policy loan and uses the funds for investments, the interest paid on the loan is tax deductible.

22. True

23. Which of the following best describes a life insurance policy rider? a) An option added to an existing policy. b) A policy that pays a dividend to its owner. c) A second insurance policy. d) A policy on which no future premiums are required.

23. (a)

24. True or false - With a disability waiver of premium rider, the insured has to be disabled a minimum of three to six weeks (depending on the policy) before the insurer will actually waive the premium.

24. False. Insurers usually waive the premium payments after the insured has been disabled for three to six months.

25. Which of the following is not a policy rider? a) Accidental death and dismemberment b) Guaranteed insurability benefit c) Right of survivorship d) Disability income benefit

25. (c)

26. Which of the following is not an example of an accelerated death benefit rider? a) Long-term care benefit b) Dread disease benefit c) Reduced paid-up benefit d) Terminal illness benefit

26. (c)

27. Rescission rights are best defined as: a) The right of the insurer to cancel a contract because of a material misrepresentation made by the insured. b) The right of the policyowner to reinstate a lapsed policy. c) The right of the insurer to adjust the insurance coverage to the correct age of the insured. d) The right of the policyowner to repudiate a policy within 10 days of receiving it.

27. (d)

28. A(n) _______ clause states that the insurer is not required to pay the death benefit if death occurs within the first two years of the life insurance policy.

28. suicide

29. Which of the following statements regarding standard life insurance policy provisions is incorrect? a) The incontestable clause gives the insurer a two-year time limit to void a life insurance policy, if it is discovered that the applicant made a material misrepresentation. b) Under the suicide clause, no death benefit will be paid if the life insured commits suicide within two years of the policy issue date. c) The reinstatement clause states that the policyowner can apply to reinstate a lapsed policy within two years of its date of lapse. d) Insurers offer preferred premiums to applicants who have not smoked cigarettes within the last 10 years.

29. (d) Non-smoker rates apply to those who have not smoked cigarettes in the last 12 months.

36 Within the first two years of the policy, the insurer can rescind the policy if the applicant made a material misrepresentation

Incontestability

36 Insurance where the business is the beneficiary

Key person insurance

_ _ _ _ _ _addresses the risk of dying too soon

Life insurance

_ _ _ _ _ _ pays a monthly benefit if insured cannot perform two or more of the activities of daily living.

Long term care insurance

30. Mike Taylor understated his age on his life insurance application. Three years later, the insurer discovered that Mike had falsely stated his age. The insurer could then: a) Cancel the policy because Mike lied about his age. b) Decrease the coverage to reflect Mike's correct age. c) Do nothing since the misstatement of Mike's age was discovered beyond the first two years of the policy. d) Cancel the policy and refund the premium.

30. (b) At any time, if the insurer discovers that a life insured's age is misstated, it has the right to adjust the coverage according to the correct age.

31. Which of the following statements about warranties and representations is incorrect? a) A statement made by a party to a contract can be treated as a warranty or as a representation. b) A representation, when found not to be true, will invalidate a contract. c) A representation is a statement that is substantially true. d) Statements made on an application for life insurance are considered to be representations, and not warranties.

31. (b) A warranty is a statement that, when considered and found not to be literally true, will invalidate the contract.

32. A policyowner can select a _______ beneficiary who will be entitled to the death benefit proceeds if the primary beneficiary predeceases the life insured.

32. contingent

20. List the THREE unbundled pricing factors around which universal life insurance is designed.

20. The unbundling factors consist of: [1] mortality charges [2] investment earnings [3] expenses

21. Name FOUR ways the cash value component of a universal life insurance policy can be invested by a policyowner.

21. Investment alternatives for the policyowner of a UL policy include: [1] a basic fixed interest account [2] a general fund investment to which current rates of interest are credited [3] an index fund investment [4] a segregated fund investment [5] a mutual fund based investment

10. Sue Carter had a 10-year $100,000 term insurance policy that matured on November 1, 2008. How much will she receive in benefits from this policy? a) 0 b) $100,000 c) $100,000 plus accrued interest d) $100,000 plus the cash surrender value

10. (a) The coverage terminated on November 01, 2008 with no benefit payable to Sue Carter, this being a term life insurance policy.

11. What is the maximum age that term insurance can stay in force? a) 55 b) 65 c) 75 d) 100

11. (d)

12. Which of the following would be the most appropriate use for decreasing term insurance? a) A buy-sell agreement b) A secured line of credit c) A mortgage d) Last expenses

12. (c) As the amount owed on the mortgage decreases (with each payment made), the term insurance coverage gets reduced as well.

