9/24/2014 VirtualUniversity.CIFP.

ca

Assessment >> Formal Assessment

Assessment: Risk Management and Estate Planning Web - Academic Partners Unit 6 Post-Assessment
(C117V13U6L0A25Q20)
Date Submitted: 06/18/2014 07:39:00 PM
Total Correct Answers: 20
Total Incorrect Answers: 0

Your Mark (total correct percentage): 100%

1 Finley and Fagan ran an automotive body shop. They had an insurance contract on the building and
contents. One night, the shop caught fire and was destroyed. The fire department declared that the
fire was accidental. However, the police found evidence that the shop was used to change the
appearance of stolen cars so they could be sold. Further investigations proved that dealing in stolen
cars was the sole activity of the body shop. Finley and Fagan contacted their insurance company to
claim compensation for the damage. Which of the following statements is TRUE?

Correct
The correct answer:Their insurer will not pay any compensation for the loss.
Your answer:Their insurer will not pay any compensation for the loss.
Solution:

Their insurer will not pay any compensation for the loss.

(Concepts) An insurance contract will not provide coverage for property used for illegal purposes. If the property is
used in part for legal activities, the insurance contract may have covered some of the loss.

(Choice D is true.) Finley and Fagan's body shop was used entirely for illegal purposes. So, Finley and Fagan's
insurer will not pay any compensation for the loss.

2 Sean had a booth at a trade fair for life insurance companies. Mr. Stevenson visited Sean's booth,
picked up some brochures and asked Sean some questions about the insurance products. Three
days later, Sean called Mr. Stevenson to ask if he could make an appointment to discuss Mr.
Stevenson's insurance needs. Mr. Stevenson agreed and set a date with Sean. At the meeting, Mr.
Stevenson signed an application for life insurance with the Great Mutual Assurance Co. Ltd. Which
of the following statements is TRUE?

Correct
The correct answer:Mr. Stevenson and Great Mutual Assurance are parties to an offer.
Your answer:Mr. Stevenson and Great Mutual Assurance are parties to an offer.
Solution:

Mr. Stevenson and Great Mutual Assurance are parties to an offer.

(Concepts) An offer to purchase insurance is made by the buyer when submitting an application. The individual who
makes the offer is referred to as the offeror. The individual or company who receives the offer is referred to as the
offeree. There is a valid offer to enter into a contract if there is an offeror, an offeree and an offer. However, there
is no legally binding contract until the offeree communicates acceptance of the offeror's offer by issuing and
delivering a policy, signed by the insurer.

(Choice B) When Sean contacted Mr. Stevenson to discuss his insurance needs, Sean was making a business
proposal to Mr. Stevenson, not an offer. However, once Mr. Stevenson submitted his application, he became the
offeror and Great Mutual Assurance became the offeree. So, Mr. Stevenson and Great Mutual Assurance are parties
to an offer.

3 John asked Sheila to take care of his house for one week while he was out of the country on
business. Sheila agreed on the condition that John let her use his car while he was away. John lent
Sheila his car. Which of the following statements is TRUE?

https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 1/8
9/24/2014 VirtualUniversity.CIFP.ca

Correct
The correct answer:John and Sheila have a legally binding contract.
Your answer:John and Sheila have a legally binding contract.
Solution:

John and Sheila have a legally binding contract.

(Concepts) The fundamental requirements for the formation of a valid contract are mutual assent by the parties to
a promise and an exchange of values between the parties. The values exchanged do not have to be in cash,
services or merchandise is sufficient consideration. Both oral and written contracts are valid.

(Choice A is true.) John asked Sheila to take care of his house and she agreed. John lent Sheila his car in return for
taking care of his house. So, John and Sheila have a legally binding contract because both parties agreed to a
promise and they exchanged something of value, namely Sheila's services in exchange for the use of John's car.

4 Rosemary received a special discount on her fire insurance because she had a sprinkler system
installed throughout her rental property. The insurance contract stated that coverage against loss
by fire would be in effect provided that the sprinkler system was kept in working order. Which of
the following statements is TRUE?

Correct
The correct answer:Rosemary made a warranty when she stated on her application for fire insurance that there
was a sprinkler system installed on the property.
Your answer:Rosemary made a warranty when she stated on her application for fire insurance that there was a
sprinkler system installed on the property.
Solution:

Rosemary made a warranty when she stated on her application for fire insurance that there was a sprinkler system
installed on the property.

