Term Life Insurance

Chapter Quizzes

Abigail would like to purchase a life insurance policy to pay off her outstanding student loan debt if she were to die prematurely. She believes that she will be able to reimburse her debt within 10 years. Abigail is also insured by her husband’s group life insurance policy, but the death benefit would not be sufficient to repay her debt. She is looking for a low-cost solution that does not leave her spouse in debt after her death. What is the right insurance for Abigail’s need?

a) Renewable 10-year term life insurance

b) Whole life insurance

c) Universal life insurance

d) Decreasing 10-year term life insurance

d) Decreasing 10-year term life insurance

Rationale: Decreasing term life insurance may be a good way to cover risks that decrease over time, such as mortgages or other loans that are repaid during a known amortization period. Since Abigail needs coverage over a 10-year period and the balance of her debt will decrease over time, a decreasing 10-year term life insurance best meets her need. Since she is expecting to pay off her debt in 10 years, she does not need a renewable policy, a whole life policy, or a universal life insurance.

Ref: 2.8

Ryan and Carter, residential contractors, have been partners for more than 20 years. They have a house in the suburbs with a mortgage balance of $200,000, which they are paying off regularly. Ryan and Carter are looking for an inexpensive insurance solution that will absorb their debt if one of them were to die prematurely. Which option is suitable for their insurance need?

a) Decreasing term first-to-die life insurance

b) Level term last-to-die life insurance

c) Term buy-sell life insurance

d) Mortgage insurance

a) Decreasing term first-to-die life insurance

Rationale: Ryan and Carter should purchase a decreasing term first-to-die insurance policy. Decreasing term insurance provides a death benefit that decreases over the course of the term, while the premiums remain level. This is a good option for them as they are paying off their mortgage and reducing the outstanding mortgage balance. A joint first-to-die life insurance coverage is appropriate whenever two or more people share a debt obligation because the benefit will be paid out as soon as one of the life insureds die.

Ref: 2.3

Simon is a healthy 30-year-old and is a non-smoker. He would like to buy a $250,000, 10-year term life insurance policy, which has a monthly premium cost of $54. How will Simon pay taxes on the calculated monthly premiums?
a) The taxes will be added to his income and are payable annually.

b) There are no premium taxes.

c) The premium tax will be additional to the $54 premium.

d) The premium tax is already incorporated into the $54 premium.

d) The premium tax is already incorporated into the $54 premium.

Rationale: Provinces and territories charge a premium tax ranging from 2% to 5% on life insurance premiums. This premium tax is incorporated into the premiums charged to the policyholder. For example, if a policyholder pays a premium of $102 in a province that has a 2% premium tax, the insurance company must remit $2.04 of that premium to the provincial government.

Therefore, Simon's $54 monthly premium already includes taxes.

Ref: 2.4

Simon is the proud owner of a restaurant named Sushi Inc. The restaurant has an excellent reputation, thanks to its chef, Huang. Simon is worried about the success of his restaurant if Huang were to die prematurely. Simon's agent recommends that Sushi Inc. should purchase a life insurance policy on Huang’s life and use the benefit to cover significant financial losses that would occur if Huang died.
a) Sushi Inc. is the policyholder of the contract, Simon is the beneficiary, and Huang is the life insured.

b) Sushi Inc. is the policyholder and the beneficiary of the contract, and Huang is the life insured.

c) Simon is the life insured of the contract, Huang is the policyholder, and Sushi Inc. is the beneficiary.

d) Simon is the policyholder, and Huang is the beneficiary and the life insured of the contract.

b) Sushi Inc. is the policyholder and the beneficiary of the contract, and Huang is the life insured.

Rationale: The policyholder is the person who takes out the life insurance policy; he is the owner and makes all the decisions about the contract. Since Sushi Inc. purchased the policy, it is, therefore, the policyholder. In addition, the policyholder is sometimes referred to as the "insured"; this term should not be confused with "life insured." The policyholder is said to be the insured because he has taken out financial loss coverage that would otherwise result from the death of the insured person. Therefore, Sushi Inc. is the policyholder (insured) and the beneficiary, and Huang is the life insured.

Ref: 2.2

Cindy, a widow, is the sole owner of a cottage by the water that she acquired many years ago for a total cost of $75,000. Today, the property is worth $650,000. It is estimated that the market value of the cottage will increase by 5% each year because of the rising demand for waterfront properties. Cindy plans on bequeathing her cottage following her death to her only son, Carl. She does not want her son to be forced to sell the cottage to cover the income tax that will have to be paid on the capital gain of the cottage when she dies.