13. What is the key difference between permanent and term insurance? a) The latter provides coverage for the whole of life with a level payment for coverage. b) The latter is more suitable for people who take up hazardous work. c) The former provides coverage for the whole of life with a level payment for coverage. d) The former does not cover funeral expenses.

13. (c)

14. True or false The annual mortality charge for permanent life insurance policies is based on the net amount of insurance vs. term insurance where the charge is based on the full amount of coverage.

14. True

15. Which of the following statements relating to whole life insurance is incorrect? a) The grace period for late payment of premiums is usually 30 days after the premium due date. b) Non-participating policies have no guarantee as to the amount of dividends paid until they are declared. c) Policy dividends are considered a refund of premiums to the policyowner. d) The owner of a participating life insurance policy will generally pay a higher premium than the owner of a non-participating policy for the same amount of coverage.

15. (b) Non-participating policies do not pay any dividends. Only participating policyholders have the opportunity to receive dividends.

16. Which provision in a permanent life insurance policy will allow a policyowner to elect to have a smaller fully paid-up amount of coverage without having to pay any further premiums? a) Premium reduction option b) Premium offset policy c) Reduced paid up option d) Automatic premium loan

16. (c) The reduced paid-up option provides for a paid-up life insurance policy for an amount of coverage that the current cash value will fund.

17. Explain why the grace period is a valuable feature of an insurance policy.

17. The grace period will ensure that the policy will not "lapse" immediately should the insured fail to pay the premium when due. The insured will have 30 days of grace beyond the premium due date to pay the overdue premium and keep the policy in force.

18. Name THREE non-forfeiture options that may be available on a permanent life insurance policy.

18. Non-forfeiture provisions include the following: [1] simply cash in the policy for the amount of the cash surrender value and terminate the policy [2] automatic premium loan provision [3] reduced paid up option [4] extended term insurance

19. Which of the following is not a dividend option on a participating life insurance policy? a) Premium reduction b) Additional term insurance c) Additional company stock d) Paid-up additions

19. (c) Dividends can be received by participating policyholders in several ways including: [1] being taken in cash [2] used to offset the premium [3] left on deposit to accumulate interest [4] used to purchase additional term insurance [5] used to purchase paid-up additions

33. Which of the following statements regarding beneficiaries is incorrect? a) A revocable beneficiary can only be changed by a policyowner with the consent of that beneficiary. b) Revised provincial insurance acts led to the discontinuation of the use of the preferred class of beneficiaries for policies issued after June 30, 1962. c) A beneficiary designation made in 2009 which requires the consent of the beneficiary to change it is an irrevocable beneficiary designation. d) The preferred beneficiary class includes adopted children as well as children of adopted children.

33. (a) An irrevocable beneficiary designation can be changed by the policyowner only with the written permission of that beneficiary.

34. Under an absolute assignment, the policyowner transfers all rights, title and interest in the contract to the _______.

34. assignee

35. Canada Revenue Agency introduced a number of changes to the taxation of life insurance polices for contracts issued after December 1, 1982. For post-December 1, 1982 policies, the adjusted cost base became _____________ and the tax liability became ___________.

35. smaller; larger. Changes applicable to life insurance policies (post December 1, 1982) resulted in a smaller adjusted cost base, an increased policy gain and, therefore, a larger tax liability.

________ protects a business from the negative impact, mostly financial, of the death or disability of a highly valued employee who is integral to the survival and success of the business. Also, a __________ agreement between two or more individuals who share ownership of a private corporation can be designed so that in the event of death or disability of a shareholder, the surviving shareholders would be required to purchase all the shares of the deceased or disabled person at a specified price.

4. key person insurance; buy-sell

At death, any capital property that an individual owns is deemed to be disposed of for income tax purposes at its fair market value (FMV). For any property whose FMV exceeds the original cost, the excess amount must be reported as capital gain income, 50% of which is taxable. The executor of an estate must ensure that all taxes owing on the income, assets and capital property of the deceased have been satisfied before the property can be delivered, free and clear, to the beneficiary. 6. a) True or false - The Income Tax Act makes both the power of attorney and the beneficiary "jointly and severally liable" for any unpaid income tax owing on assets transferred to the beneficiary under the terms of the will. ________ 6. b) True or false - Upon the death of a shareholder of a private corporation, the book value of his/her shares less their adjusted cost base becomes a capital gain to be reported in the shareholder's final tax return. ________

6.(a) The statement is false as both the executor and the beneficiary are "jointly and severally liable." The power of attorney's role ceases at death. (b) The statement is false. The capital gain on the final tax return is equal to the fair market value of the deceased's shares less the adjusted cost base.

7. The right of _______is the right to extend a term life insurance policy for an additional number of years without evidence of insurability.

