Accident and sickness insurance Mock Exam

Question # 1: Alvin owns a disability insurance policy, a critical illness insurance policy, a long-term care
policy, and an extended health insurance policy. For which of the following policies, benefits are not based on
Alvin's specific income or expenses and there are no specific limits on the benefit amount paid to Alvin?
a) Critical illness insurance
b) Disability insurance
c) Long-term care insurance
d) Extended health insurance

YOUR ANSWER
A. Critical illness insurance

Rationale: In critical illness policies, there are no specific limits on the amount of benefit that the insured can
collect, since benefits are not tied either to specific income or expenses.

In any event, there are conventions that restrict disability coverage from all sources to a prescribed maximum
of pre-disability income from all sources (usually 85%), again setting out priority of payers. For long-term care
insurance, the insured cannot be reimbursed for more than the actual expenses incurred, no matter how much
overlapping coverage he might have.
Reference: 7.4.3.1

Question # 2:Miguel is covered by a group short-term disability plan provided by his employer. The group plan
provides him with 67% of his gross income for a benefit period of six months, following a waiting period of
seven days. Recently, one of Miguel’s friends suffered a stroke and the plan covered him for only six months.
Miguel is worried that he might have a similar experience in the event that he is disabled long-term. He likes
his job and plans to continue working there until he retires.
Which of the following suggestions is an ideal fit for Miguel’s concerns about long-term disability coverage?

a) Individual disability policy with a waiting period of six months

b) Individual disability policy with a waiting period of twelve months
c) Long-term care insurance policy
d) Critical illness insurance policy

YOUR ANSWER
A. Individual disability policy with a waiting period of six months

Rationale:
An individual disability policy with a waiting period of six months is the ideal fit for Miguel, as it will continue to
provide him with income in the event that he is disabled, beyond the six-month coverage provided by his group
insurance. The long-term care insurance will only provide reimbursement of expenses should he lose his
independence but will not provide him with an income. The critical illness policy will provide him with a lump
sum amount of money but only if he is diagnosed with a condition covered by the policy. (Refer to Section 6.6)

Question # 3: Alvin is a senior marketing executive at a company and earns $90,000 a year. He is covered
under an individual disability insurance (DI) policy and is severely injured in an accident. He is unable to return
to work for 12 months and receives disability benefits. His insurance advisor assures Alvin that he does not
have to return to work even if he is physically able to. After 12 months, Alvin opts to take up a part-time job as
per his doctor’s advice. He returns to work part-time as a store supervisor, earning $40,000 a year, and
continues to receive reduced disability benefits. Which definition of disability governed Alvin’s DI policy?

a) Regular occupation
b) Own occupation
c) Any occupation
d) Total disability (according to the CPP)

YOUR ANSWER
a. Regular occupation
Rationale: “Regular occupation” uses essentially the same definition and has the same implications as “own
occupation” but with one difference: if the disabled insured elects to go back to work in any capacity, benefits
from the policy will be reduced and could, in fact, be terminated. However, the insured is not compelled to
return to any occupation, even if physically able. If he refuses to return to work, he will be entitled to his full
benefits. But this choice is strictly up to the insured and not the insurer, who cannot force him to accept another
job. The “regular occupation” definition of disability can be offered to almost all occupational classes.
Reference: 2.2.3.3

Question # 4:

Linda is a university professor. She has a disability insurance policy with a 90-day waiting period and a benefit
period payable until age 65. Her policy also has a presumptive disability clause. When Linda was involved in a
car accident, she had to stop working for one year to recuperate from her numerous injuries. Although she was
left permanently blind as a result of the accident, she was able to return to her full-time employment at the
university after the one-year absence.

Which of the following statements about how her disability benefits are paid is true?

a) Her benefits will start immediately and will be paid until age 65.
b) Her benefits will start after the 90-day waiting period and will be paid until age 65.
c) Her benefits will start immediately and will be paid for one year until she returns to work.
d) Her benefits will start after the 90-day waiting period and will be paid until she returns to work.