Which type of life insurance would be the best fit to cover this insurance need?

a) Decreasing permanent insurance

b) Increasing permanent insurance

c) Increasing term insurance

d) Decreasing term insurance

b) Increasing permanent insurance

Rationale: Cindy’s life insurance need arises from the taxable capital gain that will be realized upon her death. If the tax liability cannot be satisfied with liquid assets, the cottage may have to be sold, which would not satisfy Cindy’s wishes of leaving the cottage to Carl. With an increasing permanent life insurance, the tax liability will be funded by the insurance and there will be no need to liquidate additional assets. Since the market value of the cottage is increasing, the amount of tax due will also increase. Therefore, an increasing life insurance is the best option.

Cindy also needs the coverage to extend for her lifetime vs a defined period of time and would require permanent insurance instead of term insurance. 

Ref: 2.3.3

Chloe will be 25 years old in August of next year. She recently learned that a rare autoimmune disease runs in her family and that she has a chance of developing this disease after she is 30 years old. She contacts her insurer to convert her 10-year convertible and renewable term life insurance policy, which she had purchased three years ago, into a permanent contract before she is diagnosed with the disease. 

What will happen to the term life insurance policy?
a) Due to her chances of developing this illness, the policy will not be convertible, but she can renew it.

b) Due to her chances of developing this illness, the policy will not be convertible or renewable.

c) Her policy can be converted into a permanent insurance if she provides proof of insurability.

d) Her policy can be converted into a permanent insurance with no proof of insurability.

d) Her policy can be converted into a permanent insurance with no proof of insurability.

Rationale: A renewable and convertible term life insurance policy allows Chloe to convert her term insurance into a permanent life insurance policy at a later date. It also gives her the provision to renew it at a later date if that is her preference. Since she knows about the disease probability, she chooses conversion, which does not require proof of insurability. The new premiums will take her age into account, which will increase her premiums because she is older than when she purchased the original policy.

Ref: 2.5, 2.6

Mario and Serge are in their early forties and are equal shareholders of a shoe store. The market value of their store is $500,000 and they estimate each person's share at $250,000. They decide to meet with a life insurance agent to purchase life insurance on each other. They mention to their agent that they are looking for an economic solution because they already have a lot of expenses to bear. 

Which insurance policy should Mario and Serge purchase?
a) A $250,000 joint last-to-die permanent insurance policy 

b) They should both purchase a $250,000, 20-year term insurance on each other’s lives

c) A $250,000 joint first-to-die term insurance policy

d) They should both purchase a $250,000 permanent insurance policy on each other’s lives

c) A $250,000 joint first-to-die term insurance policy

Rationale: Mario and Serge should purchase a $250,000 joint first-to-die term life insurance policy because they want an economical solution and they do not need permanent insurance. With a joint first-to-die life insurance policy, a single amount of coverage is placed on two or more lives insured, and the death benefit is paid out upon the death of the first person to die. Two separate life insurance policies on two lives of the same coverage amount, whether term or permanent insurance, are typically more expensive than getting a policy on one person’s life. It must also be noted that permanent life insurance is always more expensive than term life insurance.

Ref: 2.2.2

Ganesh, who is 40 years old, neglected to save money and has accumulated $100,000 in debt. He married recently and decided to cut back on his expenses and to make debt repayment his primary goal, which he predicts would take him five years. He also wants to purchase a life insurance policy that would take care of his wife in the event of his death. However, he cannot afford the high premiums of whole life insurance but would like to consider it when his debts are paid off.

He would still like to purchase a life insurance policy immediately. What is the best policy to suit his need?
a) Five-year, $100,000, decreasing term insurance 

b) Five-year term insurance

c) Universal life insurance

d) Convertible term life insurance

d) Convertible term life insurance

Rationale: Ganesh should purchase a convertible, term life insurance policy. The premiums on term insurance are inexpensive and since the policy is convertible, he can convert his insurance in the future to life insurance after his debt is paid off and he can spare the money to pay for permanent life insurance. The five-year term insurances do not have the option to convert to a permanent life insurance like he wants to for the future. Universal life insurance is the most expensive of all the permanent life insurances because of its savings component.

Ref: 2.8

Alain, 35 years old, purchased a convertible, term life insurance policy 10 years ago when he was single. Now that he is married and his wife is pregnant with their first child, he would like to convert it to a permanent life insurance policy. Alain wants to make sure that the premiums for the permanent life insurance are based on his original age of 25 years when he first purchased his policy. The insurer tells him that he will have to pay a sum of $5,000 in order to avail himself of the conversion right.