(Concepts) A "warranty" is a statement made by the applicant to the insurer, which is absolutely true and is
assumed to be material to the contract. There are two types of warranties: "promissory' and "affirmative". A
promissory warranty states that a fact is presently true and will continue to be true. An affirmative warranty states
that a fact is true, but makes no statement about the future. A warranty in an insurance contract is assumed to be
affirmative unless it is clear that it is promissory.

(Choice A is true.) When Rosemary stated on her application that the building had a sprinkler system, she made a
warranty. This warranty would have been affirmative automatically if the insurer had not included the requirement
that it be maintained in working order. This requirement made the warranty promissory. So, Rosemary made a
warranty when she stated on her application for fire insurance that there was a sprinkler system installed on the
property.

5 George phoned his insurance company to take out a life insurance contract and an auto insurance
contract. Which of the following statements is FALSE?

Correct
The correct answer:George's telephone application for life insurance forms part of the contract on his life.
Your answer:George's telephone application for life insurance forms part of the contract on his life.
Solution:

George's telephone application for life insurance does not form part of the contract on his life.

(Concepts) An insurance "application" is a standard form or schedule supplied by the insurance company for the
applicant to complete. The information in the application is used to determine the underwriting risk to the insurer
and the premium payable.

The application forms part of the contract. Applications for some forms of insurance, such as property and
automobile insurance, may be oral, so they can be completed over the phone. In this case, the phone application
forms part of the insurance contract. However, an application for life insurance must be written and signed by the
applicant. So, information given over the phone with respect to a life insurance contract does not form part of the

https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 2/8
9/24/2014 VirtualUniversity.CIFP.ca
contract.

(Choice B is false.) George can take out an automobile insurance contract over the phone and the conversation
forms part of the application for the contract. However, only a written application for life insurance forms part of the
contract. So, George's telephone application for life insurance does not form part of the contract on his life.

6 A client would like you to review a property insurance policy that she recently purchased. One
section of the contract explains the perils that the insurance company does not cover through the
policy. Under what component of the insurance contract would this be listed?

Correct
The correct answer:exclusions
Your answer:exclusions
Solution:

This would be listed under the exclusions component of the insurance contract.

(Concepts) The exclusion component of the insurance contract states the perils, losses or property that the insurer
does not cover through the contract. Conditions are the responsibilities of each party, while declarations are
statements regarding the exposures to risk that the policy will cover.

(Choice B) So, the portion of the contract that explains the perils that are not covered under the policy would be
listed under the exclusions component of the insurance contract.

7 Caroline wants to make a change to her property insurance policy without cancelling her existing
policy and having the insurer issue a new one. Which of the following can Caroline add to her policy
to achieve her objective?

Correct
The correct answer:any of the above
Your answer:any of the above
Solution:

Caroline can add any of the above to her policy to achieve her objective.

(Concepts) Policyowners frequently have insurance needs that are not fully addressed by a standard insurance
policy. Many insurance policies are supplemented or modified through additions to the standard contract. These
additions are termed interchangeably as "endorsements" or "riders". "Floaters" are riders that are attached to fire
and property insurance policies to extend the coverage of property.

(Choice D) So, Caroline can add any of the above to her policy to achieve her objective.

8 Ralph took out a life insurance contract. When the policy was issued, he studied the terms carefully
and decided he did not like the conditions. Nine days after the contract was issued, he cancelled it
and received a full refund of his premium. Which of the following statements is FALSE?

Correct
The correct answer:Ralph cancelled his policy according to a right provided by federal legislation.
Your answer:Ralph cancelled his policy according to a right provided by federal legislation.
Solution:

Ralph did not cancel his policy according to a right provided by federal legislation.

(Concepts) A "right of rescission" allows the policyowner to examine the contract and, if not satisfied, return the
policy to the insurer for cancellation and a refund of any premiums paid. This right must be exercised within a 10-
day period at the beginning of a new contract. The period begins on the date the policy is delivered to the applicant.
The right of rescission is not a legislated right, but is a contractual right provided by the insurer.

(Choice B is false.) The right of rescission is not provided by federal legislation. So, Ralph did not cancel his policy
https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 3/8
9/24/2014 VirtualUniversity.CIFP.ca
according to a right provided by federal legislation.

9 Hubert bought a new Bentley. He used $5,000 of his own money and $5,000 borrowed from the
bank as a down payment. The car dealership also provided financing to purchase the car. Which of
the following has an insurable interest in the car?

Correct

The correct answer:all of the above

Your answer:all of the above
Solution:

All of the above have an insurable interest in the car.

