FP1 / Practice Exam 2

FP1 / Practice Exam 2 Vivian buys a life insurance policy in which the insurer pays policyholders dividends based on how well the life insurer is doing. If the insurer is profitable, Vivian will receive dividends. If the insurer underperforms financially, Vivian and other policyholders will receive fewer dividends. Indicate the type of insurance policy Vivian purchased. A. Variable life insurance. B. Participating life insurance. C. Limited-pay life insurance. D. Non-participating life insurance - B. Participating life insurance. Choose the type of insurance that combines term and whole life for a predetermined contract period and guarantees a sum of money for either the beneficiar(ies) or at the end of the term for the contract holder. A. Variable life insurance. B. Universal life Insurance. C. Permanent life Insurance. D. Endowment life insurance. - D. Endowment life insurance. Endowment life insurance is a combination of term life and whole life. It provides coverage for a specified period of time (usually to age 65) and builds cash value. If the insured should die during the period of coverage, the beneficiary receives the face amount of coverage. If the insured does not die during the period of coverage, the policy owner receives the entire face value of the policy as a cash payment and the insurance coverage ceases. Reference: Module 4, Section 2. Select the type of insurance that can be extended, at the option of the policyholder, at the end of the term without medical evidence of insurability. A. Level term insurance. B. Decreasing term insurance. C. Convertible term insurance. D. Renewable term insurance. - D. Renewable term insurance. Renewable term insurance allows for the policy to be extended for another term of equal length without the insured having to provide medical evidence of insurability. Henry, a 48 year-old director of engineering at an environmental firm, has $50,000 in Canada Savings Bonds on which he earns 3% interest annually. He has paid off the mortgage on his house but he has an outstanding $30,000 bank loan (taken out for home improvements) on which he pays 6% interest. His marginal tax rate is 50%. Select the action an advisor is most likely to recommend to Henry? A. Cash in $30,000 of CSBs and pay off the bank loan. 0% B. Don't do anything; let the situation remain as it is. C. Cash in $30,000 of CSBs and pay off the bank loan, then borrow $30,000 and invest it in a conservative balanced fund. D. Cash in $30,000 of CSBs and pay off the bank loan, then borrow $50,000 and invest it in an aggressive equity fund. - C. Cash in $30,000 of CSBs and pay off the bank loan, then borrow $30,000 and invest it in a conservative balanced fund. The most likely recommendation involves paying off the bank loan by cashing in CSBs and then borrowing the previous loan amount and investing it so that interest on the new loan becomes tax deductible. While borrowing more than the previous loan amount (in C.) could be an option, it would change the risk profile and risk tolerance level, and that may not be the best route to take. Jacob who is about to retire, strategically moves a major portion of his investment portfolio into Canada Savings Bonds (CSBs), guaranteed funds and money market funds. Select the loss control technique he implemented to reduce his exposure to potential equity market declines in his retirement years. A. Loss reduction. B. Loss carryover. C. Loss prevention. D. Loss avoidance. - D. Loss avoidance. Loss avoidance is not exposing one's self to a particular risk. The loss of capital due to a stock market crash can be avoided by investing in guaranteed term deposits rather than in equities. What type of risk retention is a form of "self-insurance" or handling the unavoidable risk internally? A. Active risk retention. B. Tangible risk retention. C. Passive risk retention. D. Intangible risk retention. - A. Active risk retention. With active risk retention, the client is aware of the risk and deliberately plans to retain all of part of it. A car owner with an older, low value vehicle retains the risk of loss by choosing not to insure it against collision damage. Karl and Ilse are married and in their early 60s. Karl's taxable income is $95,000 while Ilse's taxable income is $32,000. Each has given $1,000 in donations to the local humane society and been issued tax receipts. What tax planning advice is most appropriate regarding the reporting of their charitable donations? A. Karl should claim the $1,000 in his tax return this year while Ilse should wait up to 5 years until she is in a higher tax bracket.