Life Insurance Mock Exam 1 Questions
and Correct Answers
Andrew's participating life insurance was issued on April 26, 1998. Since then, he has paid $28,000 in
premiums and received $4,000 in cash from policy dividends. The cumulative net cost of pure insurance
(NCPI) is $11,000 and the cash surrender value (CSV) is $50,000.
Assuming Andrew's marginal tax rate is 45%, how much tax will he pay if he fully surrenders his policy?
a) $9,900
b) $14,850
c) $16,650
d) $22,500 - correct answers:(wrong) $22,500
Rationale:
ACB = Total premiums − NCPI − dividends paid to policyholder
ACB = $28,000 − $11,000 − $4,000 = $13,000
Policy gain = Proceeds of disposition − ACB
Policy gain = $50,000 − $13,000 = $37,000
Andrew will have to pay the following amount in taxes: $37,000 × 45% = $16,650. (Refer to Section 7.1.3)
,Araq is meeting with an agent to set up life insurance for himself. He wants the insurance to go to his
parents so that they will be taken care of if he passes away. Since they moved here from Sudbury, his
parents have been completely dependent on him. Araq also has two children from his previous
relationship. His children live with his old partner, Sadik, and he only sees them on weekends. Sadik runs
an in-home daycare for their children and a few others in the neighbourhood. She is able to fully sustain
himself and their children without any financial support from Araq.
What must Araq include in his life insurance policy?
a) Araq must provide financial support for his children, even though Sadik does not need it.
b) Araq needs to include financial support for Sadik and the children so they do not need to worry about
money when he dies.
c) Araq must provide financial support to Sadik. Sadik will be responsible - correct answers:(wrong) Araq
needs to include financial support for Sadik and the children so they do not need to worry about money
when he dies.
Rationale:
There is a legal requirement for Araq to provide financial support for his children even if Sadik has full
custody or partial custody while he is alive. Since the court has been silent on the support in event of his
death, the choice is left to him. Araq can tell his parents that he would like them to give money to his
children but there are no legal requirements. (Refer to section 10.1.3.1, 10.1.3.3)
Which of the following individuals would most likely be interested in a limited payment whole life policy
payable for 20 years?
, a) Jody, who wants her mortgage with a remaining amortization of 10 years to be covered if she dies
before it is repaid.
b) Charles, who wants insurance to cover his tax bill upon his death, and does not currently have much
disposable income.
c) Connor, who wants to make a sizeable charitable donation when he dies, but wants to reduce his
expenses when he retires in 22 years.
d) Marissa, a self-employed consultant with variable income, who would like to leave a legacy. - correct
answers:(wrong) Charles, who wants insurance to cover his tax bill upon his death, and does not
currently have much disposable income.
Rationale:
Whole life insurance, even if it is limited pay, is used to cover insurance needs that occur no matter what
age the life insured dies at, such as covering final taxes, leaving a legacy, or making a charitable donation.
Debt repayment, like in Jody's case, is a temporary need better covered by term insurance.
Since limited pay life insurance will have a higher fixed annual premium, it is not a good fit for people
who do not currently have much disposable income like Charles, or even variable income like Marissa. It
is a good fit for people who can afford it now, but will see their income drop after the payment period,
such as Connor. (Refer to Section 3.6)
Jasmine is a business owner. She is concerned with her employee turnover rate, she wants to ensure her
employees are sufficiently covered under a group plan. She feels the cost of group benefits is high for her
small business. Jasmine is considering a group plan where the policy owner pays a premium and the
insurer pays all claims.
What is this type of funding called?
a) Self-insured method
and Correct Answers
Andrew's participating life insurance was issued on April 26, 1998. Since then, he has paid $28,000 in
premiums and received $4,000 in cash from policy dividends. The cumulative net cost of pure insurance
(NCPI) is $11,000 and the cash surrender value (CSV) is $50,000.
Assuming Andrew's marginal tax rate is 45%, how much tax will he pay if he fully surrenders his policy?
a) $9,900
b) $14,850
c) $16,650
d) $22,500 - correct answers:(wrong) $22,500
Rationale:
ACB = Total premiums − NCPI − dividends paid to policyholder
ACB = $28,000 − $11,000 − $4,000 = $13,000
Policy gain = Proceeds of disposition − ACB
Policy gain = $50,000 − $13,000 = $37,000
Andrew will have to pay the following amount in taxes: $37,000 × 45% = $16,650. (Refer to Section 7.1.3)
,Araq is meeting with an agent to set up life insurance for himself. He wants the insurance to go to his
parents so that they will be taken care of if he passes away. Since they moved here from Sudbury, his
parents have been completely dependent on him. Araq also has two children from his previous
relationship. His children live with his old partner, Sadik, and he only sees them on weekends. Sadik runs
an in-home daycare for their children and a few others in the neighbourhood. She is able to fully sustain
himself and their children without any financial support from Araq.
What must Araq include in his life insurance policy?
a) Araq must provide financial support for his children, even though Sadik does not need it.
b) Araq needs to include financial support for Sadik and the children so they do not need to worry about
money when he dies.
c) Araq must provide financial support to Sadik. Sadik will be responsible - correct answers:(wrong) Araq
needs to include financial support for Sadik and the children so they do not need to worry about money
when he dies.
Rationale:
There is a legal requirement for Araq to provide financial support for his children even if Sadik has full
custody or partial custody while he is alive. Since the court has been silent on the support in event of his
death, the choice is left to him. Araq can tell his parents that he would like them to give money to his
children but there are no legal requirements. (Refer to section 10.1.3.1, 10.1.3.3)
Which of the following individuals would most likely be interested in a limited payment whole life policy
payable for 20 years?
, a) Jody, who wants her mortgage with a remaining amortization of 10 years to be covered if she dies
before it is repaid.
b) Charles, who wants insurance to cover his tax bill upon his death, and does not currently have much
disposable income.
c) Connor, who wants to make a sizeable charitable donation when he dies, but wants to reduce his
expenses when he retires in 22 years.
d) Marissa, a self-employed consultant with variable income, who would like to leave a legacy. - correct
answers:(wrong) Charles, who wants insurance to cover his tax bill upon his death, and does not
currently have much disposable income.
Rationale:
Whole life insurance, even if it is limited pay, is used to cover insurance needs that occur no matter what
age the life insured dies at, such as covering final taxes, leaving a legacy, or making a charitable donation.
Debt repayment, like in Jody's case, is a temporary need better covered by term insurance.
Since limited pay life insurance will have a higher fixed annual premium, it is not a good fit for people
who do not currently have much disposable income like Charles, or even variable income like Marissa. It
is a good fit for people who can afford it now, but will see their income drop after the payment period,
such as Connor. (Refer to Section 3.6)
Jasmine is a business owner. She is concerned with her employee turnover rate, she wants to ensure her
employees are sufficiently covered under a group plan. She feels the cost of group benefits is high for her
small business. Jasmine is considering a group plan where the policy owner pays a premium and the
insurer pays all claims.
What is this type of funding called?
a) Self-insured method