YOUR ANSWER
a. Her benefits will start immediately and will be paid until age 65
Rationale: The total and irreversible blindness Linda suffered as a result of her car accident will be considered
as a presumptive disability. Therefore, the waiting period is waived and disability benefits start immediately. In
addition, the benefits are payable for the duration of the benefit period, in this case until Linda’s reaches age
65, even if she returns to work. Linda does not have to prove loss of income due to the disability because it is a
presumptive disability. Ref: 2.2.2.8

Question # 5: Cassie meets with an insurance agent to apply for a disability insurance policy. After analyzing
Cassie’s needs, the agent recommends a guaranteed renewable contract with “any occupation” definition of
disability. The contract stipulates a 30-day waiting period and a 12-month benefit period. Cassie finds the
recommendation acceptable but feels that the premiums are expensive. Which of the following can the agent
do to reduce Cassie’s disability insurance premiums?
 a) Increase the waiting period
b) Change the definition to “own occupation”
c) Add a return of premium rider
d) Recommend a non-cancellable contract

YOUR ANSWER
A. Increase the waiting period

Rationale: Cassie’s premium can be reduced by increasing the waiting period. The other options increase the
premium amount. Waiting periods, benefit periods, the benefit amount, and the nature of the contract can all be
varied to suit a proposed insured’s needs and budget. The longer the waiting period and shorter the benefit
period, the lower the premium will be. Reference: 7.1.2.1

Question # 6:

Sam’s client, Sameera, is an executive with business interests across the country. Her latest venture will
involve her spending a significant amount of time in Winnipeg. Since her daughter also goes to school there,
she is purchasing a home in Winnipeg and has obtained a mortgage from her bank. The bank has offered
Sameera mortgage insurance that would cover her in the case of disability. As her insurance agent, Sameera
has some questions for Sam. Sameera wants to know how mortgage insurance differs from an individual
disability policy. What does Sam tell her?

a) The benefit amount can be decided by Sameera with mortgage insurance, while the insurer decides the
benefit amount in the case of an individual disability policy.
b) The definition of total disability is “any occupation” in the case of an individual policy, but Sameera can
choose the definition that will apply in the case of mortgage insurance.
c) Sameera is the beneficiary in the case of an individual policy, but the lender is the beneficiary in the case of
mortgage insurance.
d) Sameera will pay higher premiums for mortgage insurance and lower premiums for an individual policy.

YOUR ANSWER
c) Sameera is the beneficiary in the case of an individual policy, but the lender is the beneficiary in the case of
mortgage insurance.

Rationale:
Mortgage insurance is a group policy where the lender is the owner and beneficiary. The benefit amount is the
amount of the monthly mortgage payments. The lender chooses the provider. Mortgage insurance uses the
“any occupation” definition of total disability. In the case of an individual disability policy, the owner (who is also
the beneficiary) is the person whose life is insured. The benefit amount can be decided by the insured and the
insurance provider. The definition of total disability that will apply may be selected by the insured subject to
certain occupational restrictions. Premiums are lower for mortgage insurance as they have low group rates.
(Refer to Section 2.1.3)

Question # 7: Vikram is a self-employed architect and wants to apply for disability income replacement
insurance coverage. On which of the following income will Vikram’s coverage be based on?

a) A percentage of Vikram’s pre-tax, after-expense income

b) A percentage of Vikram’s pre-tax income
c) A percentage of Vikram’s after-tax, after-expense income
d) A percentage of Vikram’s after-tax income

YOUR ANSWER
A. A percentage of Vikram’s pre-tax, after-expense income

Rationale: Vikram’s coverage is based on a percentage of his pre-tax, after-expense income.

In the case of an employee, disability income replacement insurance coverage is generally based on a
percentage of pre-tax income and, in the case of the self-employed, on pre-tax but after expense (net) income.
Reference: 6.2.1.2

Question # 8: Akram owns a private corporation, EFG Groceries. His friend, Rahul, is the sole proprietor of an
arts studio. Which of the following is an advantage that Akram’s private corporation has over Rahul’s sole
proprietorship?

a) It offers protection of personal assets from creditors.

b) It is inexpensive and easy to set up and operate.
c) Its shares can be freely traded on a public stock exchange.
d) It is not subject to any provincial rules and requirements.

