CHAPTER 1

Louise is contemplating disability

insurance but finds the industry a bit
confusing. Which among the following
statements concerning disability
insurance is TRUE?

Correct
The correct answer: It is more probable that someone in their mid-twenties will suffer a
disability lasting three months or more before they are 65, than someone who is 60 years
old.
Your answer: It is more probable that someone in their mid-twenties will suffer a
disability lasting three months or more before they are 65, than someone who is 60 years
old.
Solution:

It is more probable that someone in their mid-twenties will suffer a disability lasting three
months or more before they are 65, than someone who is 60 years old. This makes sense
because for a younger person, there is more time before 65 during which he or she could
suffer an injury.

Company executives are usually considered in either the low, or lowest risk category to the
insurer. They may be considered high risk to the company itself since they are hard to
replace, but to the insurer their occupation contains few risks of injury. Disability amounts
are not received in one lump-sum, but in monthly payments. They are meant to replace
income lost due to a disability.

2 Monika works for Geological Capital

Corporation as a full-time surveyor.
She spends about seven months of
the year assessing new mining claims
in the Rockies for possible
investments. In which occupation
class would you place Monika?

Correct
The correct answer: Class 3.
Your answer: Class 3.
Solution:

You would place Monika in occupation Class 3.

(Concepts) Each insurance company has its own classification designations for the
occupation of an applicant. Class 3, or medium risk occupations, typically includes the
following:
  Surveyors, auctioneers, and manufacturers' agents employed in non-hazardous
occupations with some clerical duties, but not full time at a desk.
 Supervisors and superintendents with strictly supervisory duties, (e.g., most plant
superintendents, contractors, and inspectors).

(Choice B) As a professional surveyor, she has a relatively non-hazardous occupation and

would experience a medium level of risk in her travel and place of employment. So, you
would place Monika in occupation Class 3. 

3 In general, risk management

strategies are intended to protect
individuals from the risks associated
with their daily lives. As a financial
planner, there is a six-step risk
management process that can be used
to assess the risk of disability. Which
of the following statements regarding
the application of this process to the
risk of disability is FALSE?

Correct
The correct answer: If partial or total disability occurs, the primary amount at risk is the
client's before-tax income.
Your answer: If partial or total disability occurs, the primary amount at risk is the client's
before-tax income.
Solution:

If partial or total disability occurs, the primary amount at risk is the client's after-tax
income, not his before-tax income.

(Concepts) The six-step risk management process provides the planner with appropriate
information to identify the client's objectives (Step 2), assess the client's disability needs
(Step 3), identify strategies to meet those needs (Step 4), and help clients choose policies
that suit their financial needs (Step 5). The primary amount at risk, as identified during the
disability needs analysis, is the client's after-tax income.

(Choice C is false.) So, the primary amount at risk in the event of partial or total disability
is the client's after-tax income, not his before-tax income.

4 Ben earns $54,000 per year on which

he pays $16,000 in taxes. After
assessing his lifestyle expenditures,
net worth and other factors, he
realizes that he could face great
difficulty maintaining his standard of
 living if his after-tax income was
reduced at all. If he purchased
disability insurance, the benefits
would not be taxable. In the event of
a disability, which of the statements is
FALSE?

Correct
The correct answer: Ben's potential financial loss is his pre-tax income plus the pre-tax
cost of additional medical care.
Your answer: Ben's potential financial loss is his pre-tax income plus the pre-tax cost of
additional medical care.
Solution:

Ben's potential financial loss is not his pre-tax income plus the pre-tax cost of additional
medical care.

(Concepts) The additional expenses from non-Medicare covered medical and attendant
costs could push his total costs above his after-tax income. Any amount above this level
creates unacceptable financial difficulties. A client's potential financial loss in the event of a
disability is his after-tax income, plus the after-tax cost of any additional medical services
or equipment needed as a result of that disability.

(Choice D is false.) Because Ben would face great difficulty maintaining his standard of
living in the event of disability, he has the potential of suffering substantial loss and his
maximum acceptable loss is zero. His potential loss is his after-tax income plus the after-
tax cost of additional medical care. So, Ben's potential financial loss is not his pre-tax
income plus the pre-tax cost of additional medical care.

5 Other than the occupational

classification, there are other ways to
evaluate an individual's disability risk
category. Which of the following does
not correctly describe one of the risk
severity categories?

Correct
The correct answer: Risks of major severity can lead to a reduction in one's standard of
living.
Your answer: Risks of major severity can lead to a reduction in one's standard of living.
Solution:

Risks of material severity, not major severity, can lead to a reduction in one's standard of
living.
(Concepts) Risk severity can be categorized as:

 Critical: an occurrence that would have very serious financial consequences,

possibly leading to bankruptcy.
 Material: an occurrence that would have serious financial consequences, certainly
resulting in a reduction in standard of living.
 Minor: an occurrence that would have little financial consequence, other than some
minor loss of income or manageable expenses.

(Choice D) So, material risks, not major risks, are those risks that have the potential to
lead to a reduction in one's standard of living.

6 Roberto and Julia like to race

snowmobiles on the weekends. Their
financial advisor suggests some risk
control strategies as part of their risk
management plan. Which of the
following actions complies with this
advice?

Correct
The correct answer: Julia purchases a helmet and wears it when snowmobiling.
Your answer: Julia purchases a helmet and wears it when snowmobiling.
Solution:

Julia purchasing a helmet and wearing it while snowmobiling complies with this advice.

(Concepts) Risk management strategies can be subdivided into risk financing and risk
control strategies. Risk financing strategies include risk retention and risk sharing (i.e.,
insurance). Risk control strategies include risk reduction and risk avoidance.

(Choice C) The action of purchasing and wearing a helmet qualifies as risk reduction, so it
is a risk control strategy. The remaining choices are risk financing strategies. So, Julia
purchasing a helmet and wearing it while snowmobiling complies with the advice to adopt
some risk control strategies.

7 Tony and Sharon follow their financial

planner's advice and implement some
risk financing strategies. Which of the
following is an example of a risk
financing strategy?

Correct
The correct answer: purchasing a disability insurance contract  
Your answer: purchasing a disability insurance contract  
Solution:

Purchasing a disability insurance contract is an example of a risk financing strategy.

(Concepts) Risk financing strategies include risk sharing and risk retention. Risk sharing
generally refers to purchasing insurance. Purchasing an insurance contract is a form of risk
sharing. Risk control strategies include risk reduction and risk avoidance.

(Choice B) So, purchasing a disability insurance contract is an example of a risk financing

strategy.

8 Aaron is 17 years old. He attends high

school full-time and starts university
full-time next year. His father works
and his mother is on a CPP disability
pension. As the child of a CPP
disability pension recipient, Aaron
also receives a monthly benefit.
Assuming Aaron attends university
until the age of 26, when will Aaron's
benefits terminate?

Correct
The correct answer: when Aaron turns 25 years of age  
Your answer: when Aaron turns 25 years of age  
Solution:

Aaron's benefits will terminate when Aaron turns 25 years of age.

(Concepts) The child of a CPP disability recipient continues to receive benefits until he
turns 25 years old, as long as he is in full-time attendance at an educational institution.
Otherwise, benefits terminate at age 18. Marital status is irrelevant.

(Choice D) Aaron is 17 years old. The question assumes that Aaron will be attending
university until the age of 26. So, Aaron's benefits will terminate when Aaron turns 25
years of age.

9 Conrad works as a floor supervisor at

a major Canadian newspaper. During
the summer, he received a severe
concussion and dislocated his
shoulder after falling into a printing
press. He immediately filed for
Workers' Compensation and currently
 receives 75% of his salary at the time
of the accident. Since he has yet to
return to work, he is considering
applying for CPP and EI benefits. He is
about to prepare his income tax
return. Which of the following
statements is TRUE? 

Correct
The correct answer: Workers' compensation benefits are not taxable.
Your answer: Workers' compensation benefits are not taxable.
Solution:

Workers' Compensation benefits are not taxable.

(Concepts) Of the three benefits listed, only Workers' Compensation benefits are not
taxable for income tax purposes. However, not everyone receives the maximum benefit.

(Choice B is true.) So, Workers' Compensation benefits are not taxable.

10 Martha, Albert, Ken, and Karen

purchased disability insurance
contracts through the Indian Feather
College alumni association two years
ago. Their contracts are standard with
no additional clauses. They each
placed claims in January of this year.
Which of the four claims is most likely
to be accepted by the insurer?

Correct
The correct answer: Albert's claim, resulting from injuries sustained when a plate glass
window fell on him as he was walking down the sidewalk.
Your answer: Albert's claim, resulting from injuries sustained when a plate glass window
fell on him as he was walking down the sidewalk.
Solution:

Albert's claim is most likely to be accepted by the insurer.

(Concepts) Most standard disability insurance policies exclude several sicknesses or causes
of accidents, such as:

 injuries or sickness arising from pregnancy

 injuries resulting from risky activities, such as flying an airplane or parachuting

Also, if an individual who applies for insurance has knowledge of an existing medical
company with which he contracts.

20 One of your clients would like some

information on various aspects of
disability insurance. He has realized
that, with his occupation and age, this
type of insurance will provide a
degree of financial protection for him
and his family. Which of the following
statements with respect to disability
insurance is FALSE?

Correct
The correct answer: Individual plans offer the most extensive coverage at the lowest
overall cost.
Your answer: Individual plans offer the most extensive coverage at the lowest overall
cost.
Solution:

Individual plans offer the most extensive coverage but not at the lowest overall cost.

(Concepts) Individual plans are those available directly from an insurance company.
Although they provide individuals with the most extensive coverage, these plans are also
the most costly. In contrast, group plans offer less extensive coverage, but at a lower
overall cost.

(Choice C is false.) So, individual plans offer the most extensive coverage, but not at the
lowest overall cost.

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   the U.S. by Financial Planning Standards Board Ltd. (FPSB). Financial Planning    
Standards Council is the marks licensing authority for the CFP marks in Canada,
through agreement with FPSB.

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CP6 (8455240) - 10/24/2020 5:37:14 PM

CHAPTER 2
The NEXT 6 questions are based on
the following information.

Marni and Oscar Meyer are in their

early fifties and live in Halifax. Marni
works part-time for a local publishing
company and is not covered by her
employer's group health plan. Oscar
works for a consulting company that
offers limited medical and dental
insurance coverage. They have a
twenty-one year old son, Joey, who
lives and goes to school in Vancouver.
They try to visit Joey at least two or
three times a year for at least a week
at a time. The Meyers are also
planning a three-month trip to Nepal
for later this year.

During spring break last year, Joey

and his girlfriend, Gigi, stayed with
the Meyers in Halifax. Gigi is a U.S.
citizen and a resident of Seattle. One
day, Gigi slipped on a rock in the
Meyer's backyard and broke her ankle.
She required X-rays, an examination
by a doctor, painkillers, and an
overnight stay in the hospital.

Now that they plan to travel out-of-

province more often, Marni and Oscar
are concerned about the adequacy of
their health insurance coverage.
Although they plan to spend only
about two or three weeks a year
travelling within Canada, they are
unsure about the type of health
coverage they should have for the trip
to Nepal. They would like to purchase
an extended travel insurance plan that
offers all of the options.

Both Marni and Oscar are in excellent

health. Unfortunately, Marni has
developed a repetitive strain injury
over the last few years. The weekly
 physiotherapy sessions she goes to
seem to help. However, she is hopeful
that a new treatment available only in
Maine will cure her aching wrist
permanently.

The Meyers like to visit Joey in early

April to take advantage of Vancouver's
early spring. Although they have yet
to require any emergency medical
services while in British Columbia,
they are unsure about their health
insurance coverage in the event a
problem arises. Which of the following
statements is TRUE?

Correct
The correct answer: The Meyers are covered by the health care plan of Nova Scotia, their
province of residence, for all necessary medical services, up to their province's limits.
Your answer: The Meyers are covered by the health care plan of Nova Scotia, their
province of residence, for all necessary medical services, up to their province's limits.
Solution:

The Meyers are covered by the health care plan of Nova Scotia, their province of residence,
for all necessary medical services, up to their province's limits.