When an individual or organization stands to suffer a financial loss if a piece of property is lost, stolen, destroyed or
damaged, the individual or organization is said to have an insurable interest in that property.

Hubert, the bank, and the dealership all have an insurable interest in the car because they could each suffer a
financial loss if the car were stolen, destroyed or damaged.

10 Juliette purchased life insurance on her father, Joe, and retained the authority to exercise all rights
in the policy. In the event of Joe's death, her mother, Claire, is entitled to the policy's proceeds. This
means:

Correct
The correct answer:Juliette is the policyowner and Joe the subject.
Your answer:Juliette is the policyowner and Joe the subject.
Solution:

Juliette is the policyowner and Joe the subject.

(Concepts) The individual who purchases the life insurance policy is referred to as the policyowner. The individual
whose life is insured by the policy is referred to as the subject or life insured. The individual who stands to gain the
proceeds of the policy upon the death of the life insured is referred to as the beneficiary.

(Choice B) For this insurance contract, Juliette is the person who purchased the policy, Joe is the person whose life
is insured, and Claire is the person who is entitled to receive the death benefit if Joe dies. So, Juliette is the
policyowner and Joe the subject.

11 There are a variety of risks present in society that can lead to a financial loss for a client. Which of
the following statements about risk is FALSE?

Correct
The correct answer:Fundamental risks involve losses that affect only a small segment of society.
Your answer:Fundamental risks involve losses that affect only a small segment of society.
Solution:

Fundamental risks do not involve losses that affect only a small segment of society.

(Concepts) There are numerous ways to classify risk. Speculative risk has three alternative outcomes: loss, no
change or gain. Pure risk has only two alternative outcomes: loss or no change. Dynamic risks are those resulting
from changes in the economy, while static risks are losses that would occur even if there were no changes in the
economy. Fundamental risks involve losses that are caused by economic, social, and political phenomenon and that
can affect large segments of society. Unemployment, earthquakes or floods are examples of fundamental risks. In
contrast, particular risks apply to individuals, rather than groups.

(Choice A is false.) So, fundamental risks do not involve losses that affect only a small segment of society.

https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 4/8
9/24/2014 VirtualUniversity.CIFP.ca

12 Philip is preparing a risk management plan for his client, Ho Lee. Ho Lee is a wealthy entrepreneur
who likes to sky dive. Philip suggests that Ho Lee increase his life insurance to protect his estate
against taxes and expenses. Philip also suggests that Ho Lee increase the level of safety
precautions taken before sky diving. Which of the following is not one of the risk management
strategies that Philip is recommending to his client?

Correct
The correct answer:risk avoidance
Your answer:risk avoidance
Solution:

Philip is not recommending that his client use risk avoidance to manage risk.

(Concepts) There are two methods for managing risks: risk control and risk financing. Risk control strategies control
exposure to risk and the severity of losses. Risk avoidance and risk reduction are risk control methods. Risk
financing strategies involve sharing, transferring or retaining the costs associated with risk. Purchasing life
insurance is a form of risk transfer or risk sharing because it transfers/shares the cost of loss to another party.

(Choice B) Philip advised Ho Lee to reduce the risk associated with sky diving by increasing safety precautions,
Philip was recommending risk control through risk reduction, rather than risk avoidance. So, Philip is not
recommending that his client use risk avoidance to manage risk. A risk avoidance technique would involve sky
diving less or not at all.

13 The NEXT 8 questions are based on the Josée and Rob Saros Case Study in Unit 6, Insurance
Contracts and Risk Management.

Which of the following risk management strategies is LEAST appropriate for Josée Saros in terms of her risk of
death?

Correct
The correct answer:risk retention
Your answer:risk retention
Solution:

Risk retention is the least appropriate risk management strategy for Josée in terms of her risk of death.

There are two methods for managing risks: risk control and risk financing. Risk control strategies control exposure
to risk and the severity of losses. Risk avoidance and risk reduction are risk control methods. Risk financing
strategies involve sharing, transferring, or retaining the costs associated with risk. Purchasing life insurance is a
form of risk transfer or risk sharing because it transfers/shares the cost of loss to another party. Risk retention is
most useful for risks of low severity and low probability, and essentially involves individuals dealing with the risk
themselves.

Josée is a major breadwinner for her family, and she smokes and engages in dangerous leisure-time activities. Risk
retention is not an appropriate risk management strategy for Josée because the probability of losing her income
through death is high. So, risk retention is the least appropriate risk management strategy for Josée in terms of her
risk of death.