YOUR ANSWER
A. It offers protection of personal assets from creditors.

Rationale: An advantage that Akram’s private corporation has over Rahul’s sole proprietorship is that it offers
protection of personal assets from creditors. A private (or closely held) corporation is generally established to
operate a business either for tax advantages and/or protection for owners from the creditors of the business.
Compared to sole proprietorships, private corporations are expensive and not easy to set up and operate.
Shares of private corporations cannot be freely traded on a public stock exchange. Corporations are subject to
many provincial rules and requirements. Ref: 5.1.3.1

Question # 9: Cho owns a multicuisine restaurant which is well reviewed and wildly popular in the city, thanks
to the expertise of its executive chef Basha. Since the restaurant’s profitability depends on Basha, his absence
due to illness or disability can be risky. Which of the following options does Cho have in order to manage the
costs associated with such a risk?

a) Self-funding and insurance

b) Assuris and bequests
c) Compensation benefits
d) Business assistance plans

YOUR ANSWER
A. Self-funding and insurance

Rationale: When it comes to the risk that a business might suffer when an owner or an essential employee is
injured or ill and unable to fulfill his function with the business, the business only has two options to deal with
the costs associated with such a risk: self-funding and insurance. Ref: 1.2.3

Question # 10: Philip owns a restaurant and obtains a $100,000 loan for renovations. He is worried that he
might not be able to repay the loan if he becomes disabled and unable to manage his restaurant business. His
advisor recommends that Philip should purchase a business loan protection disability insurance. Philip wants
to know about the policy’s benefits. Which of the following information will the advisor provide to Philip?

a) The plan typically offers monthly payments of up to $10,000 for a period of 24 months.
 b) The plan offers a lump sum benefit of 100% of the loan amount after a 30-day waiting period.
c) The plan offers quarterly payments of up to $15,000 for a period of 12 months.
d) The plan provides semi-annual payments covering 50% of the loan amount with each payment.

YOUR ANSWER
A. The plan typically offers monthly payments of up to $10,000 for a period of 24 months.

Rationale: Benefits may be payable in one of two ways: periodic (monthly) or lump-sum. Periodic payments, of
up to $10,000, are the most common and typically may run for up to 24 months. Lump-sum payouts, of up to
$250,000, are possible, but not to exceed 75% of the loan balance and only after a lengthy elimination period
(usually one year). Overall, of course, benefit payments are designed to discharge the loan balance, so they
could not exceed the amount of the loan.

Reference: 5.3.2.5

Question # 11: Which of the following individuals can obtain disability insurance (DI) coverage?

a) 45-year old Crystal, who is a kindergarten teacher and owns a long-term care insurance
b) 33-year old Roy, who is a stay-at-home mom taking care of her children
c) 35-year old Mike, who is single and looking for a job as he was laid off recently due to misconduct
d) 50-year old Harry, who owns a business and is currently in critical care after an accident

YOUR ANSWER
45-year old Crystal, who is a kindergarten teacher and owns a long-term care insurance

Rationale: Crystal can obtain disability insurance (DI) coverage as she is employed and healthy. Anyone who
has earned income (from employment or self-employment), and who is insurable medically, may obtain
disability income replacement coverage. Ref: 2.1

Question # 12: Farah is employed by Success Marketers Inc. and is covered by Employment Insurance
(EI) and Canada Pension Plan (CPP). Her company offers a group disability coverage of 50% of her gross
income with a benefit period of six months and a waiting period of seven days. She has the option to pay the
entire premium for her coverage through salary deduction or elect her employer to cover the premium. She
makes a gross income of $60,000 per year and estimates that she needs $2,000 per month to meet her
monthly expenses.