(Concepts) According to the criteria of portability under the Canada Health Act, health
coverage must be portable from one province to another. Insured health services must be
made available to Canadian residents temporarily out of their own province.

(Choice B is true.) The Meyers are covered by the health care plan of Nova Scotia, their
province of residence, for all necessary medical services. They will pay no fees except for
treatment that is over and above the services covered by their provincial health care plan.
As visitors to Vancouver, they do not need to apply for residency status to receive coverage
for basic medical services because they are still covered by the Nova Scotia system. So,
the Meyers are covered by the health care plan of Nova Scotia, their province of residence,
for all necessary medical services up to their province's limits.

2 After Gigi broke her ankle and was

released from hospital, she
immediately flew back home to Seattle
at her own expense. Which of the
following statements about Gigi's
situation is TRUE?

Correct
The correct answer: Unless Gigi purchased travel insurance before leaving Seattle, she
will be required to personally pay for the full cost of her hospital stay.
Your answer: Unless Gigi purchased travel insurance before leaving Seattle, she will be
required to personally pay for the full cost of her hospital stay.
Solution:

Unless Gigi purchased travel insurance before leaving Seattle, she will be required to
personally pay for the full cost of her hospital stay.

(Concepts) Residence in a particular province is a prerequisite for obtaining benefits.

Tourists and visitors from outside of Canada must pay the full cost of any medical or
hospital services.

(Choice D is true.) Because Gigi is a non-resident and is not financially dependent on the
Meyers, she must pay the full cost of all hospital services rendered. Marni cannot claim the
cost of Gigi's hospital stay as an eligible medical expense, because Gigi is not her
dependant. So, unless Gigi purchased travel insurance before leaving Seattle she will be
required to personally pay for the full cost of her hospital stay.

3 Marni is having difficulty selecting an

extended health care plan that best
suits their situation. Which of the
following statements about extended
health plans is FALSE?

Correct
The correct answer: Travel health coverage is designed to reimburse Canadian residents
who decide to seek basic medical services in the U.S.
Your answer: Travel health coverage is designed to reimburse Canadian residents who
decide to seek basic medical services in the U.S.
Solution:

Travel health coverage is not designed to reimburse Canadian residents who decide to seek
basic medical services in the U.S.

(Concepts) Travel health coverage is designed to provide emergency medical coverage

while travelling outside the province of residence. Basic medical services are covered under
provincial health care plans. Travel insurance plans cover medical emergencies only, not
the costs associated with basic or elective medical services.

(Choice C is false.) So, travel health coverage is not designed to reimburse Canadian
residents who decide to seek basic medical services in the U.S.

4 The Meyers are thinking about buying

some additional private health
insurance. They would like a plan that
 best suits their family's needs. Which
of the following statements about
private health insurance plans is
TRUE?

Correct
The correct answer: The Meyers may be able to use a private health insurance plan to
pay the additional costs of Marni's physiotherapy sessions not covered by the province.
Your answer: The Meyers may be able to use a private health insurance plan to pay the
additional costs of Marni's physiotherapy sessions not covered by the province.
Solution:

The Meyers may be able to use a private health insurance plan to pay the additional costs
of Marni's physiotherapy sessions not covered by the province.

(Concepts) Extended health plans (i.e., private insurance plans) are not permitted to insure
benefits covered by the provincial programs. Extended health benefit plans are designed to
cover expenses that are in excess of provincial coverage, or expenses that are not covered
under the provincial plan, such as physiotherapists or other registered specialists. Private
health plans are widely available to those individuals who would like to extend their current
medical coverage.

(Choice C is true.) So, the Meyers may be able to use a private health insurance plan to
pay the additional costs of Marni's physiotherapy sessions not covered by the province.

5 Marni would like your advice on the

benefits of purchasing emergency
travel health insurance. Which of the
following statements about
emergency travel insurance is FALSE?

Correct
The correct answer: Marni's provincial health plan will cover 100% of any costs incurred
for emergency medical services while in Nepal.
Your answer: Marni's provincial health plan will cover 100% of any costs incurred for
emergency medical services while in Nepal.
Solution:

Marni's provincial health plan will not cover 100% of any costs incurred for emergency
medical services while in Nepal.

(Concepts) Provincial health plans place a limit or ceiling on the amount of coverage
provided to Canadian residents who require emergency health services while travelling
outside of Canada. In such a case, an individual would be responsible for any charges in
excess of the limit imposed by the province. However, she may be able to purchase
coverage for this excess through extended health care insurance or travel health care
insurance.
(Choice C is false.) Marni's provincial health care plan places a limit or ceiling on the
amount of coverage provided to her if she should require emergency health services while
in Nepal. So, Marni's provincial health plan will not cover 100% of any costs incurred for
emergency medical services while in Nepal.

6 Which of the following costs are not

likely to be covered by the Meyers'
travel insurance plan?

Correct
The correct answer: The cost of a revolutionary laser eye treatment available in Nepal.
Your answer: The cost of a revolutionary laser eye treatment available in Nepal.
Solution:

Coverage for the total cost of a revolutionary laser eye treatment available in Nepal is not
likely to be included in the Meyers' travel insurance plan.

(Concepts) Benefits offered by different travel insurance plans vary widely. However, all
travel health insurance plans cover medical emergencies only, not elective services.

(Choice A) The laser eye treatment would be considered an elective medical service if it
was not essential at the time of Marni's emergency. So, coverage for the total cost of a
revolutionary laser eye treatment available in Nepal is not likely to be included in the
Meyers' travel insurance plan.

7 The NEXT 8 questions are based on

the following information.

Marty Kronby retired last month after

working at the Bex Metals plant for 30
years. His wife, Connie, retired three
months ago. The day after his
retirement, Marty and Connie flew to
Florida for the winter. They intend to
maintain their residence in Canada
and to spend 3 months of each year in
Florida.

Marty and Connie have one adult son,

Ivor, who lives in a different province
to them. Ivor is married and has two
small children. They want to visit Ivor
and their grandchildren as often as
possible and may eventually sell their
home and purchase a new one near
Ivor and his family.

Soon after arriving in Florida, Connie

and Marty made some new friends,
Leo and Doris. Leo and Doris are both
American citizens and resident in
Florida. Connie and Marty invite Leo
and Doris to visit them in Canada the
following summer.

While Connie and Marty were in

Florida, Ivor paid them a visit. Ivor did
not purchase any private health
insurance prior to his trip. During his
stay, Ivor suffered a blow to the head
and was admitted to a semi-private
hospital ward in Florida. During his
stay in hospital, he was administered
painkillers. While in the hospital, he
consulted a plastic surgeon about
elective surgery that was not related
to his head injury. When he returned
to his Canadian province of residence,
he visited his own doctor who
prescribed more painkillers.

Now that they plan to travel out-of-

province and out-of-country more,
Marty and Connie are concerned about
adequate health care coverage. Their
friends have told them horror stories
about their experiences with hospital
bills in the United States. They are
also concerned about adequate
coverage should they visit Ivor and
the grandchildren for an extended
period. They have collected a pile of
pamphlets on different health care
plans offered by different providers,
but cannot decide what they need.
Part of the problem is that they do not
know what is covered and what is not
covered by their provincial health care
plan.

Connie is in excellent health. Marty

suffered a heart condition three years
ago. He has had no recurrences of the
problem. They pay premiums for
family coverage under their provincial
 health care plan. When Connie was
employed, her employer deducted $23
from her bimonthly paycheque as
premiums for the group extended
health insurance plan. Marty's
employer paid 50% of the premiums
for his group health care plan; Marty
paid the other 50%. Marty and Connie
cease to be covered by their
employers' plans three months after
their respective retirements, but have
arranged to convert Marty's plan to an
individual extended health plan for
family coverage with the same
provider.

You are Marty and Connie’s financial

advisor; they have asked you for some
advice.

Connie and Marty contacted their

doctors prior to travelling to Florida
for the winter. Although they were not
required to visit their doctors to
purchase health insurance or to renew
their passports, they wanted to make
sure they were in good health for their
own peace of mind. Which of the
following expenses are not covered
under their provincial health care
plan?

Correct
The correct answer: Advice given to Marty over the phone by his heart specialist.
Your answer: Advice given to Marty over the phone by his heart specialist.
Solution:

Advice given to Marty over the phone by his heart specialist is not covered under their
provincial health care plan.

(Concepts) Advice administered over the phone by a physician is not covered by provincial
health care plans. Routine medical examinations and X-rays are covered, provided they are
not for the purpose of qualifying for insurance, employment, visas, etc. The cost of a
hospital bed is covered for standard ward accommodation only.

(Choice B) So, advice given to Marty over the phone by his heart specialist is not covered
under their provincial health care plan.
 8 Connie wants to live close to Ivor and
her grandchildren. If Connie and Marty
sell their home and take up residence
near their son, which of the following
statements would be FALSE?

Correct
The correct answer: Connie and Marty would automatically be covered by the health care
plan of their new province three months after they take up residence there.
Your answer: Connie and Marty would automatically be covered by the health care plan of
their new province three months after they take up residence there.
Solution:

Connie and Marty would not automatically be covered by the health care plan of their new
province three months after they take up residence there.

(Concepts) All of the provinces require new residents to register for medical coverage
under the provincial health care plan. Registration under a hospital care plan may be
automatic in provinces that have separate medical and hospital care plans. The waiting
period varies from province to province, but the maximum waiting period is three months.

(Choice A is false.) So, Connie and Marty would not automatically be covered by the health
care plan of their new province three months after they take up residence there. Instead,
they would have to register for coverage.

9 Leo and Doris visited Marty and

Connie in Canada. Doris cut her hand
badly while chopping vegetables in
the kitchen and was taken to the local
hospital by Marty. Which of the
following expenses incurred by Doris
are covered by Connie's provincial
health care plan?

Correct
The correct answer: None of the above.
Your answer: None of the above.
Solution:

None of the above expenses are covered by Connie's provincial health care plan.

(Concepts) Provincial health care plans do not cover the cost of medical or hospital services
provided to visitors to the country.

(Choice D) Leo and Doris are not residents of Canada. So, none of the above expenses are
covered by Connie's provincial health care plan.

10 Marty is having difficulty

understanding how the different
health insurance plans work together.
Which of the following statements is
FALSE?

Correct
The correct answer: Some people opt out of provincial plans and elect to purchase
private health insurance instead.
Your answer: Some people opt out of provincial plans and elect to purchase private health
insurance instead.
Solution:

Some people do not opt out of provincial plans and elect to purchase private health
insurance instead.

(Concepts) Private health insurance plans are not permitted to insure benefits covered by
the provincial plans. They are only permitted to insure services over and above those
provided by the provincial plans. Extended health care insurance plans typically offer out-
of-country coverage for limited periods.

(Choice B is false.) Marty is not permitted to opt out of his provincial plan. However, he can
purchase private health insurance to insure against things that are not covered by his
provincial plan. So, some people do not opt out of provincial plans and elect to purchase
private health insurance instead.

11 Marty is bewildered by the array of

brochures and information on
different health insurance plans.
Which of the following statements is
TRUE?

Correct
The correct answer: The primary purpose of a critical care provision included in some
health care insurance plans is to provide a lump-sum cash payment.
Your answer: The primary purpose of a critical care provision included in some health
care insurance plans is to provide a lump-sum cash payment.
Solution:

The primary purpose of a critical care provision included in some health care insurance
plans is to provide a lump-sum cash payment.
(Concepts) A critical illness or critical care plan included in some health care insurance
plans is to provide a lump-sum cash payment to help an insured person cope with a severe
critical illness or condition. Provincial health care plans provide coverage to Canadian
residents while they are in their home province, out-of-province and out-of-country, but
only up to provincial limits. Extended health insurance plans provide coverage that is over
and above that provided by provincial health care plans, whether those medical expenses
are incurred in the province of residence, out-of-province or out-of-country. All travel
health insurance plans are designed to cover unforeseen medical emergencies only; they
do not cover elective procedures. There are limits to the amounts and types of services
covered, and the maximum period of absence.

(Choice D is true.) So, it is true that the primary purpose of a critical care provision
included in some health care insurance plans is to provide a lump-sum cash payment.