14 One of Josée Saros' risk management objectives is to increase her life insurance to the maximum
required coverage with the lowest possible premium. She refuses to give up parasailing and
smoking. In fact, she refuses to make any adjustments in her lifestyle. Which of the following risk
management strategies BEST describes Josée's approach?

Correct
The correct answer:risk transfer
Your answer:risk transfer
Solution:

Risk transfer best describes Josée's approach to risk management.

https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 5/8
9/24/2014 VirtualUniversity.CIFP.ca
(Concepts) There are two methods for managing risks: risk control and risk financing. Risk control strategies control
exposure to risk and the severity of losses. Risk avoidance and risk reduction are risk control methods. Risk
financing strategies involve sharing, transferring or retaining the costs associated with risk. Purchasing life
insurance is a form of risk transfer or risk sharing because it transfers/shares the cost of loss to another party. Risk
retention is most useful for risks of low severity and low probability, and essentially involves the individuals dealing
with the risk themselves. Risk sharing is most appropriate for high severity, low probability risks.

(Choice C) Josée's risk management strategy can best be described as risk transfer because she has transferred the
risk of financial loss that her death will incur by insuring her life. She is not practicing risk retention because she
has opted to purchase the maximum life insurance required with the lowest possible premium. She is not adopting
any risk avoidance or risk reduction strategies because she refuses to make any adjustments to her lifestyle. So,
risk transfer best describes Josée's approach to risk management.

15 Josée Saros wants to name the children as direct beneficiaries of her term life insurance contract,
but is worried that if she were to die tomorrow, they would spend the money irresponsibly. She
wants to make sure they don't receive all of the death benefits until they have at least reached the
age of majority. If she names her children as direct beneficiaries of her life insurance contract,
which of the following statements is TRUE?

Correct
The correct answer:Josée need not worry; the children will not be paid the death benefits directly until they have
reached the age of majority.
Your answer:Josée need not worry; the children will not be paid the death benefits directly until they have
reached the age of majority.
Solution:

Josée may name all her children as beneficiaries of her life insurance contract. However, if a child is a minor, he or
she is not legally capable of giving a discharge to the insurer, which means the insurer will not be able to pay the
proceeds to the child. Therefore, if the children are named as the direct beneficiaries of the life policy the children
will be not receive their entire share of life insurance benefits until they attain the age of majority (18 or 19,
depending on the province). So, if Josée names her children as direct beneficiaries of her life insurance contract,
she need not worry that they will collect her entire death benefits before they attain the age of majority.

16 After implementing risk management strategies appropriate to Josée Saros' objectives, Josée's
position on the Risk Management Matrix could BEST be described as:

Correct
The correct answer:medium probability and insured severity.
Your answer:medium probability and insured severity.
Solution:

Josée's position on the Risk Management Matrix could best be described as medium probability and insured
severity.

(Concepts) A risk matrix can be used to categorize risks as having critical, material, or minor severity, and high,
medium, or low probability. Risks of critical severity are those that can result in very serious financial
consequences, possibly including bankruptcy. Material risks would have serious financial consequences, certainly
resulting in a reduction in standard of living. Minor risks would have little financial consequence, other than some
minor loss of income or manageable expenses. Critical risks that cannot be avoided or reduced are best handled
through insurance.

(Choice C) Josée engages in dangerous leisure-time activities and is a heavy smoker. Therefore, her probability of
death is medium, rather than low. Because Josée refuses to make any adjustments to her lifestyle, her probability
will not change after implementing risk management strategies. Her most effective strategy is to increase her
insurance coverage to the maximum required. With an income of $95,000, she can easily afford to do so. Therefore,
the severity of the financial loss on her family as a result of her death will change from critical severity to insured
severity. So, Josée's position on the Risk Management Matrix could best be described as medium probability and
insured severity.

17 Rob decides that one of his risk management objectives is to purchase either $275,000 of 10-year

https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 6/8
9/24/2014 VirtualUniversity.CIFP.ca
renewable and convertible (R&C) term life insurance; or $175,000 of 10-year R&C term life
insurance and $100,000 of Term-100 whole life insurance. This could mean canceling all of his
existing life insurance policies. All of the following statements are true, EXCEPT:

Correct
The correct answer:Rob can purchase individual 10-year R&C term life insurance at a lower premium than his
current group term life insurance policy.
Your answer:Rob can purchase individual 10-year R&C term life insurance at a lower premium than his current
group term life insurance policy.
Solution:

To compare the price of one policy to another, determine how much the premium would be for the same amount of
coverage under each policy.