Why does he have to pay this extra money?
a) The insurance policy contains an original-age conversion that requires Alain to catch up on premiums and pay a lump sum when converting the policy.

b) The insurance company's investment income has not met the target in the last 10 years and must offset losses in order to maintain the contract.

c) As the probability of death is higher at age 35, the insurer may require an increase in premiums and make up for the lower premiums when it was a temporary policy.

d) The insurer requires a lump sum for conversion since his dependent status has changed due to the addition of a wife and a child.

a) The insurance policy contains an original-age conversion that requires Alain to catch up on premiums and pay a lump sum when converting the policy.

Rationale: Alain is asked to pay $5000 to catch up on his premium payments because of original-age conversion. Some policies base the permanent life insurance premiums on the original age of the life insured at the time the insurance contract was first issued. This is called an “original-age conversion” or a “retroactive conversion”. Original-age conversions would result in lower premiums for permanent life insurance, which would appear to be advantageous. However, the initial premiums for an original-age convertible term policy will be higher than the premiums for an attained-age convertible term policy. This is because the insurance company is taking on the risk of providing lifetime coverage at a lower rate if the original-age conversion is exercised. 

Furthermore, in the case of an original-age conversion, the policyholder would have to pay the insurer a lump sum to catch up on premiums. The lump-sum payment is due to Alain’s choice of wanting to convert the policy at the original age rather than the increased probability of death, insurance company’s income, or his marital/fatherly status.

Ref: 2.6.2

Yolanda is 26 years old. She started her medical practice six months ago. She is still paying off her student loan, but she recently took a mortgage loan to buy a house with her common-law partner. In addition to repaying her debts, she has started to invest for her retirement, which does not leave much disposable income for life insurance. The couple is in the process of adopting a child and plan on adopting another child in a few years. Yolanda wants to make sure that her family does not suffer financially if she were to die. She also wants to be able to leave a legacy to her children and future grandchildren should she live a long life.

Considering her desires and current situation, which type of life insurance would be the best option among the following?

a) Non-renewable term insurance

b) Increasing term insurance

c) Permanent insurance

d) Renewable and convertible term insurance

d) Renewable and convertible term insurance

Rationale: The fact that Yolanda wants to leave a legacy once she passes away suggests that she may need permanent insurance that, unlike term insurance which ends at a certain age, will last for her lifetime. However, due to her current budget constraint, buying permanent insurance now could be too expensive. That is why term insurance would be a better fit until she has more disposable income to put toward life insurance. To ensure that the life insurance lasts for her entire lifetime, in addition to being renewable, the life insurance must be convertible.

Ref: 2.5, 2.6

Samuel was insured under a convertible term life insurance policy for nine years before he converted his term policy into a permanent policy under the conversion provision last year. He also had an accidental death rider on his policy. Yesterday, Samuel committed suicide.

Considering the two-year suicide exclusion period found in life insurance contracts, what will the insurance company do in this situation?

a) Pay the death benefit because the conversion to a permanent policy is treated as an extension of the original policy

b) Not pay the death benefit because the permanent insurance obtained by converting the term insurance is considered as a new contract and the two-year suicide exclusion period applies

c) Reimburse only the premiums paid to date because the death benefit is never paid in full in the event of a suicide

d) Pay the death benefit under the double indemnity rider

a) Pay the death benefit because the conversion to a permanent policy is treated as an extension of the original policy

Rationale: A suicide exclusion period is found in every life insurance contract and is usually two years. However, a policy issued as a result of a conversion is treated as an extension of the original policy. Therefore, Samuel’s suicide happened after the two-year suicide exclusion period since he had been insured for ten years. In this situation, the insurance company will pay the full death benefit, but not more.

A life insurance policy with an accidental death (AD) rider will provide an extra benefit, over and above the regular death benefit, if the life insured dies as a result of an accident. The most common multiple is two times the death benefit, and as a result, this rider is sometimes referred to as “double indemnity.” Suicide is not considered an accidental death, so the accidental death rider does not play a role in this situation.

Ref: 2.6.1

Tony and Lucille have a $300,000 mortgage loan. They expect to repay this loan over a 20-year period with fixed monthly payments. They would like to ensure that if one of them dies, the survivor would have sufficient funds to reimburse the loan balance. They are worried about the cost of life insurance and are looking for the least expensive option to cover their needs.

Which term life insurance best meets their needs?
a) $300,000 joint last-to-die decreasing 20-year term policy

b) $300,000 joint last-to-die level 20-year term policy

c) $300,000 joint first-to-die decreasing 20-year term policy

d) $300,000 joint first-to-die level 20-year term policy

c) $300,000 joint first-to-die decreasing 20-year term policy

Rationale: In order to meet the clients’ needs, the life insurance must pay upon the first death, so the survivor can repay the loan balance. Then, among the options that are available, we must look for the least expensive option.