12 Connie wants to make sure that

someone competent is able to care for
Marty in the event that he has a
recurrence of his heart condition while
he is in Florida for three months. She
wants to purchase private health
insurance that offers all options. In
this situation, which of the following
options is not provided by any private
health insurance?

Correct
The correct answer: Coverage for the total cost of any anesthesia Marty may require.
Your answer: Coverage for the total cost of any anesthesia Marty may require.
Solution:

Coverage for the total cost of any anesthesia Marty may require is not covered by private
health insurance.

(Concepts) Private health care insurance purchased by individuals can only provide
coverage for services over and above those provided by their provincial plan. All provincial
plans cover the cost of an anesthesia administered in the event of a medical emergency, up
to provincial limits. However, a comprehensive private health insurance plan would cover
any anesthesia costs over and above the provincial limit, as well as the cost of returning
home, transporting a relative, or hiring an attendant on the advice of a physician.

(Choice C) Because Connie and Marty will only be absent from their home province for
three months, they will still be covered by their provincial health care plan to the extent the
plan pays for a service. All provincial plans cover the cost of anesthesia administered in the
event of a medical emergency, up to certain limits. So, the total cost of any anesthesia
Marty may require would not be covered by any private health insurance plan.
 13 After Ivor returned from his visit to
Marty and Connie in Florida, he
presented the provincial health care
authority in his province of residence
with itemized receipts for all of his
medical expenses. For which of the
following expenses would Ivor be
reimbursed?

Correct
The correct answer: All or a portion of the cost of the painkillers given to him while in
hospital in Florida.
Your answer: All or a portion of the cost of the painkillers given to him while in hospital in
Florida.
Solution:

All or a portion of the cost of the painkillers given to him while in hospital in Florida will be
reimbursed under his provincial health care plan.

(Concepts) All of the provincial health care plans cover the cost of drugs administered in a
hospital for a medical emergency to the extent such costs are covered by the plan. This
may be all or a portion of the actual cost of the drugs. Drugs prescribed to an outpatient
are not covered by provincial health plans. Out-of-country elective procedures are not
covered by provincial health care plans. In the case of an out-of-country medical
emergency, all of the provincial health care plans will cover the cost of a stay in a standard
hospital ward, up to provincial limits.

(Choice B) The drugs that Ivor received in Florida were prescribed to him while he was an
inpatient at the hospital, while the drugs that he received in Canada were prescribed when
he was an outpatient. So, all or a portion of the cost of the painkillers given to him while in
hospital in Florida will be reimbursed under his provincial health care plan.

14 Marty is completing his income tax

return. Which of the following items
cannot be included in Marty's list of
eligible medical expenses for the
federal tax credit?

Correct
The correct answer: The premiums he paid for his provincial health care plan.
Your answer: The premiums he paid for his provincial health care plan.
Solution:

The premiums Marty paid for his provincial health care plan cannot be included in Marty's
list of eligible medical expenses for the federal tax credit.

(Concepts) Premiums paid for government health insurance plans are not eligible for the
medical expenses federal tax credit. Premiums paid for extended health insurance or travel
health insurance can be claimed as an eligible medical expense, including premiums for
employer-sponsored group plans if the premiums are deducted from after-tax pay. Either
spouse can claim the medical expenses of the entire family on his or her return.

(Choice C) Marty can include as a medical expense the premiums he paid for his group
extended health insurance plan, the amount Connie's employer deducted from her
paycheque as premiums for the group extended health insurance plan, and the premiums
Connie paid for her emergency travel health insurance plan. So, only the premiums Marty
paid for his provincial health care plan cannot be included in Marty's list of eligible medical
expenses for the federal tax credit.

15 In respect to government health care,

which of the following is not one of
the five principles of the Canada
Health Act?

Correct
The correct answer: Accountability.
Your answer: Accountability.
Solution:

Accountability is not one of the five principles of the Canada Health Act.

(Concepts) The five principles arising from the Canada Health Act are public administration,
comprehensiveness, universality, accessibility, and portability.

(Choice C) So, accountability is not one of the five principles of the Canada Health Act.

16 Joel has many clients who are moving

between provinces this year. He is
reviewing the residency requirements
for the continuation of their health
care coverage. Which of the following
statements about residency
requirements and provincial health
care plans is TRUE?

Correct
The correct answer: To ensure a continuance in health coverage, Joel should advise any
of his clients who move to a new province to register immediately with the new province's
health care plan.
Your answer: To ensure a continuance in health coverage, Joel should advise any of his
clients who move to a new province to register immediately with the new province's health
care plan.
Solution:

To ensure a continuance in health coverage, Joel should advise any of his clients who move
to a new province to register immediately with the new province's health care plan.

(Concepts) In all provinces participating in the health care program, residence in that
particular province or territory is a prerequisite for obtaining benefits. Tourists and visitors
must pay the full cost of any medical or hospital services. When relocating between
provinces, the maximum waiting period for coverage for Canadian residents is three
months, not six months. People who move between provinces need to check whether they
are covered by the health care plan of the province from which they moved until they are
covered by the plan of their new province of residence. New arrivals to Canada usually
have a shorter waiting period for coverage than those moving between provinces.

(Choice D is true.) So, to ensure a continuance in health coverage, Joel should advise any
of his clients who move to a new province to register immediately with the new province's
health care plan.

17 Jackie wants to travel to New York for

a facelift by a famous plastic surgeon.
Which of the following is the most
suitable method of financing the
procedure?

Correct
The correct answer: Using her personal savings.
Your answer: Using her personal savings.
Solution:

Using her personal savings would be the most suitable method for Jackie to finance the
facelift.

(Concepts) Private health care insurance plans do not cover elective procedures. Provincial
health care plans may cover out-of-country medical procedures, but only if approval is
applied for in writing prior to the procedure, the procedure is necessary and it cannot be
obtained in Canada.

(Choice C) Jackie wants to have an elective procedure carried out by a surgeon outside of
Canada. This would not be covered by her provincial health care plan or private health
insurance. So, using her personal savings would be the most suitable method for Jackie to
finance the facelift.
 18 Misha is preparing his income tax
return. He wants to be able to claim
the medical expense tax credit. Which
of the following statements is TRUE?

Correct
The correct answer: Premiums paid to government health insurance plans are not eligible
for the federal medical expense tax credit.
Your answer: Premiums paid to government health insurance plans are not eligible for the
federal medical expense tax credit.
Solution:

Premiums paid to government health insurance plans are not eligible for the federal
medical expense tax credit.

(Concepts) Premiums paid to private health care plans can be claimed as eligible medical
expenses for the purpose of the medical expense tax credit. Only eligible medical expenses
that were paid, but not reimbursed by any health insurance plan, can be claimed for the
credit. Premiums paid by an employer on behalf of an employee are not considered a
taxable benefit to the employee.

(Choice B is true.) So, premiums paid to government health insurance plans are not eligible
for the federal medical expense tax credit.

19 Jed requires arthroscopic surgery on

his knee. Because of recent cutbacks
in medical services, his local hospital
does not offer the procedure Jed
requires. While the procedure is
available in another distant Canadian
town, he decided to travel to the U.S.
to have the surgery. Which of the
following statements about claiming
travel expenses for tax purposes are
TRUE?

Correct
The correct answer: Jed can only claim the costs of travel to the U.S. if the treatment is
not available elsewhere in Canada.
Your answer: Jed can only claim the costs of travel to the U.S. if the treatment is not
available elsewhere in Canada.
Solution:

Jed can only claim the costs of travel to the U.S. if the treatment is not available elsewhere
in Canada.

(Concepts) If medical treatment is not available locally, an individual may be able to claim
the cost of travelling to get the treatment somewhere else as an eligible medical expense,
provided he or she had to travel more than 40 kilometres. Also, if he or she had to travel
more than 80 kilometres, he or she can claim reasonable costs for meals and
accommodation. If medical treatment is available in Canada, an individual cannot claim the
cost of travelling out of the country to be treated. However, if the treatment is not
available in Canada, then the individual may claim the cost of travelling out of the country
to be treated as an eligible medical expense.

(Choice A is true.) The surgery that Jed needs is not available at the local hospital, but it is
available elsewhere in Canada. Jed can only claim the costs of travel to the U.S. if the
treatment is not available elsewhere in Canada.

20 Bruce is insured under a long-term

care insurance contract. Which of the
following conditions would entitle him
to claim benefits?

Correct
The correct answer: He frequently and seriously loses his memory.
Your answer: He frequently and seriously loses his memory.
Solution:

Bruce would be entitled to claim benefits under his long term care policy if he frequently
and seriously loses his memory.

(Concepts) Long-term care insurance benefits are usually payable in the case of cognitive
impairment (i.e., the inability to think, perceive, reason, or remember) or if the insured can
no longer perform any two of the six activities of daily living (i.e., bathing, eating, dressing,
toileting, continence or transferring positions of the body)

(Choice B) A serious loss of memory would be considered to be a cognitive impairment. So,

Bruce would be entitled to claim benefits under his long term care policy if he frequently
and seriously loses his memory.
CHAPTER 3

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.

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.

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.

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.

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.

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?

Incorrect
The correct answer: Only non-participating policies pay dividends.
Your answer: The insurance company will place restrictions on access to the accumulating
fund.
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?

Correct
The correct answer: a straight whole life policy  
Your answer: a straight whole life 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?

Incorrect
The correct answer: automatic premium loan  
Your answer: paid-up  
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?

Incorrect
The correct answer: The premiums are higher than on a comparable whole life policy.
Your answer: The policy does not build up as much cash value as a whole life policy.
Solution:

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

(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.

CHAPTER 4
Which one of the following
statements regarding Assuris
coverage is FALSE?

Incorrect
The correct answer: A side fund of a universal life (UL) policy with a value of $200,000,
would be covered up to $170,000.
Your answer: Monthly income benefits are covered up to $2,000 or 85% of the promised
benefits, whichever is greater.
Solution:

A side fund of a UL policy would receive a maximum of $100,000 accumulated value

coverage from Assuris.

2 When Rick finished university, he

 purchased a universal life insurance
policy with a death benefit of
$150,000. Today, he is married and has
one child. Which of the following
statements about universal life
insurance policies is TRUE?

Incorrect
The correct answer: Rick has the option of increasing the death benefit of his policy.
Your answer: Universal life plans are bundled policies because all of the elements of the
plan are tied to each other.
Solution:

Rick has the option of increasing the death benefit of his policy.

(Concepts) A universal life policy provides individuals with greater flexibility over
coverage, deposits, and investments compared with other types of insurance policies. A
policyowner can increase his or her coverage or add his or her spouse to the policy while
temporarily leaving the premium deposits at their current level. The policyowner also has
the option of choosing the weighting and types of investments within his or her account.
In this way, the policy provides the policyowner with a self-directed option over his or her
invested premiums.

Universal life policies do not bundle the cash and coverage elements of the plan, and thus
the premium and cash surrender values are not a function of the plan's initial face
amount. Instead, the policies are unbundled providing consumers with a more flexible
insurance option.

(Choice B) Rick owns a universal life policy. So, Rick has the option of increasing the death
benefit of his policy.

3 Mohamed owns an exempt universal

life insurance policy. His insurance
company allocates the extra amount of
cash deposits that exceed the amount
allowable for an exempt policy to a
side fund. Which of the following
statements about the side fund is
FALSE?

Correct
The correct answer: Income earned in the side fund is exempt from tax.
Your answer: Income earned in the side fund is exempt from tax.
Solution:
Income earned within the side fund is not exempt from tax.

Insurance companies have two options when allocating extra cash deposits or cash
accumulations that exceed the amount allowable under a tax-exempt universal policy. The
company can deposit the extra cash into a side fund, or refund the amount to the
policyowner. A side fund is external to the policy and is not incorporated into the death
benefit. As a result, the side fund does not reduce the net amount at risk. Deposits to the
side fund are not subject to premium tax, but income earned within the side fund is taxed
annually.

4 Michael wants to take out a loan from

his bank. He checks with his insurance
company to see if he can use the cash
surrender value of his whole life
insurance policy as collateral. Which of
the following statements is TRUE?

Incorrect
The correct answer: Michael's bank may require Michael to transfer legal right to the
benefits of the policy to the bank until the loan is repaid.
Your answer: Michael can use the cash surrender value in his policy as security, but only
for a policy loan from the life insurance company.
Solution:

Michael's bank may require Michael to transfer legal right to the benefits of the policy to
the bank until the loan is repaid.