7. Renewability

8. True or false - There are no provisions included in a term life insurance policy that allow the policyowner to discontinue premium payments beyond the grace period without the coverage lapsing.

8. True

9. Which of the following statements is incorrect regarding renewable and convertible features of term insurance? a) The insurer will charge a higher premium for these options. b) Both features allow the policyowner to renew or convert the policy without evidence of insurability. c) Insurers restrict the age at which these options can be exercised. d) The policyowner must provide evidence of insurability with the renewable feature but not with the convertible.

9. (d) Neither requires evidence of insurability.

ABC Precision Tools has been growing rapidly over the past seven years. Hari, the CEO, has seen his business grow from 30 employees working a single shift to over 120 employees operating 3 shifts per day. For the past six weeks, his chief mechanic, Li, has been recovering from knee surgery and, without him present, mechanical problems are taking longer to diagnose and fix. When Li returns, Hari plans on implementing a training program for all of the mechanics, but he realizes that if something should happen to Li, the loss could be catastrophic. Similarly, Hari also feels there are some people in the front office who are just as valuable to the company. He is becoming more aware of the risks of their unexpected disability or death. He plans to leave his business to his children, but both are not even in high school yet. This problem with Li makes Hari also think of what would happen if he himself became disabled. 5. a) As what form of business is ABC Precision Tools most likely operating? 5. b) Recommend FOUR types of insurance that Hari should consider.

ABC Precision Tools has been growing rapidly over the past seven years. Hari, the CEO, has seen his business grow from 30 employees working a single shift to over 120 employees operating 3 shifts per day. For the past six weeks, his chief mechanic, Li, has been recovering from knee surgery and, without him present, mechanical problems are taking longer to diagnose and fix. When Li returns, Hari plans on implementing a training program for all of the mechanics, but he realizes that if something should happen to Li, the loss could be catastrophic. Similarly, Hari also feels there are some people in the front office who are just as valuable to the company. He is becoming more aware of the risks of their unexpected disability or death. He plans to leave his business to his children, but both are not even in high school yet. This problem with Li makes Hari also think of what would happen if he himself became disabled. 5. (a) Hari is most likely a 100% owner of the business and ABC Precision Tools has been incorporated. (b) Hari should look at key person life insurance for his chief mechanic and some people in the front office. He should consider this type of insurance as it provides cash to replace the services provided by a key individual in the business in the event of his or her death. He should also look at disability insurance for himself. As CEO, if he suffers a serious disability, disability insurance would offset a portion of lost income currently generated through the business. Hari should consider business continuation life insurance. Upon death, all of his assets and liabilities will pass to his estate. The executor may have to sell business assets at or below fair market value to satisfy creditors. This type of insurance is intended to ensure the survival of a business upon the owner's death. Hari should also think about getting business overhead expense insurance coverage which would help keep the business running and cover expenses such as payroll, benefits, rent and utilities (up to specified maximums) if Hari is unable to work because of total disability.

Critical Illness insurance and Long-Term Care insurance have recently been introduced in the marketplace. Describe both types of insurance.

Critical Illness insurance: if the insured is diagnosed with any of the critical illnesses covered by the policy and is still alive a specified period, e.g., 30 days, after the diagnosis, a lump sum benefit is paid to the insured. Long-Term Care insurance: pays a monthly benefit if the insured cannot perform two or more of the activities of daily living (i.e., bathing, eating, dressing, toileting, or moving around).

_ _ _ _ _ _ pays a lump sum benefit following diagnosis of a major illness, like cancer

Critical illness insurance

_ _ _ _ _ is bought with a single premium or multiple premiums to pay an income starting at a specified future date.

Deferred annuity

_ _ _ _ _ base coverage on the occupation classification of the applicant

Disability Income Plans

_ _ _ _ _ is bought with a single premium to pay an income commencing immediately

Immediate annuity

36 _____ keep the policy in force even after the policyowner stops paying the premium

Non-forfeiture provisions

36 ____ policy is fully paid and no future premiums are required

Paid-up insurance

36 This allows policyowners to participate in any surplus held by the insurer

Participating insurance

36 ____ an amount a policyowner can borrow from the insurer against the cash surrender value

Policy loan

36 A number of insurers have faced lawsuits from policyowners who purchased these types of policies

Premium offset policies

_ _ _ _ _ assist in paying for prescriptions not covered under provincial health care plans

Private insurance plans

36 These are statements in a contract that are considered to be substantially true

Representations

36 This is a clause added to a life insurance policy that will keep the policy in force if the premium payor dies or becomes disabled

Waiver of premium for payor benefit

36 This type of statement, if untrue, can invalidate a contract

Warranties