CMFAS M9 practice questions, with answers and explanations

Why C: the company is keeping the whole financial responsibility for the medical bills itself. That is retaining the risk, also called self-insuring (Ch 1 §3.5).

D is the tempting one. Transferring the risk means shifting the financial responsibility to another party, usually for a fee, and buying insurance is the most common way to do it (§3.6). The company has chosen not to do that. Avoiding (§3.3) would mean not facing the risk at all, and controlling (§3.4) means taking steps to prevent or reduce losses.

Why C: a convertible Term Insurance policy lets him move to a permanent policy without evidence of insurability, so he can convert even though he would be declined for new cover today. His worsened health cannot push the new premium up; of the changes in his own risk, the insurer may price only for the age he has reached (Ch 4 §2.31).

A and D both make the conversion depend on his health, which is exactly what the option removes. B is wrong because the new premium cannot be loaded for his worsened health.

Why B: if the person paying the premiums on a juvenile policy dies or becomes disabled before the child reaches the specified age, the insurer waives all future premiums until the child reaches that age (Ch 5 §1.142). Here that is until her son turns 21.

D goes too far: the waiver stops at the specified age, not at the end of the policy term. A is wrong because the life insured is the son, not Mrs Lim, so her death does not pay the sum assured. The rider waives premiums; it does not change the policy into a paid-up one, so C is wrong.

Why B: a terminal bonus is added on top of the reversionary bonuses when the policy terminates, by maturity, death or surrender, and usually only if the policy has been in force for a minimum period (Ch 6 §2.17 to §2.18). Unlike a reversionary bonus, it is not added to the sum assured of a policy that remains in force (§2.20).

A describes a reversionary bonus. C is wrong because a terminal bonus arises only when the policy terminates, not every year; a yearly cash payment is closer to a cash dividend (§2.22). D is the reverse of what the study text says: terminal bonuses are likely to fluctuate more than reversionary bonuses (§2.21).

Why A: a premium holiday lets the policy owner stop paying the regular premium for a period, for as long as the surrender value of the policy is enough to cover the policy's charges (Ch 7 §16.17).

B is the trap. The charges do not stop: they are the reason the surrender value has to be enough, and the insurer may also levy a premium holiday charge for using the feature (§16.18). C and D describe a withdrawal and a sub-fund switch, which are different features.

Why A:

Step 1: units are bought at the offer price. Number of units = single premium ÷ offer price = S$12,000 ÷ S$2.00 = 6,000 units.

Step 2: the bid price is the offer price less the spread. Bid price = (1 − 5%) × S$2.00 = 0.95 × S$2.00 = S$1.90.

This is the method of Example 9.4 (Ch 9 §6.4).

B takes the 5% off the number of units and leaves the price alone. C adds the spread to the offer price, but the bid price is the lower of the two. D divides the premium by the bid price: S$12,000 ÷ S$1.90 = 6,315.79, but units are bought at the offer price.

Why B: a policy owner has 14 days from the date he receives the policy to go through it. If he returns it within that free-look period, he receives a refund of the premium paid, less any cost the insurer incurred in assessing the risk (Ch 11 §1.39). Ravi returned his policy 7 days after receiving it, so he is within the 14 days.

A is the tempting one. A full refund is what a proposer gets when the insurer rejects his proposal form, which is not what happened here. C ignores the free-look period. D is wrong because a free-look return is a refund of premium, not a surrender.

Why A: a policy lapses when premiums are not paid within the grace period and the policy has not yet acquired any cash value (Ch 12 §12.1).

The other case the study text gives is a policy on Automatic Premium Loan whose cash value has been exhausted (§12.1). Either way, a policy with no cash value left and an unpaid premium does not stay in force, so C is wrong. B and D describe outcomes the paragraph does not give for an unpaid premium.

Why B: during the grace period the life insured continues to enjoy the insurance cover. Under the example wording, the policy continues in force, and if a valid claim is made during the grace period the insurer deducts any unpaid premium from the amount payable (Ch 14 §8.14). 15 June is 14 days after the due date, inside the 30 days.

A treats the cover as ending on the due date, which is what the grace period prevents. C is wrong because the unpaid premium is deducted, not waived. D adds a condition the wording does not have.

Why B: an insurer is not bound by something its agent does beyond the agent's authority. It can, however, choose to adopt the act afterwards and treat the agent as having acted for it from the time the act was done. The study text calls this ratification, the validation of an unauthorised act, and the insurer can ratify in words, written or spoken, or by its conduct (Ch 15 §7.1).

None of the other three is the acceptance of an unauthorised act after the event, which is what the question describes.