(Concepts) A bank may require a loan applicant to assign or transfer legal right to the
benefits of the policy to the bank until the loan is repaid. A "policy loan" is a loan from the
issuing insurance company. While a policy loan is an option, the use of the policy's cash
surrender value as collateral is not restricted to the issuing insurance company. When a
policy loan is taken out, the insurance company sets the interest rates.

(Choice B is true.) In Michael's situation, he wants to use the policy as collateral for a bank
loan, so the bank will set the interest rate, and the bank may require Michael to assign
rights to the death benefit to the bank until the loan is repaid. If Michael dies before the
bank loan is fully repaid, the outstanding debt will be paid off from the death benefit, with
the excess going to the named beneficiaries.

5 Gavin leads a very hectic life as a

freelance photo-journalist. When he
purchased a whole life insurance
policy, Gavin made sure that the policy
 included a feature that allowed him to
miss a series of premiums as long as
he had a sufficient cash value available
in the policy. What type of premium
payment policy does Gavin have?

Incorrect
The correct answer: Premium holiday.
Your answer: Vanishing premium.
Solution:

Gavin has a premium holiday premium payment policy.

(Concepts) A whole life policy that includes a premium holiday feature allows the
policyholder to skip one or a series of premiums without penalty or added cost, provided
that he has a sufficient cash surrender value in the policy. If the skipped premiums are not
eventually made up, the premium holiday will lead to a reduced cash value and/or death
benefit in the future.

(Choice B) Gavin made sure that the policy included a feature that allowed him to miss a
series of premiums as long as he had a sufficient cash value available in the policy. So,
Gavin's policy has a premium holiday provision.

6 Duncan has a universal life insurance

policy that has both an exempt
accumulating fund and a non-exempt
side fund. Which of the following
options regarding the policy's
investments BEST describes what
Duncan's insurance company may
offer?

Incorrect
The correct answer: Duncan's insurer may offer all of the above options.
Your answer: Duncan may be able to choose among various interest paying savings
accounts offered by the insurance company.
Solution:

The insurer may offer all of these options to Duncan.

The investments included in the accumulating fund of an exempt policy often include daily
interest or T-bill savings accounts, guaranteed term deposits, and a variety of interest-
bearing linked accounts. The side fund can offer all of the same investments that the
exempt portion does - with the added element of segregated funds.

Duncan has a universal life policy that has both an exempt accumulating fund and a non-
exempt side fund. The insurer can offer a selection of interest-bearing investments and
segregated funds to Duncan.

7 Keith would like to purchase a

universal life insurance policy and
name his wife as beneficiary. He is
unsure which is the most appropriate
type of death benefit to choose and has
asked you for some advice on the
matter. When choosing an appropriate
death benefit option for Keith, you
should consider:

Correct
The correct answer: the capital needs of Keith's beneficiary.
Your answer: the capital needs of Keith's beneficiary.
Solution:

When choosing an appropriate death benefit option for Keith, you should consider the
capital needs of Keith's beneficiary.

The choice of the most appropriate death benefit option should be based on the following
considerations, in order of priority:

1. the beneficiary's capital needs in the event of the death of the life insured
2. the investment objectives of the policyowner
3. the policyowner's ability to pay premiums
4. the policyowner's personal preferences

So, when choosing an appropriate death benefit option for Keith, you should consider the
capital needs of Keith's beneficiary.

8 Bob has a universal life insurance

policy. Which of the following options
would NOT be available to him?

Correct
The correct answer: Bob can choose an exempt policy with a tax-exempt side fund.
Your answer: Bob can choose an exempt policy with a tax-exempt side fund.
Solution:

The side fund of an exempt policy is not tax-exempt. The income earned within the fund is
taxed annually.

The ultimate flexibility of universal life allows the policyowner to:

 change the death benefit

 change the life insured
 add additional lives insured
 pay the cost of insurance based upon yearly term or level term rates
 have a guaranteed or variable cost of insurance
 have an accumulating fund plus other accounts
 have a guaranteed or variable investment return on the accumulating fund and
other accounts
 have an exempt policy or non-exempt policy with a taxable account
 make any amount of contributions, as long as there is a minimum cash value

Some policies do not offer all of these options.

9 Becky's insurance agent tried to

explain segregated funds to her. Since
she was familiar with mutual funds, he
compared "seg" funds to mutual funds.
Which of the following statements is
FALSE?

Correct
The correct answer: Mutual fund companies and insurance companies must both issue a
prospectus on their funds.
Your answer: Mutual fund companies and insurance companies must both issue a
prospectus on their funds.
Solution:

Mutual fund companies must issue a prospectus on their funds while insurance companies
must issue a summary information folder.

(Concepts) Although seg funds are similar to mutual funds, they are regulated by the
ULICA, not the provincial securities acts. Accordingly, the life insurance companies do not
have to issue a prospectus. Rather, they are required to issue a Summary Information
Folder. Only insurance agents who are licensed and regulated under provincial legislation
are permitted to sell segregated funds. Because they are a creation of the Uniform Life
Insurance Companies Act, rather than the Provincial Securities Acts, segregated funds
must be issued in conjunction with a life insurance contract.

Segregated fund can flow through their capital losses to unitholders. Mutual funds must
carry-forward their net losses to apply against capital gains in future years.

(Choice B is false.) So, mutual fund companies must issue a prospectus on their funds
while insurance companies must issue a summary information folder.

10 Diego recently purchased a universal

life insurance policy. His insurance
agent also suggested he invest in one
of the company's segregated funds,
instead of a mutual fund. Which of the
following is not a feature of a
segregated fund?

Correct
The correct answer: Seg funds are at risk in the event of insolvency of the issuing
company.
Your answer: Seg funds are at risk in the event of insolvency of the issuing company.
Solution:

Seg funds are not at risk in the event of insolvency of the issuing company.

(Concepts) Segregated funds do not form part of the assets of the issuing life insurance
company, but are held in trust, so they are not at risk in the event of insolvency of the
issuing company. The seg fund operates as an inter vivos trust that flows taxable income
through to the unitholders. By designating a named beneficiary, the death benefit
proceeds bypass the probate process and the related fees and expenses. Under the
Uniform Life Insurance Companies Act, the insurance company must provide a guarantee
of principal, which requires that at least 75% of the net capital contributed to a segregated
fund must be returned to the unitholder, once the policy has been in effect for 10 years.

(Choice A) Segregated funds do not form part of the assets of the issuing life insurance
company. So, seg funds are not at risk in the event of insolvency of the issuing company.

11 Carmen is the single mother of two

children aged 16 years and 17 years.
She wants to purchase $200,000 in life
insurance to provide for the children in
the event she should die prematurely.
She discusses naming the children as
beneficiaries with her financial advisor.
Which of the following statements is
FALSE?

Incorrect
The correct answer: If she names both of the children as beneficiaries, the proceeds will
be paid directly to them.
Your answer: If the proceeds are paid into a testamentary trust for the children, the
children or trust will be taxed on the interest income earned on the proceeds.
Solution:

If Carmen names both of the children as beneficiaries, the proceeds will not be paid
directly to them.

(Concepts) If possible, it is better to name one or more individuals as beneficiaries of a life

insurance policy, instead of the estate. If the estate is named as the beneficiary, the
proceeds will be subject to probate and will also be available to the creditors of the estate.
However, children under the age of 18 years cannot receive the proceeds of life insurance
directly, instead, the proceeds must be held in a testamentary trust.

(Choice C is false.) Carmen's children are both under 18 years of age. So, if Carmen
names both of the children as beneficiaries, the proceeds will not be paid directly to them.

12 Life insurance policies can offer

individuals considerable income tax
advantages. Which of the following
statements about the taxation of life
insurance is FALSE?

Correct
The correct answer: There is a tax credit for the premiums paid.
Your answer: There is a tax credit for the premiums paid.
Solution:

There is no tax credit for the premiums paid on life insurance policies.

(Concepts) For income tax purposes, a policyowner does not receive a tax credit for the
premiums paid each year, but the death benefit is not taxable. In most cases, the
taxpayer cannot deduct the cost of the premiums for tax purposes. In the case of
permanent insurance, if the taxpayer disposes of the policy, the excess of the cash
surrender value over the adjusted cost basis is fully taxable income.

(Choice B is false.) So, there is no tax credit for the premiums paid on life insurance
policies. 

13 Ravi owns and operates a company

that manufactures slot machines for
casinos. The company relies on a
significant line of credit for its
operations. The bank required Ravi to
purchase a life insurance policy with a
 $1 million death benefit as collateral
for the loan. Which of the following is
not one of the conditions that must be
met in order for Ravi to be able to
deduct a portion of the premium?

Correct
The correct answer: The policy must be assigned to the borrower.
Your answer: The policy must be assigned to the borrower.
Solution:

In order for Ravi to use a certain amount of the premium as a tax deduction, the policy
must not be assigned to the borrower.

(Concepts) The Income Tax Act permits a tax deduction for insurance premiums when the
policy is used as collateral for a loan that will be used specifically to generate income from
a business or property, in which case the interest on the loan would be tax deductible. The
loan cannot be used to go on a vacation or buy home furnishings, for example. The policy
must be assigned to a "restricted" financial institution, which includes banks, trust
companies, credit unions, and insurance companies, as a requirement of the lender.

(Choice A) One of the conditions that must be met is the policy must be assigned to the
lender, not the borrower. So, Ravi does not have to assign the policy to the borrower in
order to be able to deduct a portion of the premium.

14 Samantha purchased an exempt whole

life policy last year. The first year net
cost of pure insurance was $280, she
paid total premiums of $2,100 and the
policy did not pay any dividends. Her
adjusted cost basis of the policy at the
end of the first policy year is:

Correct
The correct answer: $1,820.
Your answer: $1,820.
Solution:The adjusted cost basis of the policy at the end of the first policy year is $1,820.

(Concepts) The adjusted cost basis of a life insurance policy (ITA 148(9)) can be
calculated as:

 the premiums paid under the policy, less any dividends received; plus
 interest paid on a policy loan if it was not deductible in computing income; plus
 amounts included in income from a non-exempt policy subject to the income
accrual rules; minus
  the net cost of pure insurance (NCPI)

(Choice B) Samantha paid $2,100 in premiums, and her policy has an NCPI of $280. She
paid no interest on a policy loan and her policy is exempt. So, the adjusted cost basis of
Samantha's policy at the end of the first policy year is $1,820, calculated as (total
premiums paid - net cost of pure insurance) or ($2,100 - $280).

15 Heidi owns a whole life policy with a

cash surrender value of $36,000 and
an adjusted cost basis of $16,000. This
past year, she transferred the
ownership of the policy to her mother.
Which of the following statements is
TRUE?

Correct
The correct answer: Heidi must report taxable income in the amount of $20,000.
Your answer: Heidi must report taxable income in the amount of $20,000.
Solution:

Heidi must report taxable income in the amount of $20,000.

(Concepts) If the taxpayer disposes of an insurance policy to someone other than his
spouse, common-law partner or child, he is deemed to have received proceeds of
disposition in the amount of the cash surrender value. This CSV then becomes the ACB for
the recipient. The difference between these deemed proceeds and the adjusted cost basis
is considered to be fully taxable income for the transferor.

(Choice D) Heidi transferred a whole life policy with a CSV of $36,000 and an ACB of
$16,000 to her mother. Heidi is deemed to have received proceeds of disposition of
$36,000. Her mother's adjusted cost basis for the policy would be $36,000. So, for income
tax purposes, Heidi will report $20,000 in taxable income, calculated as (cash surrender
value - adjusted cost basis) or ($36,000 - $16,000).

16 Emily owns a whole life policy on her

mother's life. The policy has a cash
surrender value of $68,000 and an
adjusted cost basis of $42,000. In her
will, Emily leaves the policy to her
husband, Brad. If Emily dies, Brad may
choose to:

Correct
The correct answer: acquire the policy for $42,000 and have $0 in taxable income
included on Emily's final income tax return.
Your answer: acquire the policy for $42,000 and have $0 in taxable income included on
Emily's final income tax return.
Solution:

Brad may choose to acquire the policy for $42,000 and have $0 in taxable income included
on Emily's final income tax return.