For the same amount of coverage, Rob can NOT purchase individual 10-year R&C term life insurance at a lower
premium than his current group term life insurance policy. Currently, for a $100,000 benefit, he pays a premium of
$125 per year for a 10-year R&C term life policy. If he purchased the same coverage as an individual 10-year R&C
term life insurance policy, it would cost him $139, calculated as ($61 + ($78 x ($100,000 ÷ $100,000))). This is
more than his group plan.

Rob's current $20,000 whole life policy has an annual premium of $250. If he purchased the same amount of
coverage of whole life coverage, it would cost $182 per year, calculated as ($94 + ($441 x ($20,000 ÷
$100,000))). If he purchased the same amount of coverage of Term-100 permanent life insurance, it would cost
$165 per year, calculated as ($89 + ($382 x ($20,000 ÷ $100,000))). Both of these options provide lower
premiums than his current whole life policy.

Rob's current 5-year R&C term policy has an annual premium of $145. If he decided to purchase the same $50,000
coverage of 10-year R&C term life insurance, it would cost $100 per year, calculated as ($61 + ($78 x ($50,000 ÷
$100,000))). This is lower than his current R&C term policy.

18 Rob Saros' group plan with the Board of Trade gives him the option of converting his policy to an
individual plan, provided he applies to the insurer in writing within 31 days of ceasing to be a
member of the group. Rob decides to convert his group policy to an individual policy under this
option. When calculating the premium for the new individual policy, which of the following will the
insurer NOT take into account?

Correct
The correct answer:Any deterioration in Rob's health since he purchased the group insurance.
Your answer:Any deterioration in Rob's health since he purchased the group insurance.
Solution:

Any deterioration in Rob's health since he purchased the group insurance will not be taken into account.

(Concepts) One of the main advantages of converting group coverage to an individual policy is that the conversion
is usually guaranteed at standard rates. This may be particularly attractive for an individual with health problems
who might otherwise be uninsurable or heavily rated.

(Choice C) So, any deterioration in Rob's health since he purchased the group insurance will not be taken into
account when calculating the premium for the new individual policy.

19 Rob Saros wants to name his estate as the beneficiary of his life insurance proceeds and have the
proceeds divided among his three children according to the terms of his will. If the death benefit
were paid into Rob's estate upon his death, which of the following statements would FALSE?

Correct
The correct answer:The opportunity to minimize taxes through income splitting would not be present unless the
estate was the beneficiary.
Your answer:The opportunity to minimize taxes through income splitting would not be present unless the estate
was the beneficiary.
Solution:

The opportunity to minimize taxes through income splitting could be present even if the estate was not the
https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 7/8
9/24/2014 VirtualUniversity.CIFP.ca
beneficiary.

(Concepts) If an individual wants to create an opportunity to minimize taxes through income splitting, he or she
needs to set up trusts for his or her children for the purpose of receiving the death benefit. However, the individual
can do this through his or her will using estate assets or by naming the trusts directly as beneficiaries.

(Choice D is false.) So, the opportunity to minimize taxes through income splitting could be present even if the
estate was not the beneficiary.

20 Rob Saros decides to cancel his existing whole life insurance policy with a CSV of $10,000 and
purchase a new whole life policy for $100,000. At the time he cancelled the policy, he had paid
$5,000 in premiums and the accumulated NCPI was $3,000. What is the adjusted cost basis (ACB)
of Rob's policy?

Correct
The correct answer:$2,000.
Your answer:$2,000.
Solution:

The ACB of Rob's policy is $2,000.

(Concepts) The adjusted cost basis of a life insurance policy (ITA 148(9)) can be calculated as:

the premiums paid under the policy, less any dividends received; plus
interest paid on a policy loan if it was not deductible in computing income; plus
amounts included in income from a non-exempt policy subject to the income accrual rules; minus
the net cost of pure insurance (NCPI)

(Choice D) At the time he cancelled the policy, Rob had paid $5,000 in premiums and the accumulated NCPI was
$3,000. So, the ACB of Rob's policy is $2,000, calculated as (premiums paid - accumulated NCPI) or ($5,000 -
$3,000).

Close

CFP®, CERTIFIED FINANCIAL PLANNER® and are certification marks owned outside the U.S. by Financial Planning
Standards Board Ltd. (FPSB). Financial Planning Standards Council is the marks licensing authority for the CFP marks in
Canada, through agreement with FPSB.

Copyright ©2002-2014 www.CIFP.ca. All rights reserved.

Powered by 724Learning.net.

CP3 (1626770) - 9/24/2014 10:50:09 PM

https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp 8/8