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Assessment >> Formal Assessment

Assessment: Risk Management and Estate Planning Web - Academic Partners Unit 1 Post-Assessment
(C117V13U1L0A25Q20)
Date Submitted: 05/14/2014 10:30:00 PM
Total Correct Answers: 17
Total Incorrect Answers: 3

Your Mark (total correct percentage): 85%

1 Louise is contemplating disability insurance but finds the industry a bit confusing. Which among the
following statements concerning disability insurance is TRUE?

Correct
The correct answer:It is more probable that someone in their mid-twenties will suffer a disability lasting three
months or more before they are 65, than someone who is 60 years old.
Your answer:It is more probable that someone in their mid-twenties will suffer a disability lasting three months or
more before they are 65, than someone who is 60 years old.
Solution:

It is more probable that someone in their mid-twenties will suffer a disability lasting three months or more before
they are 65, than someone who is 60 years old. This makes sense because for a younger person, there is more time
before 65 during which he or she could suffer an injury.

Company executives are usually considered in either the low, or lowest risk category to the insurer. They may be
considered high risk to the company itself since they are hard to replace, but to the insurer their occupation
contains few risks of injury. Disability amounts are not received in one lump-sum, but in monthly payments. They
are meant to replace income lost due to a disability.

2 Monika works for Geological Capital Corporation as a full-time surveyor. She spends about seven
months of the year assessing new mining claims in the Rockies for possible investments. In which
occupation class would you place Monika?

Correct
The correct answer:Class 3.
Your answer:Class 3.
Solution:

You would place Monika in occupation Class 3.

(Concepts) Each insurance company has its own classification designations for the occupation of an applicant. Class
3, or medium risk occupations, typically includes the following:

Surveyors, auctioneers, and manufacturers' agents employed in non-hazardous occupations with some
clerical duties, but not full time at a desk.
Supervisors and superintendents with strictly supervisory duties, (e.g., most plant superintendents,
contractors, and inspectors).

(Choice B) As a professional surveyor, she has a relatively non-hazardous occupation and would experience a
medium level of risk in her travel and place of employment. So, you would place Monika in occupation Class 3.

3 In general, risk management strategies are intended to protect individuals from the risks associated
with their daily lives. As a financial planner, there is a six-step risk management process that can be
used to assess the risk of disability. Which of the following statements regarding the application of
this process to the risk of disability is FALSE?

Correct

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The correct answer: If partial or total disability occurs, the primary amount at risk is the client's before-tax
income.
Your answer: If partial or total disability occurs, the primary amount at risk is the client's before-tax income.
Solution:

If partial or total disability occurs, the primary amount at risk is the client's after-tax income, not his before-tax
income.

(Concepts) The six-step risk management process provides the planner with appropriate information to identify the
client's objectives (Step 2), assess the client's disability needs (Step 3), identify strategies to meet those needs
(Step 4), and help clients choose policies that suit their financial needs (Step 5). The primary amount at risk, as
identified during the disability needs analysis, is the client's after-tax income.

(Choice C is false.) So, the primary amount at risk in the event of partial or total disability is the client's after-tax
income, not his before-tax income.

4 Ben earns $54,000 per year on which he pays $16,000 in taxes. After assessing his lifestyle
expenditures, net worth and other factors, he realizes that he could face great difficulty maintaining
his standard of living if his after-tax income was reduced at all. If he purchased disability insurance,
the benefits would not be taxable. In the event of a disability, which of the statements is FALSE?

Correct
The correct answer:Ben's potential financial loss is his pre-tax income plus the pre-tax cost of additional medical
care.
Your answer:Ben's potential financial loss is his pre-tax income plus the pre-tax cost of additional medical care.
Solution:

Ben's potential financial loss is not his pre-tax income plus the pre-tax cost of additional medical care.

(Concepts) The additional expenses from non-Medicare covered medical and attendant costs could push his total
costs above his after-tax income. Any amount above this level creates unacceptable financial difficulties. A client's
potential financial loss in the event of a disability is his after-tax income, plus the after-tax cost of any additional
medical services or equipment needed as a result of that disability.

(Choice D is false.) Because Ben would face great difficulty maintaining his standard of living in the event of
disability, he has the potential of suffering substantial loss and his maximum acceptable loss is zero. His potential
loss is his after-tax income plus the after-tax cost of additional medical care. So, Ben's potential financial loss is not
his pre-tax income plus the pre-tax cost of additional medical care.

5 Other than the occupational classification, there are other ways to evaluate an individual's disability
risk category. Which of the following does not correctly describe one of the risk severity categories?

Correct
The correct answer:Risks of major severity can lead to a reduction in one's standard of living.
Your answer:Risks of major severity can lead to a reduction in one's standard of living.
Solution:

Risks of material severity, not major severity, can lead to a reduction in one's standard of living.

