In this blog video, I’m going to work through practice question ID: Life 2-005. We generally try to keep these videos to not much longer than the length of time it takes to complete a challenging question on exam day. But for this video, I’m going to give you a little more, including a few tips that may help you with many different potential questions.
First, the scenario provides details about the Smith’s disability policies. This information has been placed there to distract you, but it also helps prepare you for the real world. Clients will give you lots of information and it will be your role to take that information and even ask probing questions to learn what’s relevant to the task at hand. Now, you may be wondering how do I know that the information on the disability policy is a distractor? Well it’s because before reading the scenario, I always find the question mark and RTQF, “Read The Question First”.
Which of the following life insurance policies would be most appropriate?
Now, I can dig into the scenario and pull out the relevant information. On a real exam, if possible, circle or highlight key points. If this is not possible, flag it in some way or make a mental note of them. For the purposes of this video, I will bullet point the key points. The Smiths have a $400,000 mortgage outstanding that they would like paid off if either of them passes away. The amortization period on the mortgage is 20 years. This is the length of time it will take for them to pay the mortgage in full assuming they don’t die and make the agreed upon payments. It does not say that they will need the coverage for any other purpose. So we are focusing specifically on this mortgage need. There are three key nuggets of information required to answer this question correctly.
Nugget number one, which is also a very important exam tip, train your brain that whenever you are asked, what type of life insurance you would recommend, your immediate knee jerk reaction is to ask yourself term or perm. Always start there. Is this an insurance need that you can say with certainty will go away by a specific date? And therefore term insurance, which is temporary insurance may be appropriate. For example, a mortgage with a 20 year amortization period is a temporary insurance need and 20 year term insurance would totally work. Or is it a need that will not go away by a certain date, such as taxes owing on investment property at death. Since you don’t know when you will die, you can’t possibly select an appropriate term and you would need permanent life insurance instead.
This is so important I’m going to say it again. When asked what type of life insurance policy would you recommend, always start with the question term or perm? Nugget number two, if you need to ensure two lives, but you’ll only need one death benefit, a joint policy may be appropriate. For example, for the mortgage need, we need to ensure both Justine and Russell’s lives since we don’t know who may die first. Buying a joint policy where there will only be one death benefit would be appropriate. It addresses the insurance need and is cheaper than buying separate policies on each of their lives, where the insurer is on the hook for two potential payouts. Nugget number three, if a joint policy is appropriate, you must then consider when would the death benefit be needed? Would it be required upon the death of the first spouse, such as a more to be paid in full, or upon the death of the second spouse, such as capital gains taxes on a jointly owned investment property?
Now, let’s watch these three nuggets turn to gold as we circle back and correctly tackle the question at hand. When it comes to addressing risk, there could be several different viable solutions. For many questions, you will need to eliminate three wrong answers and the one left standing, which may not be your exact recommendation, is still valid and therefore a correct answer. Let’s do that now. The purpose of the life insurance policy being acquired is to pay out the mortgage if Justin or Russell pass away before it is paid off.
So again, ask yourself, term or perm. This is a temporary or a term insurance need, so we can eliminate the answer that suggests a more expensive permanent whole life policy. The Smiths only have one mortgage and therefore only one death benefit is required. So a $400,000 joint policy is appropriate. This would cost less than two separate $400,000 policies, which could potentially pay out two death benefits. Since they want the mortgage paid out when the first spouse dies, we can eliminate the two answers that recommend last to die joint policies. So let’s go ahead and select the answer, a 10 year renewable term insurance policy on a joint first to die basis. And good news. There was a lot of learning to unpack with this question and we still got it right.