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NEW QUESTION # 24
Fiona and Stanley have provided the following data in order for their advisor to proceed with a capital needs analysis:
Fiona ($)
Assets
Stanley ($)
5,000
Cash
3,000
150,000
Life insurance
125,000
30,000
Investments
30,000
Fiona ($)
Estate obligations
Stanley ($)
15,000
Last expenses
15,000
10,000
Car loans
5,000
75,000
Mortgage outstanding
75,000
Assuming their required net monthly income is $3,000, and the discount rate is 6%, how much additional life insurance should Fiona and Stanley obtain respectively?
Answer: A
Explanation:
The capital-needs approach first determines how much capital is required to generate the desired survivor income.
Required annual income is:
$3,000 × 12 = $36,000
At a 6% capitalization rate:
$36,000 ÷ 0.06 = $600,000
For Fiona, estate obligations total:
$15,000 + $10,000 + $75,000 = $100,000
Total capital requirement:
$600,000 + $100,000 = $700,000
Available assets are:
$5,000 + $150,000 + $30,000 = $185,000
Additional insurance required:
$700,000 # $185,000 = $515,000
For Stanley, obligations are:
$15,000 + $5,000 + $75,000 = $95,000
Total requirement:
$600,000 + $95,000 = $695,000
Available resources:
$3,000 + $125,000 + $30,000 = $158,000
Additional insurance required:
$695,000 # $158,000 = $537,000
Thus, Fiona requires $515,000 and Stanley requires $537,000 of additional insurance.
The capital-needs method integrates immediate estate obligations, survivor-income requirements, existing insurance, and other available capital to establish the insurance shortfall.
FPII reference/topic: Insurance Planning - capital needs analysis; income replacement; estate obligations; existing financial resources.
NEW QUESTION # 25
Tara bought an insurance policy on Wednesday, June 6. What date would her rescission right end?
Answer: A
Explanation:
Life insurance policies generally provide a 10-day rescission or "free-look" period after the policy is received.
During this period, the policyholder can review the contract and cancel it without the ordinary consequences associated with surrendering an established policy.
Canadian consumer guidance describes the standard life-insurance free-look period as usually 10 days, while some policies provide a longer period. Ontario's financial-services regulator similarly states that life-insurance consumers must generally be given at least 10 days, and in certain cases 20 days, to reconsider the purchase.
Using the 10-day period specified by the examination framework and counting ten days after Wednesday, June 6, the period ends on Saturday, June 16.
The rescission right differs from ordinary cancellation or surrender after the free-look period. During rescission, the policyholder is normally entitled to have the contract unwound and premiums refunded according to the governing policy and applicable law.
Therefore, of the dates presented, Saturday, June 16 is correct.
FPII reference/topic: Insurance Planning - insurance contracts; policy delivery; rescission rights; free-look period; consumer protection.
NEW QUESTION # 26
Chris reviewed the current investment portfolio of his client, Judy. Chris determined that Judy needs a higher rate of return in order to retire within five years. Judy's portfolio is concentrated in fixed income instruments.
What is Chris's next step to help Judy achieve her retirement goal?
Answer: B
Explanation:
Before Chris changes Judy's asset allocation or recommends higher-return investments, he must determine the level of investment risk that Judy can appropriately accept.
A higher required rate of return normally requires greater exposure to investment risk. Judy's present concentration in fixed-income securities may not generate the return necessary to meet her five-year retirement objective, but this does not automatically justify moving her into equities or other higher-volatility assets.
The advisor must evaluate Judy's risk profile, including her risk tolerance, risk capacity, required return, investment time horizon, liquidity requirements, and ability to absorb losses. Her five-year period until retirement is particularly important because a major portfolio decline immediately before retirement can materially impair the sustainability of retirement withdrawals.
Only after establishing an acceptable risk level can Chris determine an appropriate asset mix and select specific investments. Option D therefore comes later. Option C may form part of the broader solution if the required return is inconsistent with Judy's risk capacity, but it is not the immediate portfolio-management step.
The correct sequencing is to reconcile Judy's return objective with an acceptable and financially sustainable degree of risk.
FPII reference/topic: Investment and Tax Planning - risk profiling; required return; risk capacity and tolerance; asset allocation.
NEW QUESTION # 27
In order to complete the analysis and development of a financial plan, an advisor receives a client's investment statements and tax returns. From the perspective of principle six (code of ethics), what action should the advisor take in order to maintain a relationship of trust and confidence?
Answer: C
Explanation:
Principle 6 of the FP Canada Code of Ethics is Confidentiality. It requires client information to be secured, protected, and maintained so that access is limited to authorized persons.
FP Canada's Standards state directly that client information must be handled in a manner that permits access only to those who are authorized, and that the relationship of trust and confidence depends on personal and confidential information being collected, used, and disclosed only as authorized.
Investment statements and tax returns contain highly sensitive financial and personal information. The advisor must therefore maintain appropriate physical and electronic safeguards, restrict internal access to personnel who require the information for authorized purposes, and avoid disclosure to external parties unless the client has authorized it or disclosure is otherwise legally permitted or required.
Option B involves professional referrals and raises separate considerations concerning competence, scope, and client consent. Option C is more closely related to placing the client's interests first. Option D relates to analysis and diligence but does not specifically address the ethical requirement described by Principle 6.
Accordingly, securing the documents so that only authorized personnel can access them directly satisfies the confidentiality obligation.
FPII reference/topic: Financial Planning Practice - Code of Ethics; Principle 6 Confidentiality; protection and authorized use of client information.
NEW QUESTION # 28
Jerry, age 58, has been working for the same employer since he graduated university. Over the years, he has had a few promotions. Jerry and his wife, Beth, are well on their way to financial independence, and they plan to retire in two years. Which of the following scenarios will most likely represent Jerry and Beth's financial scenario?
Scenario
Liquid assets relative to total assets (%)
Investment assets-to-net worth ratio (%)
Debt-to-asset ratio (%)
A
5
75
10
B
10
25
20
C
15
45
25
D
20
70
30
Answer: D
Explanation:
Scenario A best represents a household approaching financial independence and retirement.
Jerry and Beth are only two years from retirement and are described as being well on their way to financial independence. At this stage of the financial life cycle, a financially strong household would ordinarily be expected to have accumulated a substantial investment portfolio and to have materially reduced debt. Scenario A has an investment-assets-to-net-worth ratio of 75%, the highest of the four scenarios, together with the lowest debt-to-asset ratio of 10%.
Scenario D also has significant investment assets at 70%, but its 30% debt ratio represents materially greater leverage immediately before retirement. Scenarios B and C have lower proportions of wealth committed to investment assets-25% and 45% respectively-which are less consistent with the stated level of financial independence.
The 5% liquid-asset ratio in Scenario A is not necessarily problematic. Near retirement, an appropriate emergency reserve is important, but excessive cash holdings may reduce long-term investment efficiency. The overall balance of high accumulated investment wealth and low debt is the decisive factor.
Since option D corresponds to Scenario A, option D is correct.
FPII reference/topic: Retirement Planning - financial life cycle; personal financial ratios; investment-asset accumulation; debt reduction before retirement.
NEW QUESTION # 29
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