Based on the two options how could Farah’s disability income be taxed?

a) If Farah pays the entire premium herself, the benefit will not be taxed; but if her employer pays for the
premium, the benefit will be taxed.
b) Regardless of who pays the premiums, the disability benefit is considered income and will be taxed.
c) If Farah pays the entire premium herself, the benefit will be taxed; but if her employer pays the premium, the
benefit will not be taxed.
d) Regardless of who pays the premiums, the disability benefit is considered a non-taxable benefit.

YOUR ANSWER
If Farah pays the entire premium herself, the benefit will not be taxed; but if her employer pays for the
premium, the benefit will be taxed.
 Rationale: Employees must pay the premium for disability policies in order for the benefits to be tax-free. If the
employer pays the premium, Farah’s benefit will be taxed. (Refer to Section 2.3.5)

Question # 13: Ibrahim is a construction worker and his job involves working in a high-risk environment on a
daily basis. He wants to apply for an accident and sickness insurance policy. He is concerned that his
occupation may disqualify him for coverage. Which of the following policies will use Ibrahim’s occupation as a
critical factor to determine coverage?

a) Disability insurance policy

b) Critical illness insurance policy
c) Long-term care insurance policy
d) Credit card travel insurance policy

YOUR ANSWER
A. Disability insurance policy

Rationale: A client’s occupation is the most critical factor in determining the type, benefits and costs of
disability insurance coverage. While knowledge of a client’s occupation is useful for any insurance, the amount
of critical illness and long-term care insurance required is not primarily determined by occupation.

Reference: 6.1.4

Question # 14: Matias, age 38, works for a roofing company. Many years ago, he purchased a disability
policy, with premiums being deducted from his bank account every month. Usually, about 60 days before the
anniversary date of the policy, he receives a letter from the insurance company stating the premiums for the
following year. The premiums do go up every three or four years but, given his profession, he feels the
insurance is worth it. What type of disability policy does Matias have?

a) Guaranteed renewable policy

b) Cancellable policy
c) Non-cancellable policy
d) Guaranteed issue policy

YOUR ANSWER
a. Guaranteed renewable policy

Rationale: Guaranteed renewable policies bind the insurer to renewing the coverage each year until the
maturity date of the policy (usually at age 65), but the insurer has the right to modify premiums unilaterally.
Matias’ contract cannot be cancelled until he turns 65, but the premiums can go up, unlike a non-cancellable
policy.

Ref: 2.2.1.2

Question # 15: Sam is covered under his employer’s group disability insurance (DI) plan. He is 58-years old
and is planning to retire this year. He meets with his insurance agent to discuss his options to convert his
coverage from the group plan to individual DI policy. Which of the following explanations is the agent likely to
provide?
 a) The conversion will be subject to some restrictions with regard to the type of policy to which the group
coverage may be converted.
b) Sam will have to provide medical evidence of insurability to convert his group coverage to an individual DI
policy with the issuer of the master plan.
c) The conversion must be made within 90 days of termination of participation in the group plan.
d) The conversion must be made within 60 days in order to obtain coverage without medical underwriting.

YOUR ANSWER
The conversion will be subject to some restrictions with regard to the type of policy to which the group
coverage may be converted.

Rationale: In circumstances where the plan member no longer qualifies for membership, he may have the
option to convert his group coverage to an individual DI policy with the issuer of the master plan, without
necessarily having to provide medical evidence of insurability. The conversion must then be made within 30
days of termination of participation in the group plan and is usually subject to some restrictions as to the type of
policy to which the group coverage may be converted.