An individual policy, while less expensive than a joint first-to-die policy, does not cover the clients’ needs. If Lucille dies first, Tony will not have the funds required to repay the loan. A joint last-to-die policy is not adequate because the clients’ have expressed their desire for the survivor to have sufficient funds to reimburse the loan after the first death. With a joint last-to-die policy, the survivor would not receive the death benefit. So, a joint first-to-die policy would cover the need for the survivor to repay the loan balance following the first death. The premiums for a decreasing term insurance are lower than that of a level term insurance and since the loan balance decreases over time, the decreasing joint first-to-die insurance would cover the clients’ needs at the lowest price.

Ref: 2.2.2, 2.2.3, 2.3.2

Dale is 65 years old. He has a 20-year term life insurance, with a face amount of $1,000,000, that he bought five years ago. He pays an annual premium of $10,000. This year, the probability of death for Dale is 1.260%. What is the mortality cost of his life insurance policy for this year?

a) $15,800

b) $10,000

c) $12,600

d) $6,500

c) $12,600

Rationale: On a per policy basis, the annual mortality cost is estimated by multiplying the policy’s face amount by the life insured’s probability of death during the year. Dale’s policy has a face amount of $1,000,000. The probability of death is 1.260%. The annual mortality cost of Dale’s policy can be calculated by multiplying the face value of $1,000,000 with the probability of death. 

$1,000,000 × 1.26% = $12,600.

Ref: 2.4.1

What is the main advantage of term life insurance?
a) Premiums are guaranteed after the renewal period.

b) Premiums are guaranteed over the term.

c) Coverage is available for extension after the term.

d) Coverage is guaranteed after the renewal period.

b) Premiums are guaranteed over the term.

Rationale: One of the main advantages of term insurance is that the premiums are guaranteed over the term of the insurance. However, the premiums are not guaranteed to remain the same after renewal. Coverage can be converted or renewed, but not extended, and coverage is not necessarily guaranteed after the renewal period.

Ref: 2.7

Tarik and Jade purchased life insurance policies on their twins, Sarah and Karim, when they were seven years old. They know that premiums are very low at that age and opted for a renewable and convertible term insurance policy that will give the children the right to continue the coverage when they are adults. Unfortunately, Karim was diagnosed with cancer when he turned 16. He underwent treatment and is in remission. Tarik and Jade are worried about the changes to Karim’s life insurance policy and the premium that he will have to pay. What kind of change to the policy premium can they expect?
a) Premiums will decrease with age.

b) Premiums will increase with age.

c) The insurer will refuse to renew the contract.

d) Premiums will increase with the cancer diagnosis.

b) Premiums will increase with age.

Rationale: Karim will still be insurable despite his diagnosis and the premiums will increase at the time of renewal according to the contract. Since his parents purchased a renewable policy, the insurance company assumes the additional risk of having to maintain coverage for the insured person after the initial term, even after Karim’s diagnosis of cancer. On the other hand, premiums will increase with age because the new premiums will reflect the age of the life insured at renewal. It must be noted that most policies provide a guaranteed schedule of renewal rates when the policy is first issued.

Ref: 2.5.1, 2.5.1.1

Kamila is raising her two young boys, aged 3 and 5 years, on her own. She earns a modest income and wants to make sure that, in the event of her untimely death, her kids are taken care of financially until they are adults.

Which product would suit her insurance needs?
a) Whole life insurance

b) Universal life insurance

c) Term life insurance

d) Joint life insurance

c) Term life insurance

Rationale: There are several types of life insurance, but Kamila needs insurance for a specific period, i.e., until her kids are adults. Term insurance usually covers periods of 1 year, 5 years, 10 years, or 20 years. In this case, a 15-year term would be good since her younger son is 3 years old. As long as policy premiums are paid, the coverage would be guaranteed throughout this period.

Ref: 2.1

Mark was born on November 21, 1977. On August 25, 2002, he bought a convertible term life insurance on his life. His insurance company uses the nearest birthday to determine the attained age. On February 15, 2016, Mark converts his term policy into a permanent policy. Calculate what would be the age used to determine the permanent insurance’s premiums if conversion is done at the attained age.
a) 24

b) 25

c) 38

d) 39

c) 38

Rationale: If the conversion is done at the attained age, Mark’s attained age at the time of conversion is 38 since his nearest birthday at that moment is November 21, 2015.

The insurance company uses the nearest birthday to determine the attained age, so Mark’s attained age when he bought his life insurance was 25 (nearest birthday was November 21, 2002). This will also be the original age should the conversion be on an original-age basis.

Ref: 2.6.2