(Concepts) According to the Income Tax Act, an individual can transfer a whole life policy
to her spouse in her will at its adjusted cost basis. The surviving spouse may alternately
elect to acquire the policy at its cash surrender value and have any resulting income
declared on her final return. This may be advantageous if the deceased spouse has unused
tax deductions or credits available on her final return. The surviving spouse should choose
whichever provides a more favourable tax treatment.

(Choice B) Emily and Brad are spouses. Emily is leaving a whole life policy to Brad in her
will, and the policy has an ACB of $42,000 and a CSV of $68,000. So, Brad has the option
of acquiring the policy for $42,000 and having $0 of taxable income included on Emily's
final tax return, calculated as (elected proceeds of disposition - Emily's adjusted cost
basis) or ($42,000 - $42,000).

17 Stanley recently started working as an

insurance agent. He sold his first policy
to Gladys, who purchased the policy to
insure the life of her son Ben, a world-
class sprinter. This is a:

Incorrect
The correct answer: third-party contract.  
Your answer: two-party contract.
Solution:

This is an example of a third-party contract.

(Concepts) A third-party life insurance contract is one where the insured (or owner)
insures the life of another person. The three parties are thus the insured, the life insured
and the insurer. For this type of policy, there must be an insurable interest at the time the
contract is signed. An insurable interest means that the insured will suffer a financial loss
or fail to make a financial gain in the event of the death of the life insured.

(Choice C) Gladys purchased the policy for the purpose of insuring the life of her son. The
three parties involved are the insurer, Ben (the life insured) and Gladys (the insured). So,
the policy is an example of a third-party contract. 
 18 Kinvara is 16 years old and very
mature for her age. She called her
father's life insurance agent to ask him
questions about life insurance. Which
of the following statements is FALSE?

Incorrect
The correct answer: As a named beneficiary of a life insurance contract owned by her
father, if he dies tomorrow, Kinvara can receive the death benefit directly.
Your answer: Kinvara can take out a life insurance contract on the life of her father.
Solution:

As a named beneficiary of a life insurance contract owned by her father, Kinvara cannot
receive the death benefit directly.

(Concepts) A person who is age 16 or over may apply for life insurance on her own life or
on the life of another person. By law, the minor has the same rights under the insurance
contract as someone who had reached the age of majority (18 or 19 years depending on
provincial laws). A minor who is at least 16 years old can take out whole life or term life
insurance on her own life or on the life of someone in whom she has an insurable interest,
(e.g., her father). However, a minor cannot receive the proceeds of a life insurance
contract directly until she reaches the age of majority, which is aged 18 or 19, depending
on the province.

(Choice B is false.) Kinvara is 16 years old, so she can take out whole life or term life
insurance on the life of her father. However, because she has not yet reached the age of
majority, she cannot receive the proceeds the contract directly. So, as a named
beneficiary of a life insurance contract owned by her father, Kinvara cannot receive the
death benefit directly.

19 After starting a family and going back

to work full-time, Jenny decided to
purchase a life insurance policy for
herself. Which of the following is not
one of Jenny's rights as the
policyowner?

Incorrect
The correct answer: The right to deduct the premiums due from any benefits payable.
Your answer: The right to designate and change the named beneficiary.
Solution:

The insurance company, not Jenny, has the right to deduct the premiums due from any
benefits payable.

(Concepts) Both the insurer and the policyowner (or insured), have certain rights in an
insurance contract. The policyowner has the right to:

 continue the insurance for the stated premium until the end of the stated term
 cancel the insurance or discontinue premium payments at any time
 reinstate the contract under certain conditions

One of the insurer's rights is the right to deduct the premiums due from any benefits
payable.

(Choice D) Jenny is the policyowner. So, the insurance company, not Jenny, has the right
to deduct the premiums due from any benefits payable.

20 Manuel took out a whole life policy that

named his son, Miguel as an
irrevocable beneficiary. Which of the
following does Manuel not require
Miguel's written consent for?

Incorrect
The correct answer: Allowing the policy to lapse.
Your answer: Assigning the policy.
Solution:

Manuel does not require Miguel's written consent to allow the policy to lapse.

(Concepts) When the beneficiary is designated irrevocably, the designation cannot be

changed without the written consent of the beneficiary. The insured requires the
beneficiary's written consent to assign and surrender the policy, or take out a policy loan.
However, the insured does not require the beneficiary's written consent to allow the policy
to lapse.

(Choice C) Manuel took out a whole life insurance policy that named his son, Miguel, as an
irrevocable beneficiary. Manuel requires Miguel's written consent to assign or surrender
the policy, or take out a policy loan. However, Manuel does not require Miguel's written
consent to allow the policy to lapse.
CHAPTER 5
1 Priscilla once had a negative experience with a property insurance
company and wants to make sure it does not happen again. Her financial
advisor reassures her about the credibility of insurance companies by
telling her about the insurance industry and its regulations. Which of the
following statements is FALSE?

Correct
The correct answer: The Property and Casualty Insurance Compensation Corporation is
an industry-operated fund that pays policy claims if a member insurance company goes
bankrupt. Payment is limited to $100,000.
Your answer: The Property and Casualty Insurance Compensation Corporation is an
industry-operated fund that pays policy claims if a member insurance company goes
bankrupt. Payment is limited to $100,000.
Solution:

The Property and Casualty Insurance Compensation Corporation is an industry-operated

fund that pays policy claims if a member insurance company goes bankrupt. Payment is
limited to $250,000, not $100,000.

(Concepts) There are over 200 insurance companies in Canada offering general insurance.
In 2003, these general insurers had registered sales of over $31.4 billion and controlled
assets in excess of $88.3 billion.

In Canada, the property and liability insurance business is regulated by both federal and
provincial governments. The federal Office of the Superintendent of Financial Institutions is
concerned primarily with the solvency and stability of insurance companies that are
regulated under federal statutes, such as the Insurance Companies Act.

The Property and Casualty Insurance Compensation Corporation (PACICC) is an industry-

operated fund that pays policy claims if a member insurance company goes bankrupt. It
will also pay back premiums if an insurance company becomes insolvent. The maximum
recovery from PACICC is $250,000 with respect to all unpaid claims for losses arising from
a single occurrence.

(Choice A is false.) So, the Property and Casualty Insurance Compensation Corporation is
an industry-operated fund which pays policy claims if a member insurance company goes
bankrupt. Payment is limited to $250,000, not $100,000.

2 Mark asks his financial advisor to explain what a deductible is and why it
is included in his insurance contract. Which of the following statements
is FALSE?

Correct
The correct answer: Deductibles keep insurance costs down by increasing the number of
small claims.
Your answer: Deductibles keep insurance costs down by increasing the number of small
claims.
Solution:

Deductibles keep insurance costs down by decreasing, not increasing, the number of small
claims.

(Concepts) High numbers of small claims raise the operating costs of insurance companies
and these costs are passed on to consumers. To keep costs down, most types of physical
damage property insurance policies have a deductible, which is a fixed amount of a claim
the insured must pay. Deductibles encourage insured individuals to be more careful with
their property and discourage frivolous claims.

(Choice B is false.) So, deductibles keep insurance costs down by decreasing the number
of small claims.

3 Chet bought a cottage on Georgian Bay last summer. He leaves a variety

of recreational items, including a sailboat and a Jeep, on the premises
for weekend use. He purchased a property insurance policy to protect
the cottage and his recreational items from theft or damage while he is
away. Which of the following is not covered by this property insurance?

Correct
The correct answer: His Jeep.
Your answer: His Jeep.
Solution:

The property insurance will not cover Chet's Jeep.

(Concepts) Personal property policies include coverage for dwellings, contents, valuables,
fine arts, outboard motors and boats, tourists' and travellers' effects and seasonal
property. Homeowner policies do not provide coverage for risks associated with
professional activities and automobiles.
A vehicle should be covered under a separate car insurance policy.
(Choice C) Chet has a property insurance policy on the cottage and its effects. However,
the property insurance will not cover Chet's Jeep.

4 Waylon purchased a small apartment building in a working class

neighbourhood. Much to his annoyance, Waylon is required to purchase
certain types of property insurance for the building. He decides to
purchase a basic fire insurance policy. One-year later, the building is hit
by a meteorite. Which of the following is not covered by Waylon's
insurance policy?

Correct
The correct answer: falling objects  
Your answer: falling objects  
Solution:

Falling objects are not covered by Waylon's insurance policy.

(Concepts) Insurance companies use a basic fire insurance policy as a starting point to
develop further coverage. Minimum coverage would include any damage from fire,
lightning, and specific types of explosions. Basic coverage does not include loss from
falling objects.

(Choice D) Waylon purchased a basic fire insurance policy. He would need to have
purchased an extended coverage endorsement to cover certain additional perils, such as
meteorites (falling objects). So, falling objects are not covered Waylon's insurance policy.

5 Mel and Tiffany have a homeowner's insurance policy that provides "all
risks" coverage on their house and "named perils" coverage on the
contents. Which type of homeowner's policy do they have?

Correct
The correct answer: Homeowner's Broad Form policy.
Your answer: Homeowner's Broad Form policy.
Solution:

Mel and Tiffany have a Homeowner's Broad Form policy.

(Concepts) In the case of named peril's coverage, all of the perils and forms of loss
covered are specifically listed. Any peril or form of loss that is not listed is not covered. In
the case of all risks coverage, all perils and forms of loss are assumed covered, according
to certain conditions, unless specifically listed as not covered.
The Homeowner's Broad Form policy has "all risks" coverage on the house and "named
perils" coverage on the contents. The Homeowner's Standard policy has "named perils" on
both house and contents. The Homeowner's Comprehensive Form policy has "all risks" on
both house and contents. They all contain a personal legal liability component.

(Choice A) Mel and Tiffany's homeowner's insurance policy that provides "all risks"
coverage on their house and "named perils" coverage on the contents. So, Mel and Tiffany
have a Homeowner's Broad Form policy.

6 The NEXT 7 questions are based on the following information.

Ingrid and Ivan Pracht purchased a house five years ago and took out a
typical broad form homeowner's policy with the CoverAll Insurance
Company. The policy provided all-risks coverage on the building and
named-perils coverage on personal contents on an actual cash value
basis.

Ivan owned an oil painting that had been in his family for three
generations. The painting was covered by an all-risks valued contract for
$25,000 with XYZ Insurance. Ivan added a rider to the household policy
with CoverAll Insurance covering the painting for $20,000. The painting
was recently appraised as having a value of $40,000.

Three years ago, Ingrid purchased an antique oak dresser for $1,000 and
at the same time added a rider to the household insurance policy to
provide coverage for the dresser. She recently saw a similar dresser in
similar condition in an antique store with a price tag of $2,000.

Last year, Ivan started his own business working from the basement of
the house. He had computer equipment and files that he used solely for
the business. He also had a library of fine books that he read solely for
pleasure. He did not purchase any additional insurance.

One evening, while Ingrid and Ivan were at a friend's house for dinner,
someone used a crowbar to force open a back window. They stole Ivan's
oil painting before starting a fire in the basement and escaping by the
basement window. The fire totally destroyed Ingrid's dresser and Ivan's
company files, computer equipment and personal library.

The fire also spread through a storage area into the adjacent garage,
destroying a motorized lawn mower and Ingrid's car. Ingrid's car
insurance had typical comprehensive coverage for specified perils with
the ProtectU Insurance Company. She had taken out the insurance policy
over the phone two days prior to the fire and had not yet paid the
premium or received the insurance contract.

CoverAll Insurance, XYZ Insurance and ProtectU Insurance are direct

insurance companies and no insurance brokers are involved.
 The Prachts had hired a woman, Edith, to clean their home one evening
per week and she was in their house the night of the event. Edith heard
the intruder in the basement and smelt smoke. She ran out through the
back door of the kitchen. In her state of panic, Edith slipped on the porch
steps and broke her arm before running to a neighbour's house to call
911.

Ingrid and Ivan are extremely upset about Edith's injury, the act of
vandalism to their home and their loss. All of their insurance documents
have been destroyed in the fire, but they know the phone number of
their financial advisor by memory.

