Intro to Life Insurance

Chapter Quizzes

Omar and Ursula are a young couple living in Mississauga. Omar works as an account executive and Ursula is a full-time student studying marine safety. Ursula will graduate in 2 years, but until then Omar is paying for all of their expenses. Omar recently purchased a new condo and his mortgage broker suggests that he meet with an insurance agent to discuss his life. 

Which of these financial impacts would the agent be thinking about when he explores the risk of death with Omar?

a) Loss of income

b) Loss of caregiver

c) Income taxes

d) Estate creation

a) Loss of income

Rationale: One of the most devastating financial impacts results from the death of an income earner. Omar is the only person with a job in this couple. If Omar were to die prematurely, Ursula would not be able to pay for all of the expenses, including the mortgage on the condo. Before he can think about his income tax liability and wealth creation, Omar must ensure that Ursula’s basic needs will be met if he dies prematurely.

Ref: 1.2.1

Abishola won a free cruise to the Caribbean. She is excited about winning the trip because she rarely travels, but she is worried that something will happen to her on the ship. Abishola’s sister told her to purchase a travel health insurance, but two days before her trip she decides to give the prize to her sister and stay home instead. 
 
What risk management strategy is Abishola applying by cancelling her vacation?
a) Risk avoidance

b) Risk retention

c) Risk transfer 

d) Risk reduction 

a) Risk avoidance

Rationale: Abishola applied the risk avoidance strategy by deciding not to expose herself to the risk in the first place. By cancelling her trip, she is sure that she will not die or get injured on the ship.

Ref: 1.3.1

Yolande is a 76-year-old retired widow with a whole life policy for $150,000. Her three children that currently live in Australia are named as revocable beneficiaries of the policy. Yolande meets with her insurance agent to change her beneficiary designation because she feels that her children are financially stable and do not need the funds. She would like to leave her death benefit to the Canadian Cancer Society. Her husband died of pancreatic cancer 10 years ago; while he was sick, the society took good care of him. 

Which of the following statements is true about Yolande leaving the death benefit to the Canadian Cancer Society?

a) She can name the Canadian Cancer Society as a beneficiary on her policy.

b) She cannot modify her beneficiary designation since her children are out of the country but she can ask them to pay the funds to the Canadian Cancer society.

c) She cannot leave funds directly to the Canadian Cancer Society because she must choose a beneficiary that has an insurable interest in her life.

d) She must assign the policy to the Canadian Cancer Society.

a) She can name the Canadian Cancer Society as a beneficiary on her policy.

Rationale: Many people would like to name their favourite charity as a beneficiary in their policies. Yolande wants to support the Canadian Cancer Society to thank them for taking care of her husband when he was ill. Yolande can designate anyone as her beneficiary. Since she feels that her children are older and independent, she can change the beneficiary designation and name the Canadian Cancer Society as the beneficiary in her policy without the consent of her children as they are not irrevocable beneficiaries. She does not have to assign the policy to them while she is alive for them to be a beneficiary.

Ref: 1.2.5.3

Owen is terminally ill. He was never married and has no children, but is very close to his sister Marta and her 13-year-old daughter Emma. Owen has $150,000 invested in his Registered Retirement Savings Plan (RRSP) that he would like to leave to Emma as an inheritance. Owen is considering what might happen if he dies while Emma is still a minor. Identify the correct scenario from the following options if that happens:

a) Marta would receive the inheritance on Emma’s behalf and would pay tax on the inheritance.

b) Emma would receive the inheritance directly tax-free.

c) Marta would receive the inheritance on Emma's behalf tax-free.

d) Emma would receive the inheritance directly and pay tax at the marginal tax rate.

a) Marta would receive the inheritance on Emma’s behalf and would pay tax on the inheritance.

Rationale: When a person dies, their registered assets (e.g., Registered Retirement Savings Plan (RRSP) immediately lose its registered status unless there is a tax-free transfer. A tax-free transfer would apply if the beneficiary was Owen’s spouse. Thus, the entire amount will be taxed at the marginal tax rate of the deceased upon his death. In this example, Owen wants to leave his RRSP’s to his niece. Since she is not his spouse the funds will be taxable the year he dies. Also, since Emma is a minor and children cannot directly receive inheritances, the money be paid to a guardian. In this case, the guardian would most likely be her mother Martha.

Ref:1.2.4

Monique is a stay-at-home mother to five school-age children. Her husband, Rashid, is an anesthesiologist and works long hours at the hospital. Monique gets the children ready in the morning, runs all the errands, and basically keeps the household running smoothly. Rashid has an individual insurance policy and group insurance coverage at work that will cover all of Monique’s expenses if he were to die prematurely, but Monique does not have any coverage. Their insurance agent suggests that Monique purchase a life insurance policy as well. 

