See how well you do using these formulas in the three sample LLQP exam quiz questions below.

Formulas

1. Economic (Capital) Value of Human Life formula:
   Income Need ÷ Discount rate = Capital required.
   
   
2. Segregated Fund Guarantee Linear Method:
   
   Step #1: Guaranteed amount x withdrawal ÷ Adjusted Cost Base (ACB) = Guarantee Reduction Amount.
   
   Step #2: Guaranteed Amount less Guarantee Reduction amount from step #1 = Reduced Guarantee.
   
   
3. Canada Pension Plan (CPP) early retirement formula:
   
   Step #1: CPP monthly pension amount at age 65 x (monthly discount rate of .5% per month (2011) x number of months retiring early = reduction in CPP pension.
   
   Step #2: CPP pension at age 65 minus reduction in CPP pension from step #1 = CPP pension.

LLQP sample exam questions requiring you to use the above formulas:

1) Marcia, age 36, wants a capital account funded by life insurance to provide income to her family in case of her premature death. She feels that her husband, Farquad, age 39, and her two children, Fiona and Hansel, age 9 and 11 respectively, would need, about $50,000 yearly, net of income tax at 40%, to maintain the family’s lifestyle. Due to a chronic back problem, Farquad has not worked for the last ten years. He does not expect his health to improve in the future. So, the family depends totally on Marcia for financial support. Based on the information above, and assuming a discount rate of 5%, approximately how much life insurance is needed to fund a capital account in case of Marcia’s death using the economic value of human life formula?

1. $1,000,000
2. $1,700,000
3. $   600,000
4. $1,450,000

Answer: b. – $1,700,000

Rationale:

Step #1: Gross-up the net income of $50,000 into a pre-tax amount: $50,000 ÷ (1 -.40) = $83,333.33.

Step #2: Gross income of $83,333.33 ÷ Discount Rate of 5% = $1,666,667 or approximately $1,700,000.

Reference: LLQP Volume 2, Module 12.2, Fact Finding Process, page 12-9.

2) You purchased an Individual Variable Insurance Contract (IVIC) and invested a lump-sum amount of $20,000 (2,000 units at $10.00 each). The death and maturity guarantees are 75%. The FMV is $14.00 per unit, and you decided to redeem $7,000 or 500 units. Your life insurance company has a linear guarantee. What is true about the guarantee after the surrender? 

1. Guarantee reduces 35%, $15,000 to $9,750
2. Guarantee reduces 35%, $20,000 to $14,750
3. Guarantee reduces 25%, $15,000 to $11,250
4. Guarantee reduces 25%, $20,000 to $16,250 

Answer: a. – Guarantee reduces 35%, $15,000 to $9,750.

Rationale:

Step #1: Guaranteed Amount $15,000 x Withdrawal Amount of $7000 ÷ Adjusted Cost Base (ACB) of $20,000 = amount guarantee is reduced of $5,250.

Step #2: Guarantee Amount $15,000 (75% of $20,000) minus $5,250 = $9,750.

Step #3: $5,250 ÷ $15,000 = 35% reduction in guarantee.

Reference: LLQP Program, volume 2, Module 9:4 Guarantees page 9-20

3) William, age 62, has lived and worked in Canada his whole life. He is thinking of taking his Canada Pension Plan (CPP) early, when he turns 63, in January, 2011. If William was turning 65, his CPP pension would be $960 monthly. What will his approximate monthly CPP pension amount be if he retires as scheduled on his 63rd birthday?

1. $960 because he has lived in Canada for 40 years
2. $845 because his pension is reduced by .5% per month for each month he retired early
3. $822 because his pension is reduced by .6% per month for each month he retired early
4. Under CPP rules, you cannot take your CPP pension until you turn 65.

Answer: – b. $845 because his pension is reduced by .5% per month for each month he retired early.

Rationale: CPP pension at age 65 x (monthly discount rate (.5%) x months retiring early) = CPP pension.

Step #1: $960 CPP pension at age 65 x (.5% x 24 months) = $115.20

Step #2: $960 CPP pension at age 65 less $115.20 = $844.80 or $845.

Reference: LLQP program, Volume 2, Module 10:2 Canada Pension Plan, Page 10-7

I want to offer you my best wishes for exam writing success on your Advocis and Provincial LLQP exams.