You are the Prachts' financial advisor. You receive their distraught phone
call at 2:00 a.m. They need you to reassure them on several points.

Based on the rider that Ingrid had purchased for the dresser, the insurer
will only pay Ingrid $1,000 for the dresser less the deductible. The
coverage provided for the dresser by the rider was:

Correct
The correct answer: on a valued basis.
Your answer: on a valued basis.
Solution:

The coverage provided for the dresser by the rider was on a valued basis.

(Concepts) Insurance coverage provided on a valued basis insures property for a specific
amount that is agreed upon by the insurer and the insured at the time the contract is
made. The insurer usually requires proof of the value of the property such as the price of
purchase or an independent appraisal.

(Choice D) If Ingrid had been insured for the actual cash value or replacement cost of the
dresser, she would have likely received an amount closer to $2,000 based on the price of
a similar item in similar condition. However, she only received $1,000 for the dresser. So,
the coverage provided for the dresser by the rider was on a valued basis.

7 In regards to the loss of Ivan's oil painting, ignoring the deductible,

which of the following statements is TRUE?

Correct
The correct answer: Ivan can collect a combined total of $40,000 from XYZ Insurance
and Coverall Insurance.
Your answer: Ivan can collect a combined total of $40,000 from XYZ Insurance and
Coverall Insurance.
Solution:
Ivan can collect a combined total of $40,000 from XYZ Insurance and Coverall Insurance.

(Concepts) Most insurance policies contain a provision stating that the insurer is only liable
for its rateable portion of a loss if there is other valid and collectible insurance. The
rateable portion is the portion of a loss that one insurer is required to pay in the event of
two policies covering the same property loss. When an insurance claim is made on an
object that is covered partially by two or more insurance companies, the insurance
companies will determine how to share the cost between them according to their rateable
portions. According to the principle of indemnity, an individual cannot collect any more
than the value of his loss.

(Choice A is true.) Ivan lost a painting that was valued at $40,000 in a fire. He had
coverage of $25,000 with XYZ Insurance and an additional $20,000 with CoverAll
Insurance. According to the principle of indemnity, Ivan cannot collect more than the
painting is worth. So, Ivan can collect a combined total of $40,000 from XYZ Insurance
and Coverall Insurance.

8 Which of the following crimes are Ingrid and Ivan victims of?

Correct
The correct answer: burglary  
Your answer: burglary  
Solution:

Ingrid and Ivan are victims of burglary.

(Concepts) An individual has been a victim of robbery if there was violence, or the threat
of violence used against him or her. An individual has been a victim of theft if someone
steals his or her property without forcing entry or using violence. An individual has been a
victim of burglary if someone uses force on the structure of his or her home to gain entry
or exit. An individual has been a victim of arson if someone sets fire to his or her property.

(Choice A) Ingrid and Ivan are not victims of robbery because there was no violence or
threat of violence against their personal selves. They are not victims of theft because the
criminal had to break into their property in order to steal the goods. They are victims of
burglary because someone used force on the structure of their home to gain entry or exit.
They are also victims of arson because someone set light to their property. So, Ingrid and
Ivan are victims of burglary.

9 Ivan wants to know if all of his items destroyed by fire are covered by
insurance. Which of the following statements is TRUE?

Correct
The correct answer: The insurance company will cover the actual value of Ivan's library
at the time of loss.
Your answer: The insurance company will cover the actual value of Ivan's library at the
time of loss.
Solution:

The insurance company will cover the actual value of Ivan's library at the time of loss.

(Concepts) An insurance policy can covers an individual for the loss of personal effects on
an actual cash value basis. This will pay out a value equal to the replacement value of the
property based on its condition immediately before the loss. The insurer will not cover the
cost of loss of any items used for business unless additional coverage has been specifically
purchased for this purpose.

(Choice B is true.) The Prachts have a typical broad form homeowners' policy with all-risks
coverage on the building and named-perils coverage on the personal contents, on an
actual cash value basis. A fire set by vandals destroyed a dresser, Ivan's business
computer and company files and a personal library. They are not covered for any items
used for business purposes. So, of the items listed, the insurance company will only cover
the loss of Ivan's personal library, and this will be done on an actual value basis.

10 Ivan wants to make sure that Edith is compensated for any out-of-
pocket expenses arising from her injury. Which of the following
statements is TRUE?

Correct
The correct answer: Edith is covered by the Prachts' household insurance policy because
they hired her as a residence employee.
Your answer: Edith is covered by the Prachts' household insurance policy because they
hired her as a residence employee.
Solution:

Edith is covered by the Prachts' household insurance policy because they hired her as a
residence employee.

(Concepts) Household insurance contracts protect the policyowner against liability to a

residence employee. A residence employee means a person employed by the policyowner
to perform duties in connection with the maintenance or use of the insured premises. This
does not include persons who perform duties in connection with the policyowner's
business.

(Choice C is true.) Edith was injured while she was cleaning the Prachts' home. So, Edith
is covered by the Prachts' household insurance policy because they hired her as a
residence employee.
 11 In regards to the motorized lawn mower destroyed by the fire, which of
the following statements is TRUE?

Correct
The correct answer: The Prachts should place a claim with CoverAll Insurance.
Your answer: The Prachts should place a claim with CoverAll Insurance.
Solution:

The Prachts should place a claim with their household insurer only, that is, CoverAll
Insurance.

(Concepts) Motorized vehicles, other than automobiles, are covered by most household
insurance policies.

(Choice A is true.) The Prachts have a homeowners' policy with CoverAll Insurance, and an
automobile policy with ProtectU Insurance. The Prachts' lawnmower is a motorized vehicle,
and it is not their automobile, so it would be covered under their homeowners' policy, not
their automobile policy. So, the Prachts should place a claim with their household insurer,
CoverAll Insurance.

12 Ingrid wants to know if her car is covered against the loss and, if so,
how to place a claim for the loss of her car. Which of the following
statements is TRUE?

Correct
The correct answer: Ingrid must place a claim with ProtectU Insurance for the loss of
her car.
Your answer: Ingrid must place a claim with ProtectU Insurance for the loss of her car.
Solution:

Ingrid must place a claim with ProtectU Insurance for the loss of her car.

An individual may take out specified perils automobile insurance, which is a modified
comprehensive insurance plan that protects automobiles against loss or damage caused by
specific perils named in the policy. These specified perils typically include loss through fire.
You can purchase automobile insurance over the telephone or online. When you requests
automobile insurance, the policy is effective immediately upon the agent's acceptance.
This means both sides are bound by the terms of the policy even before any premiums are
paid or the contract is received.

Ingrid has specified perils automobile insurance. So, Ingrid must place a claim with
ProtectU Insurance for the loss of her car.
 13 Gregory added an electric garage door to his home several years ago.
Gregory also made sure that his homeowner's policy covered the garage
door against the negligent acts of a third party. He is covered for
replacement cost. A couple of weeks ago, his neighbour crashed through
his garage door. The insurance adjuster valued the replacement cost of
the garage door at $2,200. Which of the following statements is TRUE?

Correct
The correct answer: Gregory can make a claim to his insurance company to recover the
$2,200 loss.
Your answer: Gregory can make a claim to his insurance company to recover the $2,200
loss.
Solution:

Gregory can make a claim to his insurance company to recover the $2,200 loss.

(Concepts) If an individual owns a homeowner's policy that covers a specific item against
the negligent acts of a third party, and in the future a third party damages the item, the
individual may make a claim to his insurance company to recover the loss. If the policy
provides for replacement cost, then the full cost of a new replacement will be covered. The
process of subrogation entitles the insurance company to attempt to recover the loss, plus
legal fees, from the third party.

(Choice A is true.) Gregory's garage door is covered against the negligent acts of a third
party, and he opted for replacement cost coverage. Gregory's neighbour crashed through
his garage door, so his neighbour would be the third party. Gregory would make a claim to
his insurance company for the replacement cost of the garage door, which is $2,200.
Gregory's insurance company would then pay him the $2,200 replacement cost and sue
the neighbour for this amount plus legal costs. So, Gregory can make a claim to his
insurance company to recover the $2,200 loss.

14 Geraldine's neighbour burned leaves in the backyard close to Geraldine's

wooden garden shed. The shed caught fire and burnt to the ground,
causing $2,000 in damages to the shed and the tools inside. Geraldine
placed a claim with her insurance company. Her insurance company
exercised its rights under the principle of subrogation. How was the
claim settled?

Correct
The correct answer: Geraldine's insurer paid her claim and then the insurer sued her
neighbour for reimbursement.
Your answer: Geraldine's insurer paid her claim and then the insurer sued her neighbour
for reimbursement.
Solution:

Geraldine's insurer paid her compensation and then the insurer sued her neighbour for
reimbursement.

(Concepts) Under the principle of subrogation, the insurer settles a claim and then sues
the negligent third-party for reimbursement.

(Choice B) Geraldine's neighbour was responsible for starting a fire that caused a loss to
Geraldine. So, under the principle of subrogation, Geraldine's insurer paid her claim and
then the insurer sued her neighbour for reimbursement.

15 Satish and Amit sold the apartment they jointly owned and bought a
house together. The sale and purchase contracts closed on the same day.
Satish left his personal property at a friend's house for two days before
putting it into the new house. Amit stored his property at his mother's
house for five days before moving it to the new house. They continued
paying the premiums on the standard homeowner's policy on the
apartment and informed the insurer in writing of the sale and purchase.
In the event of damage to their personal property the day before it was
placed in the new house, whose loss would be fully covered to the extent
of the policy?

Correct
The correct answer: Only Satish's loss would be fully covered.
Your answer: Only Satish's loss would be fully covered.
Solution:

Only Satish's loss would be fully covered.

(Concepts) Personal property is protected against the same perils as the insured home
while it is on the insured premises. If the personal property is removed for the purpose of
moving to a new principal residence, it is still fully covered to the extent of the policy for
up to three days while in transit.

(Choice B) Satish stored his property at a friend's house for only two days prior to moving
it to the new house, so his property would be fully covered to the extent of the policy.
Amit's property was removed for longer than three days so it would not be fully covered.
So, only Satish's loss would be fully covered.

16 Frasier runs a window cleaning business from the basement of his home.
If any of the workers hired by Frasier is injured while on his property,
who would be covered under the employer's liability component of his
homeowner policy?

Correct
The correct answer: Only the woman who visits his house for one morning each week to
clean his home.
Your answer: Only the woman who visits his house for one morning each week to clean
his home.
Solution:

The woman who visits his house for one morning each week to clean his home would be
covered under the employer's liability component of his homeowner policy.

(Concepts) Persons who visit a home in connection with the operation of a home-based
business are not covered under the homeowner policy, even if they perform work related
to the business on the home premises. Only individuals who are residence employees are
covered under a homeowner policy.

(Choice B) The woman who visits Frasier’s house to clean his home is considered to be a
residence employee. So, the woman who visits his house for one morning each week to
clean his home would be covered under the employer's liability component of his
homeowner policy.

17 Which of the following individuals would be covered by their

automobile's collision insurance?

Correct
The correct answer: Derek, who was involved in a road rage incident on the
expressway. He ended up rolling his car into the ditch causing $3,500 damage.
Your answer: Derek, who was involved in a road rage incident on the expressway. He
ended up rolling his car into the ditch causing $3,500 damage.
Solution:

The damage to Derek's car would be covered by his automobile's collision insurance,
because collision insurance covers the cost of repairs to an individual's car when it is
involved in a collision or tips over.

Damage to a vehicle from incidents such as vandalism, fire, theft, and glass breakage is
covered by a driver's comprehensive insurance. Therefore both Anthony and Christina
would receive benefits under their comprehensive insurance. Anthony would be covered
under third party liability insurance. This type of insurance protects the insured against
claims made by others for injuries or damage to their property caused by the insured or
someone using their car with the insured's permission.

18 A fire in a neighbouring industrial complex spread to the townhouse

complex occupied by Jim Walsh. He was forced to evacuate his
townhouse and the tenant who rented a bedroom from him was also
forced to leave. City officials would not allow the residents to return to
 their homes for five days while they checked for gas leaks and other
threats. Jim's homeowner's policy covers the cost of the damage,
"additional living expenses" while the insured is unable to inhabit his
home because of damage or because a civil authority prohibits access,
and "fair rental value" to cover the loss of rental income. Which of his
losses are covered under his homeowner's insurance policy?