Ref: 2.3.3.3

Question # 16: Lucy is in the process of applying for an accident and sickness insurance policy and is working
with her insurance agent, Kam. While assessing Lucy’s financial situation, Kam reviews Lucy’s cash flow
statement listing out all her income and expenses. Which of the following will increase the accuracy of a cash
flow statement?

a) A budget based on actual spending patterns

b) Credit card statements
c) Home equity line of credit (HELOC) statements
d) A review of current assets

YOUR ANSWER
a. A budget based on actual spending patterns

Rationale: The cash flow statement lists all sources of net income (income after income tax) and all expenses
including debt payment for liabilities. It is most accurate when it is backed up with a budget based on actual
spending patterns.
Ref: 6.4.1.3

Question # 17: Gavin helped his client, Gianna, apply for a critical illness insurance policy last week and is
meeting her to deliver the final contract. Which of the following should Gavin avoid doing while delivering the
contract to Gianna?

a) Deliver the contract to Gianna without explaining the definitions of covered conditions.
b) Enquire if Gianna has experienced a negative change in health since the date of application.
c) Obtain the first policy premium from Gianna if she had not made the payment already.
d) Explain to Gianna about the riders, policy benefits, coverage limits, and exclusions.

YOUR ANSWER
A. Deliver the contract to Gianna without explaining the definitions of covered conditions.

Rationale: Gavin should avoid delivering the contract to Gianna without explaining about the definitions of
 covered conditions.

The agent should always keep in mind that the client is generally not knowledgeable regarding the intricacies
of insurance and it is the role of the agent to explain the contract at time of delivery, with particular emphasis
on those contract clauses which might impact the rights of the insured:

 Benefits/coverage limits;
 Riders;
 Key definitions of covered conditions, particularly in regard to critical illness policies;
 Exclusions.
 Particular attention should be paid to the last two items: definitions and exclusions.

Reference: 7.4.3

Question # 18: Sagar is covered under a group health insurance plan that provides accidental death and
dismemberment (AD&D) coverage. The amount of coverage offered under the plan is $100,000. Sagar has
diabetes and his leg needs to be amputated due to a serious infection. How much benefit will Sagar receive
from the AD&D coverage for the loss of his leg after the amputation?

a) $0
b) $100,000
c) $75,000
d) $50,000

YOUR ANSWER
A. $0

Rationale: Sagar will not receive any benefit from the AD&D coverage because the permanent loss of his leg
is not caused by an accident.

Accidental death and dismemberment (AD&D) coverage is common to most group insurance and individual
extended health insurance plans. It pays a benefit if the plan member dies, loses or permanently loses the use
of a limb, hearing or eyesight as the consequence of an accidental occurrence (as contrasted with illness or a
medical condition, such as diabetes).

Reference: 4.3.1.5

Question # 19: Which of the following examples represents in-kind income?

a) Bella is 68 years old and her nephew provides her with food and shelter gratuitously.
b) Joy is 65 years old and she receives old age security (OAS) pension from the government.
c) Stella is 55 years old and disabled. She receives income from Employment Insurance.
d) Fern is 71 years old and she receives a monthly benefit of $1,200 from a trust set up by her spouse.

YOUR ANSWER
A. Bella is 68 years old and her nephew provides her with food and shelter gratuitously.

Rationale: Bella’s nephew provides her with in-kind income. Not all income comes in the form of cash
payments. “In-kind income” is provided in the form of goods or services, offered on an exchange basis for
goods and services previously provided by the client, or gratuitously, most often by a close family member.
 Reference: 6.2.3

Question # 20: Karen paid $2,200 annually for her LTC insurance policy, including a $550 annual extra
premium for a return of premium rider that provides a 35% refund of total premiums paid over a 10-year claim-
free period. If she dies this year after having paid into the policy and after being claims-free for 10 years, how
much death benefit will be paid?

a) $7,700
b) $5,500
c) $6,600
d) $8,800

YOUR ANSWER
A. $7,700

Rationale: If Karen dies, the insurance company will pay a death benefit of $7,700 calculated as 35% ×
$2,200 × 10. Many long-term care policies offer a return of premium benefit at time of death of the insured if
the policy has been claims-free. The amount returned (refunded) will vary from contract to contract, but is
usually a function of the number of years the policy has been in force and claims-free: as much as 50% of
premiums paid for a 10-year period or 100% for 20 years. The cost of the rider can add anywhere from 25% to
50% to the basic policy fee.