Which of these financial impacts was the agent thinking about when he gave Monique that suggestion?
a) Loss of caregiver

b) Loss of income

c) Income taxes

d) Estate Creation

a) Loss of caregiver

Rationale: Monique needs a life insurance. She is the family’s caregiver and if she were to die prematurely, Rashid would have a difficult time managing the household. Even though she does not have a paying job, her death as a non-income earner would have a significant impact on the surviving family’s finances, especially because she is taking care of their five children.

Ref: 1.2.2

Kameron loves cycling even though he knows that it can be risky. He goes cycling every weekend. He has the option to bike in one of four locations. The safest is indoors at his local gym and the riskiest is mountain biking down a steep cliff in the Rockies. Kameron chooses to bike in his local gym.

What risk management strategy does Kameron implement?

a) Risk reduction

b) Risk retention

c) Risk transfer

d) Risk avoidance

a) Risk reduction

Rationale: Kameron chose to go biking, so he did not avoid the risk of injury. He did, however, find the safest way to bike. Riding the bike inside a gym will not completely eliminate the risk of injury, but it will reduce the probability or severity of injury. This is called “risk reduction”. 

Ref: 1.3.2

Julia is a 48-year-old single mother. She has two children, Monica and Jacob, who are 8 and 10 years old, respectively. Julia works hard to provide for her children and save money for their college education, but she is worried about what will happen to them if she dies prematurely. She has a small mortgage on her house that is insured by a mortgage insurance policy she purchased at the bank. Other than the mortgage, she does not have any debt.
 
Which of these financial impacts should be Julia’s main consideration when purchasing life insurance?
a) Education funding

b) Debt repayment

c) Business impact

d) Charitable giving

a) Education funding

Rationale: Julia’s main concern is her children’s education. It is important to her that the children have the necessary funds to go to college if she were to die prematurely. She does not have any debt to worry about since her mortgage is insured. Before she can think about charitable giving, she should secure her children’s future. 

Ref: 1.2.5.1

Kim is 36 years old, works hard, and saves 50% of her income. She uses her savings to travel and has already visited every continent in the world. When it is time for her yearly trip, she receives a text message from her friend Kelly inviting her to cross the Somalian dessert with her in two weeks. Kim doesn't know much about Somalia and goes online to find out more. She quickly realizes that this trip is dangerous and decides to go to Sweden instead.

What risk management strategy is Kim using by deciding to visit another country?

a) Risk reduction

b) Risk avoidance

c) Risk transfer

d) Risk retention

a) Risk reduction

Rationale: Risk reduction: It may be possible to take action to reduce the probability or severity of that risk. Kim used the risk reduction strategy. She still takes her yearly trip, so it cannot be said that she is avoiding all travel risk completely. Instead, Kim chooses not to go to a dangerous country, but rather chooses a destination with less risk. Risk transfer would not be possible in this case. If Kim wants to go on the trip, there is really no way to have someone else assume the risk for her. Kim has also not simply retained the risk either – she is modifying the circumstance.
Ref: 1.3.2

Tanya and André are a young married couple who are fit and follow a healthy lifestyle. Tanya’s aunt was diagnosed with breast cancer last year, and after watching her suffer physically and financially for months, the couple decide to meet with their insurance agent to purchase a critical illness insurance policy to protect them if ever either one of them is diagnosed with a critical illness. 

What risk management strategy are they applying by purchasing a critical illness policy?

a) Risk transfer

b) Risk avoidance

c) Risk reduction

d) Risk retention

a) Risk transfer

Rationale: By purchasing a critical insurance policy, Tanya and André are applying a risk transfer strategy. To deal with the risk of illness, they can purchase the policy to ensure that if they get sick, they will receive the benefit and avoid financial hardship.

Ref: 1.3.4

Which of the following statements about life insurance is FALSE?

a) It can only help prevent a devastating financial impact for an insured person’s family.

b) It can serve many purposes including replacing the loss of an insured person’s income or repaying that individual’s debts.

c) It can be used as a planned giving tool for charitable organizations.

d) It can fulfill a purpose even if the insured person doesn’t earn an income.

a) It can only help prevent a devastating financial impact for an insured person’s family.

Rationale: Life insurance is not only used to prevent a devastating financial impact for an insured person’s family, such as loss of income or debts and taxes owed, but it can also be used to prevent negative business impact (for example, key person insurance) or create an estate by leaving money for education, charitable donation or for a legacy.

Life insurance can fulfil a purpose even if the insured person doesn’t earn an income. For example, to help address the loss of a caregiver, or for estate creation purposes.

STUDY REFERENCE:
1.2 Potential financial impact of death