Correct
The correct answer: Damage to his townhouse, additional living expenses for the five
days that he was unable to inhabit his townhouse, and fair rental value to cover the loss of
rent from the rental of one bedroom.
Your answer: Damage to his townhouse, additional living expenses for the five days that
he was unable to inhabit his townhouse, and fair rental value to cover the loss of rent from
the rental of one bedroom.
Solution:

Damage to Jim's townhouse, additional living expenses for the five days that he was
unable to inhabit his townhouse, and fair rental value to cover the loss of rent from the
rental of one bedroom will be covered under his homeowner's insurance policy.

(Concepts) A typical homeowner's insurance policy will cover damage to the individual's
residence, provide additional living expenses for a set period of time that the individual
cannot return to his or her residence, and fair rental value to cover the loss of any
reasonable rental income.

(Choice C) Jim's homeowner's insurance policy covers damage to his townhouse,

additional living expenses while he is unable to inhabit his townhouse, and fair rental value
to cover the loss of rent from the rental of one bedroom. So, damage to Jim's townhouse,
additional living expenses for the five days that he was unable to inhabit his townhouse,
and fair rental value to cover the loss of rent from the rental of one bedroom will be
covered under his homeowner's insurance policy.

19 Martin is having difficulty purchasing auto insurance. He owns a 1975

Dodge Dart that has seen better days. Which of the following factors
would not lead to an invalid auto insurance contract?

Correct
The correct answer: Having a car more than 25 years old.
Your answer: Having a car more than 25 years old.
Solution:

The contract would not be invalid just because Martin's car is over 25 years old.

(Concepts) A contract of insurance is an agreement made in good faith. An individual can

rend his or her automobile insurance contract invalid and forfeit the right to recover
indemnity from the insurer if he or she:

 gives false particulars about his car on his application

 knowingly misrepresents or fails to disclose in the application any fact required to
be stated
 contravenes a term of the contract
 commits a fraud
 willfully makes a false statement in respect of a claim under the contract

The age of the car will not invalidate the contract, because the insurance company will
have considered this before issuing the policy.

(Choice C) The age of the car will not invalidate the contract, because the insurance
company will have considered this before issuing the policy. So, having a car that is more
than 25 years old is not sufficient reason to invalidate the contract.

20 While shopping on the weekend, a tow-truck backed into Rachel's Austin

Mini, breaking the windshield. She fortunately had adequate coverage on
her car. After the adjuster inspected the damage, the insurance company
accepted Rachel's claim to replace the front windshield. Which of the
following statements is FALSE?

Correct
The correct answer: Rachel must make the claim within 30 days of the accident.
Your answer: Rachel must make the claim within 30 days of the accident.
Solution:

Rachel must make the claim within 7 days of the accident, not within 30 days.

(Concepts) In general, if an individual makes a claim under his or her automobile

insurance policy, the insurance company will only provide an amount that covers the cost
of the damages that the car received due to the accident. After an accident, the insured
has seven days to make the claim with his or her insurance company. After the claim has
been made, the insurance company has 60 days to make the payment.

(Choice A is false.) So, Rachel must make the claim within 7 days of the accident.
CHAPTER 6

Finley and Fagan ran an automotive

body shop. They had an insurance
contract on the building and contents.
One night, the shop caught fire and
was destroyed. The fire department
declared that the fire was accidental.
However, the police found evidence
that the shop was used to change the
appearance of stolen cars so they
could be sold. Further investigations
proved that dealing in stolen cars was
the sole activity of the body shop.
Finley and Fagan contacted their
insurance company to claim
compensation for the damage. Which
of the following statements is TRUE?

Correct
The correct answer: Their insurer will not pay any compensation for the loss.
Your answer: Their insurer will not pay any compensation for the loss.
Solution:

Their insurer will not pay any compensation for the loss.

(Concepts) An insurance contract will not provide coverage for property used for illegal
purposes. If the property is used in part for legal activities, the insurance contract may
have covered some of the loss.

(Choice D is true.) Finley and Fagan's body shop was used entirely for illegal purposes. So,
Finley and Fagan's insurer will not pay any compensation for the loss.

2 Sean had a booth at a trade fair for

life insurance companies. Mr.
Stevenson visited Sean's booth,
picked up some brochures and asked
Sean some questions about the
insurance products. Three days later,
Sean called Mr. Stevenson to ask if he
could make an appointment to discuss
Mr. Stevenson's insurance needs. Mr.
Stevenson agreed and set a date with
Sean. At the meeting, Mr. Stevenson
signed an application for life insurance
with the Great Mutual Assurance Co.
Ltd. Which of the following statements
is TRUE?

Correct
The correct answer: Mr. Stevenson and Great Mutual Assurance are parties to an offer.
Your answer: Mr. Stevenson and Great Mutual Assurance are parties to an offer.
Solution:

Mr. Stevenson and Great Mutual Assurance are parties to an offer.

(Concepts) An offer to purchase insurance is made by the buyer when submitting an

application. The individual who makes the offer is referred to as the offeror. The individual
or company who receives the offer is referred to as the offeree. There is a valid offer to
enter into a contract if there is an offeror, an offeree and an offer. However, there is no
legally binding contract until the offeree communicates acceptance of the offeror's offer by
issuing and delivering a policy, signed by the insurer.

(Choice B) When Sean contacted Mr. Stevenson to discuss his insurance needs, Sean was
making a business proposal to Mr. Stevenson, not an offer. However, once Mr. Stevenson
submitted his application, he became the offeror and Great Mutual Assurance became the
offeree. So, Mr. Stevenson and Great Mutual Assurance are parties to an offer.

3 John asked Sheila to take care of his

house for one week while he was out
of the country on business. Sheila
agreed on the condition that John let
her use his car while he was away.
John lent Sheila his car. Which of the
 following statements is TRUE?

Correct
The correct answer: John and Sheila have a legally binding contract.
Your answer: John and Sheila have a legally binding contract.
Solution:

John and Sheila have a legally binding contract.

(Concepts) The fundamental requirements for the formation of a valid contract are mutual
assent by the parties to a promise and an exchange of values between the parties. The
values exchanged do not have to be in cash, services or merchandise is sufficient
consideration. Both oral and written contracts are valid.

(Choice A is true.) John asked Sheila to take care of his house and she agreed. John lent
Sheila his car in return for taking care of his house. So, John and Sheila have a legally
binding contract because both parties agreed to a promise and they exchanged something
of value, namely Sheila's services in exchange for the use of John's car.

4 Rosemary received a special discount

on her fire insurance because she had
a sprinkler system installed
throughout her rental property. The
insurance contract stated that
coverage against loss by fire would be
in effect provided that the sprinkler
system was kept in working order.
Which of the following statements is
TRUE?

Correct
The correct answer: Rosemary made a warranty when she stated on her application for
fire insurance that there was a sprinkler system installed on the property.
Your answer: Rosemary made a warranty when she stated on her application for fire
insurance that there was a sprinkler system installed on the property.
Solution:

Rosemary made a warranty when she stated on her application for fire insurance that
there was a sprinkler system installed on the property.

(Concepts) A "warranty" is a statement made by the applicant to the insurer, which is

absolutely true and is assumed to be material to the contract. There are two types of
warranties: "promissory' and "affirmative". A promissory warranty states that a fact is
presently true and will continue to be true. An affirmative warranty states that a fact is
true, but makes no statement about the future. A warranty in an insurance contract is
assumed to be affirmative unless it is clear that it is promissory.
(Choice A is true.) When Rosemary stated on her application that the building had a
sprinkler system, she made a warranty. This warranty would have been affirmative
automatically if the insurer had not included the requirement that it be maintained in
working order. This requirement made the warranty promissory. So, Rosemary made a
warranty when she stated on her application for fire insurance that there was a sprinkler
system installed on the property.

5 George phoned his insurance company

to take out a life insurance contract
and an auto insurance contract. Which
of the following statements is FALSE?

Correct
The correct answer: George's telephone application for life insurance forms part of the
contract on his life.
Your answer: George's telephone application for life insurance forms part of the contract
on his life.
Solution:

George's telephone application for life insurance does not form part of the contract on his
life.

(Concepts) An insurance "application" is a standard form or schedule supplied by the

insurance company for the applicant to complete. The information in the application is
used to determine the underwriting risk to the insurer and the premium payable.

The application forms part of the contract. Applications for some forms of insurance, such
as property and automobile insurance, may be oral, so they can be completed over the
phone. In this case, the phone application forms part of the insurance contract. However,
an application for life insurance must be written and signed by the applicant. So,
information given over the phone with respect to a life insurance contract does not form
part of the contract.

(Choice B is false.) George can take out an automobile insurance contract over the phone
and the conversation forms part of the application for the contract. However, only a
written application for life insurance forms part of the contract. So, George's telephone
application for life insurance does not form part of the contract on his life.

6 A client would like you to review a

property insurance policy that she
recently purchased. One section of the
contract explains the perils that the
 insurance company does not cover
through the policy. Under what
component of the insurance contract
would this be listed?

Correct
The correct answer: exclusions  
Your answer: exclusions  
Solution:

This would be listed under the exclusions component of the insurance contract.

(Concepts) The exclusion component of the insurance contract states the perils, losses or
property that the insurer does not cover through the contract. Conditions are the
responsibilities of each party, while declarations are statements regarding the exposures
to risk that the policy will cover.

(Choice B) So, the portion of the contract that explains the perils that are not covered
under the policy would be listed under the exclusions component of the insurance
contract.

7 Caroline wants to make a change to

her property insurance policy without
cancelling her existing policy and
having the insurer issue a new one.
Which of the following can Caroline
add to her policy to achieve her
objective?

Correct
The correct answer: any of the above
Your answer: any of the above
Solution:

Caroline can add any of the above to her policy to achieve her objective.

(Concepts) Policyowners frequently have insurance needs that are not fully addressed by a
standard insurance policy. Many insurance policies are supplemented or modified through
additions to the standard contract. These additions are termed interchangeably as
"endorsements" or "riders". "Floaters" are riders that are attached to fire and property
insurance policies to extend the coverage of property.

(Choice D) So, Caroline can add any of the above to her policy to achieve her objective.
 8 Ralph took out a life insurance
contract. When the policy was issued,
he studied the terms carefully and
decided he did not like the conditions.
Nine days after the contract was
issued, he cancelled it and received a
full refund of his premium. Which of
the following statements is FALSE?

Correct
The correct answer: Ralph cancelled his policy according to a right provided by federal
legislation.
Your answer: Ralph cancelled his policy according to a right provided by federal
legislation.
Solution:

Ralph did not cancel his policy according to a right provided by federal legislation.

(Concepts) A "right of rescission" allows the policyowner to examine the contract and, if
not satisfied, return the policy to the insurer for cancellation and a refund of any
premiums paid. This right must be exercised within a 10-day period at the beginning of a
new contract. The period begins on the date the policy is delivered to the applicant. The
right of rescission is not a legislated right, but is a contractual right provided by the
insurer.

(Choice B is false.) The right of rescission is not provided by federal legislation. So, Ralph
did not cancel his policy according to a right provided by federal legislation.

9 Hubert bought a new Bentley. He used

$5,000 of his own money and $5,000
borrowed from the bank as a down
payment. The car dealership also
provided financing to purchase the
car. Which of the following has an
insurable interest in the car?

Correct
The correct answer: all of the above
Your answer: all of the above
Solution:

All of the above have an insurable interest in the car.

When an individual or organization stands to suffer a financial loss if a piece of property is

lost, stolen, destroyed or damaged, the individual or organization is said to have an
insurable interest in that property.

Hubert, the bank, and the dealership all have an insurable interest in the car because they
could each suffer a financial loss if the car were stolen, destroyed or damaged.

10 Juliette purchased life insurance on

her father, Joe, and retained the
authority to exercise all rights in the
policy. In the event of Joe's death, her
mother, Claire, is entitled to the
policy's proceeds. This means:

Correct
The correct answer: Juliette is the policyowner and Joe the subject.
Your answer: Juliette is the policyowner and Joe the subject.
Solution:

Juliette is the policyowner and Joe the subject.