Ref: 3.3.4.2

Question # 21: Preston purchases an individual disability insurance (DI) policy with the future purchase option
(FPO). The coverage currently in force equals 60% of Preston’s current income. The FPO rider allows him to
increase the benefit amount by 20% of base coverage every year. During the first policy anniversary, Preston
applies to exercise the FPO option. His income has not increased since policy issue, but he was recently
diagnosed with high blood pressure. What outcome can be expected with regard to exercising the FPO option?

a) He cannot exercise the FPO option as he does not qualify for the additional coverage financially.
b) He can exercise the FPO option as he has the guaranteed right to purchase coverage without medical
evidence.
c) He cannot exercise the FPO option due to the drastic change in his health status.
d) He can exercise the FPO option and his coverage will increase by 20%, thereby increasing his base
coverage to 80% of his current income.

YOUR ANSWER
A. He cannot exercise the FPO option as he does not qualify for the additional coverage financially.

Rationale: Preston cannot exercise the FPO option as he does not qualify for the additional coverage
financially.

The key restriction to exercising the FPO is that the insured must qualify for the additional coverage financially.
The amount of disability income replacement insurance for which an individual can qualify is restricted to about
60% of his pre-disability earned income. This same limit applies to the exercise of an FPO option: if the
coverage currently in force is equal to 60% of earned income, no further coverage can be purchased, even
though the right to purchase coverage without medical evidence is guaranteed.
 Reference: 2.2.4.3

Question # 22: Neil is a resident of Ontario and has diabetes. He has made plans to travel to his hometown
for vacation. He meets with his insurance agent to purchase travel insurance. The insurance agent is likely to
tell Neil that:

a) his claim can be denied if treatment was required specifically related to diabetes.
b) he will not qualify for coverage because of his diabetes.
c) he will be issued coverage only after showing adequate evidence of insurability.
d) his claims related to diabetes will not be affected if he had been symptom-free for at least two months prior
to the trip.

YOUR ANSWER
a. his claim can be denied if treatment was required specifically related to diabetes.

Rationale: The existence of a pre-existing condition will not prevent him from qualifying for coverage, but a
claim may be denied if treatment is required specifically related to the pre-existing condition. Since the
coverage is typically issued with little or no medical underwriting “up front,” underwriting takes place at claim
time.

Question # 23: Anne just got off the phone with her client, Cathy. Anne had provided a recommendation
regarding accident and sickness insurance to Cathy, who is unsatisfied because it is too expensive and does
not include the future purchase option that she had asked for. What should Anne do?

a) She needs to revise the recommendation so that it meets Cathy’s needs as closely as possible.
b) She needs to sit down with Cathy and explain why she cannot reduce the premiums on the policy that she
has recommended.
c) Anne is constrained by the rates of the insurance company that she works for and has to accept that Cathy
will not buy the policy.
d) Anne should add in the future purchase option because that is what Cathy wants, even though it will
increase the premium.

YOUR ANSWER
A. She needs to revise the recommendation so that it meets Cathy’s needs as closely as possible.

Rationale: If there are aspects of a recommendation that do not suit the prospect’s needs or expectations, the
agent has an obligation, both moral and legal, to serve the client by providing as suitable a solution to the
client’s needs as possible under the circumstances. If the recommended product solution is not acceptable (too
expensive, does not contain all the features desired, etc.), it is the obligation of the agent to restructure the
recommendation to make it acceptable to the client, while still ensuring that it meets the client’s coverage
needs as closely as possible. Anne needs to try to find another solution that meets Cathy’s needs and her
budget.

Ref: 7.1.7
 Question # 24: Evelyn purchased a creditor disability insurance policy which was offered as a package deal
while obtaining a mortgage from a bank. If Evelyn becomes totally disabled, which of the following outcomes
can be expected with regard to the creditor disability insurance?

a) Tax-free benefits will be paid to the bank on behalf of Evelyn.

b) Evelyn will start receiving the benefits immediately without a waiting period.
c) Benefits received by Evelyn will be considered as taxable income.
d) The benefits paid to Evelyn will not be subject to a maximum allowable limit.