(Concepts) Risk severity can be categorized as:

Critical: an occurrence that would have very serious financial consequences, possibly leading to bankruptcy.
Material: an occurrence that would have serious financial consequences, certainly resulting in a reduction in
standard of living.
Minor: an occurrence that would have little financial consequence, other than some minor loss of income or
manageable expenses.

(Choice D) So, material risks, not major risks, are those risks that have the potential to lead to a reduction in one's
standard of living.

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6 Roberto and Julia like to race snowmobiles on the weekends. Their financial advisor suggests some
risk control strategies as part of their risk management plan. Which of the following actions
complies with this advice?

Correct
The correct answer:Julia purchases a helmet and wears it when snowmobiling.
Your answer:Julia purchases a helmet and wears it when snowmobiling.
Solution:

Julia purchasing a helmet and wearing it while snowmobiling complies with this advice.

(Concepts) Risk management strategies can be subdivided into risk financing and risk control strategies. Risk
financing strategies include risk retention and risk sharing (i.e., insurance). Risk control strategies include risk
reduction and risk avoidance.

(Choice C) The action of purchasing and wearing a helmet qualifies as risk reduction, so it is a risk control strategy.
The remaining choices are risk financing strategies. So, Julia purchasing a helmet and wearing it while
snowmobiling complies with the advice to adopt some risk control strategies.

7 Tony and Sharon follow their financial planner's advice and implement some risk financing
strategies. Which of the following is an example of a risk financing strategy?

Correct
The correct answer:purchasing a disability insurance contract
Your answer:purchasing a disability insurance contract
Solution:

Purchasing a disability insurance contract is an example of a risk financing strategy.

(Concepts) Risk financing strategies include risk sharing and risk retention. Risk sharing generally refers to
purchasing insurance. Purchasing an insurance contract is a form of risk sharing. Risk control strategies include risk
reduction and risk avoidance.

(Choice B) So, purchasing a disability insurance contract is an example of a risk financing strategy.

8 Aaron is 17 years old. He attends high school full-time and starts university full-time next year. His
father works and his mother is on a CPP disability pension. As the child of a CPP disability pension
recipient, Aaron also receives a monthly benefit. Assuming Aaron attends university until the age of
26, when will Aaron's benefits terminate?

Correct
The correct answer:when Aaron turns 25 years of age
Your answer:when Aaron turns 25 years of age
Solution:

Aaron's benefits will terminate when Aaron turns 25 years of age.

(Concepts) The child of a CPP disability recipient continues to receive benefits until he turns 25 years old, as long as
he is in full-time attendance at an educational institution. Otherwise, benefits terminate at age 18. Marital status is
irrelevant.

(Choice D) Aaron is 17 years old. The question assumes that Aaron will be attending university until the age of 26.
So, Aaron's benefits will terminate when Aaron turns 25 years of age.

9 Conrad works as a floor supervisor at a major Canadian newspaper. During the summer, he received
a severe concussion and dislocated his shoulder after falling into a printing press. He immediately
filed for Workers' Compensation and currently receives 75% of his salary at the time of the
accident. Since he has yet to return to work, he is considering applying for CPP and EI benefits. He
is about to prepare his income tax return. Which of the following statements is TRUE?
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Correct
The correct answer:Workers' compensation benefits are not taxable.
Your answer:Workers' compensation benefits are not taxable.
Solution:

Workers' Compensation benefits are not taxable.

(Concepts) Of the three benefits listed, only Workers' Compensation benefits are not taxable for income tax
purposes. However, not everyone receives the maximum benefit.

(Choice B is true.) So, Workers' Compensation benefits are not taxable.

10 Martha, Albert, Ken, and Karen purchased disability insurance contracts through the Indian Feather
College alumni association two years ago. Their contracts are standard with no additional clauses.
They each placed claims in January of this year. Which of the four claims is most likely to be
accepted by the insurer?

Correct
The correct answer:Albert's claim, resulting from injuries sustained when a plate glass window fell on him as he
was walking down the sidewalk.
Your answer:Albert's claim, resulting from injuries sustained when a plate glass window fell on him as he was
walking down the sidewalk.
Solution:

Albert's claim is most likely to be accepted by the insurer.

(Concepts) Most standard disability insurance policies exclude several sicknesses or causes of accidents, such as:

injuries or sickness arising from pregnancy

injuries resulting from risky activities, such as flying an airplane or parachuting

Also, if an individual who applies for insurance has knowledge of an existing medical condition and does not inform
the insurance company, the insurance company can challenge any claims made on that policy, or cancel the policy
altogether.
(Choice B) Martha had a pre-existing medical condition that she was aware of when she applied for coverage. Ken
was involved in a dangerous sport, and Karen's claim resulted from her pregnancy. The insurer may challenge these
claims. Albert, on the other hand, was the innocent victim of an accident. So, Albert's claim is most likely to be
accepted by the insurer.