(Concepts) The individual who purchases the life insurance policy is referred to as the
policyowner. The individual whose life is insured by the policy is referred to as the subject
or life insured. The individual who stands to gain the proceeds of the policy upon the death
of the life insured is referred to as the beneficiary.

(Choice B) For this insurance contract, Juliette is the person who purchased the policy, Joe
is the person whose life is insured, and Claire is the person who is entitled to receive the
death benefit if Joe dies. So, Juliette is the policyowner and Joe the subject.

11 There are a variety of risks present in

society that can lead to a financial loss
for a client. Which of the following
statements about risk is FALSE?

Correct
The correct answer: Fundamental risks involve losses that affect only a small segment
of society.
Your answer: Fundamental risks involve losses that affect only a small segment of
society.
Solution:

Fundamental risks do not involve losses that affect only a small segment of society.

(Concepts) There are numerous ways to classify risk. Speculative risk has three alternative
outcomes: loss, no change or gain. Pure risk has only two alternative outcomes: loss or no
change. Dynamic risks are those resulting from changes in the economy, while static risks
are losses that would occur even if there were no changes in the economy. Fundamental
risks involve losses that are caused by economic, social, and political phenomenon and
that can affect large segments of society. Unemployment, earthquakes or floods are
examples of fundamental risks. In contrast, particular risks apply to individuals, rather
than groups.

(Choice A is false.) So, fundamental risks do not involve losses that affect only a small
segment of society.

12 Philip is preparing a risk management

plan for his client, Ho Lee. Ho Lee is a
wealthy entrepreneur who likes to sky
dive. Philip suggests that Ho Lee
increase his life insurance to protect
his estate against taxes and expenses.
Philip also suggests that Ho Lee
increase the level of safety
precautions taken before sky diving.
Which of the following is not one of
the risk management strategies that
Philip is recommending to his client?

Correct
The correct answer: risk avoidance  
Your answer: risk avoidance  
Solution:

Philip is not recommending that his client use risk avoidance to manage risk.

(Concepts) There are two methods for managing risks: risk control and risk financing. Risk
control strategies control exposure to risk and the severity of losses. Risk avoidance and
risk reduction are risk control methods. Risk financing strategies involve sharing,
transferring or retaining the costs associated with risk. Purchasing life insurance is a form
of risk transfer or risk sharing because it transfers/shares the cost of loss to another party.

(Choice B) Philip advised Ho Lee to reduce the risk associated with sky diving by
increasing safety precautions, Philip was recommending risk control through risk
reduction, rather than risk avoidance. So, Philip is not recommending that his client use
risk avoidance to manage risk. A risk avoidance technique would involve sky diving less or
not at all.  
 13 The NEXT 8 questions are based on
the Josée and Rob Saros Case Study in
Unit 6, Insurance Contracts and Risk
Management.

Which of the following risk management

strategies is LEAST appropriate for Josée
Saros in terms of her risk of death?

Correct
The correct answer: risk retention
Your answer: risk retention
Solution:

Risk retention is the least appropriate risk management strategy for Josée in terms of her
risk of death.

There are two methods for managing risks: risk control and risk financing. Risk control
strategies control exposure to risk and the severity of losses. Risk avoidance and risk
reduction are risk control methods. Risk financing strategies involve sharing, transferring,
or retaining the costs associated with risk. Purchasing life insurance is a form of risk
transfer or risk sharing because it transfers/shares the cost of loss to another party. Risk
retention is most useful for risks of low severity and low probability, and essentially
involves individuals dealing with the risk themselves.

Josée is a major breadwinner for her family, and she smokes and engages in dangerous
leisure-time activities. Risk retention is not an appropriate risk management strategy for
Josée because the probability of losing her income through death is high. So, risk
retention is the least appropriate risk management strategy for Josée in terms of her risk
of death.

14 One of Josée Saros' risk management

objectives is to increase her life
insurance to the maximum required
coverage with the lowest possible
premium. She refuses to give up
parasailing and smoking. In fact, she
refuses to make any adjustments in
her lifestyle. Which of the following
risk management strategies BEST
describes Josée's approach?

Correct
The correct answer: risk transfer
Your answer: risk transfer
Solution:
Risk transfer best describes Josée's approach to risk management.

(Concepts) There are two methods for managing risks: risk control and risk financing. Risk
control strategies control exposure to risk and the severity of losses. Risk avoidance and
risk reduction are risk control methods. Risk financing strategies involve sharing,
transferring or retaining the costs associated with risk. Purchasing life insurance is a form
of risk transfer or risk sharing because it transfers/shares the cost of loss to another party.
Risk retention is most useful for risks of low severity and low probability, and essentially
involves the individuals dealing with the risk themselves. Risk sharing is most appropriate
for high severity, low probability risks.

(Choice C) Josée's risk management strategy can best be described as risk transfer
because she has transferred the risk of financial loss that her death will incur by insuring
her life. She is not practicing risk retention because she has opted to purchase the
maximum life insurance required with the lowest possible premium. She is not adopting
any risk avoidance or risk reduction strategies because she refuses to make any
adjustments to her lifestyle. So, risk transfer best describes Josée's approach to risk
management.

15 Josée Saros wants to name the

children as direct beneficiaries of her
term life insurance contract, but is
worried that if she were to die
tomorrow, they would spend the
money irresponsibly. She wants to
make sure they don't receive all of the
death benefits until they have at least
reached the age of majority. If she
names her children as direct
beneficiaries of her life insurance
contract, which of the following
statements is TRUE?

Correct
The correct answer: Josée need not worry; the children will not be paid the death
benefits directly until they have reached the age of majority.
Your answer: Josée need not worry; the children will not be paid the death benefits
directly until they have reached the age of majority.
Solution:

Josée may name all her children as beneficiaries of her life insurance contract. However, if
a child is a minor, he or she is not legally capable of giving a discharge to the insurer,
which means the insurer will not be able to pay the proceeds to the child. Therefore, if the
children are named as the direct beneficiaries of the life policy the children will be not
receive their entire share of life insurance benefits until they attain the age of majority (18
or 19, depending on the province). So, if Josée names her children as direct beneficiaries
of her life insurance contract, she need not worry that they will collect her entire death
benefits before they attain the age of majority.

16 After implementing risk management

strategies appropriate to Josée Saros'
objectives, Josée's position on the
Risk Management Matrix could BEST
be described as:

Incorrect
The correct answer: medium probability and insured severity.
Your answer: low probability and insured severity.
Solution:

Josée's position on the Risk Management Matrix could best be described as medium
probability and insured severity.

(Concepts) A risk matrix can be used to categorize risks as having critical, material, or
minor severity, and high, medium, or low probability. Risks of critical severity are those
that can result in very serious financial consequences, possibly including bankruptcy.
Material risks would have serious financial consequences, certainly resulting in a reduction
in standard of living. Minor risks would have little financial consequence, other than some
minor loss of income or manageable expenses. Critical risks that cannot be avoided or
reduced are best handled through insurance.

(Choice C) Josée engages in dangerous leisure-time activities and is a heavy smoker.

Therefore, her probability of death is medium, rather than low. Because Josée refuses to
make any adjustments to her lifestyle, her probability will not change after implementing
risk management strategies. Her most effective strategy is to increase her insurance
coverage to the maximum required. With an income of $95,000, she can easily afford to
do so. Therefore, the severity of the financial loss on her family as a result of her death
will change from critical severity to insured severity. So, Josée's position on the Risk
Management Matrix could best be described as medium probability and insured severity.

17 Rob decides that one of his risk

management objectives is to purchase
either $275,000 of 10-year renewable
and convertible (R&C) term life
insurance; or $175,000 of 10-year
R&C term life insurance and $100,000
of Term-100 whole life insurance. This
could mean canceling all of his
existing life insurance policies. All of
the following statements are true,
 EXCEPT:

Correct
The correct answer: Rob can purchase individual 10-year R&C term life insurance at a
lower premium than his current group term life insurance policy.
Your answer: Rob can purchase individual 10-year R&C term life insurance at a lower
premium than his current group term life insurance policy.
Solution:

To compare the price of one policy to another, determine how much the premium would
be for the same amount of coverage under each policy.

For the same amount of coverage, Rob can NOT purchase individual 10-year R&C term life
insurance at a lower premium than his current group term life insurance policy. Currently,
for a $100,000 benefit, he pays a premium of $125 per year for a 10-year R&C term life
policy. If he purchased the same coverage as an individual 10-year R&C term life
insurance policy, it would cost him $139, calculated as ($61 + ($78 x ($100,000 ÷
$100,000))). This is more than his group plan.

Rob's current $20,000 whole life policy has an annual premium of $250. If he purchased
the same amount of coverage of whole life coverage, it would cost $182 per year,
calculated as ($94 + ($441 x ($20,000 ÷ $100,000))). If he purchased the same amount
of coverage of Term-100 permanent life insurance, it would cost $165 per year, calculated
as ($89 + ($382 x ($20,000 ÷ $100,000))). Both of these options provide lower premiums
than his current whole life policy.

Rob's current 5-year R&C term policy has an annual premium of $145. If he decided to
purchase the same $50,000 coverage of 10-year R&C term life insurance, it would cost
$100 per year, calculated as ($61 + ($78 x ($50,000 ÷ $100,000))). This is lower than his
current R&C term policy.

18 Rob Saros' group plan with the Board

of Trade gives him the option of
converting his policy to an individual
plan, provided he applies to the
insurer in writing within 31 days of
ceasing to be a member of the group.
Rob decides to convert his group
policy to an individual policy under
this option. When calculating the
premium for the new individual policy,
which of the following will the
insurer NOT take into account?

Correct
The correct answer: Any deterioration in Rob's health since he purchased the group
insurance.
Your answer: Any deterioration in Rob's health since he purchased the group insurance.
Solution:

Any deterioration in Rob's health since he purchased the group insurance will not be taken
into account.

(Concepts) One of the main advantages of converting group coverage to an individual

policy is that the conversion is usually guaranteed at standard rates. This may be
particularly attractive for an individual with health problems who might otherwise be
uninsurable or heavily rated.

(Choice C) So, any deterioration in Rob's health since he purchased the group insurance
will not be taken into account when calculating the premium for the new individual policy.

19 Rob Saros wants to name his estate as

the beneficiary of his life insurance
proceeds and have the proceeds
divided among his three children
according to the terms of his will. If
the death benefit were paid into Rob's
estate upon his death, which of the
following statements would FALSE?

Correct
The correct answer: The opportunity to minimize taxes through income splitting would
not be present unless the estate was the beneficiary.
Your answer: The opportunity to minimize taxes through income splitting would not be
present unless the estate was the beneficiary.
Solution:

The opportunity to minimize taxes through income splitting could be present even if the
estate was not the beneficiary.

(Concepts) If an individual wants to create an opportunity to minimize taxes through

income splitting, he or she needs to set up trusts for his or her children for the purpose of
receiving the death benefit. However, the individual can do this through his or her will
using estate assets or by naming the trusts directly as beneficiaries.

(Choice D is false.) So, the opportunity to minimize taxes through income splitting could
be present even if the estate was not the beneficiary.

20 Rob Saros decides to cancel his

existing whole life insurance policy
 with a CSV of $10,000 and purchase a
new whole life policy for $100,000. At
the time he cancelled the policy, he
had paid $5,000 in premiums and the
accumulated NCPI was $3,000. What
is the adjusted cost basis (ACB) of
Rob's policy?

Correct
The correct answer: $2,000.
Your answer: $2,000.
Solution:

The ACB of Rob's policy is $2,000.

(Concepts) The adjusted cost basis of a life insurance policy (ITA 148(9)) can be
calculated as:

 the premiums paid under the policy, less any dividends received; plus
 interest paid on a policy loan if it was not deductible in computing income; plus
 amounts included in income from a non-exempt policy subject to the income
accrual rules; minus
 the net cost of pure insurance (NCPI)

(Choice D) At the time he cancelled the policy, Rob had paid $5,000 in premiums and the
accumulated NCPI was $3,000. So, the ACB of Rob's policy is $2,000, calculated as
(premiums paid - accumulated NCPI) or ($5,000 - $3,000).