YOUR ANSWER
A. Tax-free benefits will be paid to the bank on behalf of Evelyn.

Rationale: The tax-free benefits will be paid to the bank on behalf of Evelyn. There will invariably be a waiting
period, often 60 days but benefits as mentioned earlier will be paid to the bank. The benefit is subject to a
maximum allowable monthly and overall limit.

Ref: 2.4

Question # 25: Yara is a member of her employer’s group insurance plan, which provides her with disability
benefits of $2,000 a month. Yara and her employer contribute equally to the plan and so far, they have each
paid $4,800 in premiums. Yara became ill and was unable to work for seven months. She received $10,000 in
disability benefits. How much of these benefits would have been received by Yara tax-free?

a) Yara would have received $4,800 of the benefits tax-free.

b) Yara would have received $5,200 of the benefits tax-free.
c) Yara would have received the entire $10,000 as a tax-free benefit.
d) Yara would have received the entire $10,000 as a taxable benefit.

YOUR ANSWER
a. Yara would have received $4,800 of the benefits tax-free.

Rationale: Yara would have received the first $4,800 of the benefits tax-free and the other $5,200 of benefits
would have been taxed. If the employer and employee share the group disability premiums, in the event of a
claim, the plan member receives a portion of the benefits equal to his aggregate premiums paid, tax-free, and
the balance of the benefits is treated as taxable income.

Ref: 8.4.2.1

Question # 26: Vicky owned a disability insurance (DI) policy with an accidental death and dismemberment
(AD&D) rider. The policy had a 90-day waiting period and a benefit period of 2 years. Vicky was severely
injured in a river rafting accident during a weekend. He made a claim, but died due to injuries during the
waiting period. What outcome can be expected with regard to Vicky’s claim and the AD&D rider benefit?

a) The AD&D death benefit will not be paid due to standard exclusions because Vicky’s death was caused by
participation in dangerous sports.
b) Vicky’s estate will receive the AD&D death benefit because his death was directly attributable to an
accident.
 c) Vicky’s estate will receive the AD&D death benefit and a refund of DI premiums because his death occurred
within 365 days of the accident.
d) The insurer will not pay the AD&D death benefit because Vicky died during the 90-day waiting period.

YOUR ANSWER
A. The AD&D death benefit will not be paid due to standard exclusions because Vicky’s death was caused by
participation in dangerous sports.

Rationale: Because Vicky’s death was caused by participation in dangerous sports, the AD&D death benefit
will not be paid due to standard exclusions.

The accidental death and dismemberment (AD&D) rider provides additional benefits, over and above those
benefits payable on account of income loss due to disability, should the life insured incur death or specified
severe injuries due to an accident. For a claim to be receivable, the death or loss must occur within 365 days
of the accident in question and the death/loss must be directly attributable to the accident. Standard exclusions
apply, like loss or death due to participation in dangerous sports.

Reference: 2.2.4.5

Question # 27:

Kenneth understands that, statistically, there is a chance that he could suffer a long-term disability before he
retires at age 65. Affordability is not an issue for him. However, he does not like the idea of paying premiums
for which he will possibly never collect a benefit. Kenneth often says to his agent: “There is a chance I suffer
from a disability, but there is as good a chance that I do not”. He would prefer to save an amount equivalent to
what the disability insurance premiums would be for his retirement.
What rider might address Kenneth’s concern and convince him to get disability coverage?

a) Return of premium rider

b) Residual disability benefit
c) Cost of living adjustment
d) Future purchase option

YOUR ANSWER
A. Return of premium rider

Rationale: With a return of premium (ROP) rider, if Kenneth never makes a disability claim or receives less
disability benefits than the total amount of premiums he has paid, part of all his premiums will be repaid, which
he can then use to help cover his retirement expenses. This way, he covers the risk of being disabled at some
point before retirement and also covers the risk of paying premiums without ever collecting a benefit. Since
affordability is not an issue for Kenneth, he may be able to afford the extra cost of the ROP rider.

