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Assessment >> Formal Assessment

Assessment: Risk Management and Estate Planning Web - Academic Partners Unit 4 Post-Assessment
(C117V13U4L0A25Q20)
Date Submitted: 06/05/2014 04:37:00 PM
Total Correct Answers: 20
Total Incorrect Answers: 0

Your Mark (total correct percentage): 100%

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

Correct
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:A side fund of a universal life (UL) policy with a value of $200,000, would be covered up to
$170,000.
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?

Correct
The correct answer:Rick has the option of increasing the death benefit of his policy.
Your answer:Rick has the option of increasing the death benefit of his policy.
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
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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?

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

Correct

The correct answer:Premium holiday.

Your answer:Premium holiday.
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?

Correct
The correct answer:Duncan's insurer may offer all of the above options.
Your answer:Duncan's insurer may offer all of the above options.
Solution:

The insurer may offer all of these options to Duncan.

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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?

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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?

Correct
The correct answer:If she names both of the children as beneficiaries, the proceeds will be paid directly to them.
Your answer:If she names both of the children as beneficiaries, the proceeds will be paid directly to them.
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.

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(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)
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(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:

Correct
The correct answer:third-party contract.
Your answer:third-party contract.
Solution:

This is an example of a third-party contract.

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(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?

Correct
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:As a named beneficiary of a life insurance contract owned by her father, if he dies tomorrow, Kinvara
can receive the death benefit directly.
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?

Correct
The correct answer:The right to deduct the premiums due from any benefits payable.
Your answer:The right to deduct the premiums due from any benefits payable.
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

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of the following does Manuel not require Miguel's written consent for?

Correct
The correct answer:Allowing the policy to lapse.
Your answer:Allowing the policy to lapse.
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.

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