11 Alice, Wendy, Uri, and George have standard presumptive clauses in their disability contracts. In the
event of a claim under the presumptive clause, which of the following claimants will not qualify for
total disability payments?

Correct
The correct answer:Uri, who worked as a mailman before losing one leg and is now unable to find any work.
Your answer:Uri, who worked as a mailman before losing one leg and is now unable to find any work.
Solution:

Uri does not qualify for total disability payments.

(Concepts) A standard presumptive clause presumes total disability if, through sickness or accident, there is a
complete and irrevocable loss of speech, hearing, sight, or the loss of use of two limbs. Full payments continue until
either the end of the benefit period or for life, regardless of what the claimant might be able to earn from his or her
own or any other occupation, or from his or her investments.

(Choice C) Because Uri only lost one leg, he does not qualify under the presumptive clause. So, Uri does not qualify
for total disability payments.

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12 Tom would like some advice on the type of disability coverage he should purchase. He is in his late
thirties and currently works as a highly skilled medical researcher, but can teach at the local
university if required. Which of the following statements about the provisions that he could choose
to have in his disability insurance coverage is FALSE?

Incorrect
The correct answer:The policy may include a future income option to increase disability coverage, provided he
continues to be insurable.
Your answer:The longer the benefit payment period; the higher the cost of the premium.
Solution:

A future income option guarantees individuals' right to increase their coverage at a future date regardless of
changes in the individuals' health. An own-occupation clause generally covers those individuals in highly profitable
or specialty employment positions. It provides the insured with full benefits if he or she cannot practice his or her
own occupation, even if the insured is still capable of practicing some other occupation. The elimination period is a
form of risk retention, so the longer the elimination period, the lower the premiums. If the individual chooses a low
elimination period, he or she is more likely to have a longer benefit payment period, so the premiums would be
higher.

So, the policy may include a future income option to increase disability coverage, regardless of whether or not he
continues to be insurable.

13 Benito earns $165,000 per year of employment income as a securities lawyer with a large
Vancouver law firm. The company provides their employees with a plan that offers a non-taxable
disability benefit. Benito regularly works between 70 to 80 hours per week and is beginning to
suffer from nervous exhaustion. Which of the following statements with respect to Benito's
disability benefit is FALSE?

Correct
The correct answer:Benito does not need to report the insurance premium paid by his employer as a taxable
benefit on his income tax return.
Your answer:Benito does not need to report the insurance premium paid by his employer as a taxable benefit on
his income tax return.
Solution:

Benito needs to report the insurance premium paid by his employer as a taxable benefit on his income tax return.

(Concepts) If an individual's employer pays the insurance premium and the benefit itself is non-taxable, the
payment of premiums represents a taxable benefit to the employee. As such, the individual must include the
amount of the premium in his taxable income each year.

To minimize exposure to high cost insurance claims, insurance companies may limit the maximum benefit it pays to
a percentage of one's salary or to a dollar figure, such as $75,000. The principle of indemnification says that an
individual cannot profit from a loss due to disability. As a result, the maximum non-taxable benefit is based on the
individual's after-tax income.

(Choice A is false.) Benito's employer provides him with a plan that offers a non-taxable disability benefit and pays
the benefit on Benito's behalf. So, Benito needs to report the insurance premium paid by his employer as a taxable
benefit on his income tax return.

14 Jason works as an investment advisor. He has a disability insurance policy that specifies a monthly
benefit for total disability of $4,500. Late last year, he suffered an illness that caused a total
disability. He has recuperated to a point where he can return to work part-time. He decided to file a
residual disability claim with his insurance company. Before the disability, he earned $6,000 before-
tax per month. However, after the disability, he worked only part-time and earned on average
$4,000 before-tax per month. What is Jason's monthly non-taxable disability benefit?

Correct

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The correct answer:$1,500.
Your answer:$1,500.
Solution:

Jason's monthly non-taxable disability benefit is $1,500.

(Concepts) In the case where the insured makes a residual claim, the benefit is pro-rated according to his or her
loss of income.

(Choice A) So, Jason's monthly non-taxable residual disability benefit is $1,500, calculated as ((loss of monthly
before-tax income ÷ prior monthly before-tax income) x monthly benefit for total disability) or (($6,000 - $4,000)
÷ $6,000) x $4,500).

15 After purchasing a typical disability insurance contract, Susan developed a medical condition that
prevented her from working for four months. After a three-month waiting period, she collected one
month's total disability payment before returning to work. After 11 months of working, the same
medical condition re-occurred and Susan was assessed as being totally disabled for another six
months. Which of the following situations applies according to her disability contract?