Ref: 2.2.4.7

Question # 28: David owns and operates a restaurant which employs less than five employees. As the owner
of the business, David receives its profits and reports this income in his personal income tax return. Based on
this information, David can be described as a:

a) sole proprietor.
b) business partner.
c) shareholder.
 d) independent representative.

YOUR ANSWER
sole proprietor.
Rationale: A sole proprietor is the only owner of an unincorporated business. It is operated by its owner, who
personally receives all the benefits. The net income of the proprietorship is income of the proprietor, to be
reported on his personal income tax return.

Ref: 5.1.1

Question # 29:

Renique runs her own business in an office that she rents. The rent is $2,000 per month and her total business
expenses are $3,500 per month, including utilities, telephone charges, and salaries for part-time employees.
The entire business income comes from her efforts only. She is worried that if she were to become disabled,
she would still have to pay $3,500 per month in business expenses. She has saved $12,000 to pay for these
expenses in the event that she becomes disabled. She approaches her advisor with her problem. Which of the
following recommendations does her advisor make to Renique to cover her need of $3,500 a month?

a) Purchase a business overhead expense policy with a waiting period of three months.
b) Purchase a business overhead expense policy with a waiting period of one month.
c) Purchase a disability insurance policy with a waiting period of three months.
d) Purchase a disability insurance policy with a waiting period of one month.

YOUR ANSWER
A. Purchase a business overhead expense policy with a waiting period of three months.

Rationale:
As Renique needs to cover her business overhead expenses in the event of her disability, she should
purchase a business overhead expense policy (BOE) with a benefit of $3,500 per month. As she has saved
$12,000 in a fund for this purpose, she can purchase a BOE policy with a waiting period of three months.
Renique will, of course, need to purchase a disability insurance policy to protect her income in the event of
disability. However, we do not know her individual requirements to suggest the right solution for her. (Refer to
Section 5.3.1)

Question # 30:

Dominique, aged 49, is a recently divorced man with two children and an ex-spouse, Francois. He approaches
you to discuss possible disability insurance planning. Prior to the meeting, you request that he come prepared
to discuss his income and financial obligations. He presents to you the following pre-tax amounts:

Income:
 $200,000 of employment income, annually
 $232,000 of income from a commercial rental property, annually
 $148,000 per annum distributed from a non-registered lifetime annuity
 $100,000 per annum distributed from a non-registered segregated fund for life
Financial obligations:

 $240,000 in spousal support per annum

 $96,000 in children support payments per annum
 $6,000 annually for a term life insurance policy required as per the terms of the divorce agreement
 $168,000 per annum in housing/lifestyle costs for Dominique
 What is the appropriate amount of monthly income benefit (MIB) for Dominique to apply for?

a) $2,500
b) $5,000
c) $6,000
d) $7,750

YOUR ANSWER
A. $2,500

Rationale: The amount of monthly income benefit (MIB) that Dominique should apply for is $2,500. Every line
of income recorded above should be included as income for the purposes of calculating MIB that he is eligible
for, as none of them are registered.

Hi earned income is $200,000

His total passive income is $480,000 ($232,000 + $148,000 + $100,000)

The financial obligations to fulfill his end of the divorce agreement will be present whether he is working or not.
Dominique wants to cover as much of his own housing/lifestyle costs. Combined, his total obligations annually:
$240,000 (spousal support) + $96,000 (child support) + $6,000 (term annuity payment) + $168,000
(Dominique's lifestyle/housing costs) = $510,000

We know he wants to cover $510,000 of financial obligations, but he will receive $480,000 (passive income)
regardless of his working or not. If he becomes disabled there will be an shortfall of $30,000, calculated as
$510,000 - $480,000. Hence, he must apply for $2,500 MIB ($2,500 x 12 = $30,000) to cover for the shortfall
which is 15% of this earned income.
Ref: 6.2.2.3