Correct
The correct answer:Susan must wait another three months before collecting total disability payments.
Your answer:Susan must wait another three months before collecting total disability payments.
Solution:

Susan must wait another three months before collecting total disability payments.

(Concepts) Most policies stipulate that any recurrence of a disability within six months after the payment of
disability benefits has ended will be considered a continuation of the original disability and thus a new elimination
period is not required.

(Choice A) In Susan's case, she returned to work for more than six months before the disability re-occurred, and as
such, she will have to endure the waiting period once again. So, Susan must wait another three months before
collecting total disability payments.

16 Alley, an archaeologist, purchased a substantial amount of disability insurance four years ago prior
to an expedition in Africa. At 38 years of age, her premiums on the ten-year policy are relatively
inexpensive. However, the policy specifies that the premiums will increase at specified times until
reaching a stated maximum. Which of the following statements with respect to the premiums on her
disability insurance policy is FALSE?

Correct
The correct answer:Alley's policy includes a level premium term.
Your answer:Alley's policy includes a level premium term.
Solution:

Alley's policy does not include a level premium term.

(Concepts) Most individual policies have a level premium over the period of coverage, which means the insurer
cannot raise the premium. Some companies offer step-rated premiums, where the initial premium level is low and
increases at specified times until it reaches a stated maximum.

(Choice D is false.) Given the above information, Alley's policy includes a step-rated premium because the insurer
will increase the premiums at regular intervals until reaching a maximum, likely near the end of policy's term. The
policy may also include a return of premiums provision which may entitle Alley to reclaim a portion of her paid
premiums if she does not file a claim during the term of the policy. So, Alley's policy does not include a level
premium term.

17 Pat is self-employed as a carpenter. He is trying to decide whether he should purchase an individual

disability contract or a group contract through the trade association to which he belongs. In
comparing individual plans to group plans, which of the following statements is FALSE?
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Correct

The correct answer:Group plans usually provide a higher quality of coverage than individual plans.
Your answer:Group plans usually provide a higher quality of coverage than individual plans.
Solution:

Group plans usually provide a lower quality of coverage than individual plans.

(Concepts) Group plans are usually less expensive than individual plans, which would likely be unaffordable for
most employers. To keep the cost of premiums reasonable for employers, group plans tend to provide a lower
quality of coverage than individual plans. Group plans do not provide employees with as much protection, in that
they are more susceptible to cancellation than individual plans, premiums are not guaranteed, and the amount of
coverage available may be inadequate for some employees.

(Choice A is false.) So, group plans usually provide a lower quality of coverage than individual plans.

18 Paula is completing her income tax return. She receives a disability benefit from the disability policy
that she personally owns and for which she personally pays the premiums. Which of the following
statements about the tax treatment of her disability benefit is TRUE?

Incorrect
The correct answer:There is no tax credit for the premiums.
Your answer:The benefits are taxable.
Solution:

There is no tax credit for the premiums of Paula's disability policy.

(Concepts) There is no tax credit for individual disability insurance premiums. Benefits are not taxable and there is
no tax deduction for premiums of personally owned and paid disability policies.

(Choice B is true.) Paula receives a disability benefit from the disability policy that she personally owns and for
which she personally pays the premiums. So, there is no tax credit for the premiums of Paula's disability policy.

19 Jack is self-employed and works on a contract basis. He recently purchased a disability insurance
policy. He personally owns the policy and makes all of the premium payments. Which of the
following statements, with respect to the taxation of his disability benefits is FALSE?

Correct
The correct answer:Jack's premiums are deductible by the company with which he contracts.
Your answer:Jack's premiums are deductible by the company with which he contracts.
Solution:

Jack's premiums are not deductible by the company with which he contracts.

(Concepts) If an individual owns an individual disability insurance policy, he is responsible for all aspects of the
policy. If a company contracts an individual who personally owns a disability insurance policy, that company does
not have the opportunity to deduct the individual's premiums.

(Choice C is false.) Jack personally owns an individual disability insurance policy, so he is responsible for all aspects
of the policy. So, Jack's premiums are not deductible by the company with which he contracts.

20 One of your clients would like some information on various aspects of disability insurance. He has
realized that, with his occupation and age, this type of insurance will provide a degree of financial
protection for him and his family. Which of the following statements with respect to disability
insurance is FALSE?

Incorrect

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The correct answer:Individual plans offer the most extensive coverage at the lowest overall cost.
Your answer:Disability income insurance provides periodic payments to claimants.
Solution:

Individual plans offer the most extensive coverage but not at the lowest overall cost.

(Concepts) Individual plans are those available directly from an insurance company. Although they provide
individuals with the most extensive coverage, these plans are also the most costly. In contrast, group plans offer
less extensive coverage, but at a lower overall cost.

(Choice C is false.) So, individual plans offer the most extensive coverage, but not at the lowest overall cost.

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