FP1 / PRACTICE EXAM 2 QUESTIONS
WITH 100% CORRECT ANSWERS |
LATEST VERSION 2025/2026.
Vivian buys a life insurance policy in which the insurer pays policyholders dividends based on
how well the life insurer is doing. If the insurer is profitable, Vivian will receive dividends. If the
insurer underperforms financially, Vivian and other policyholders will receive fewer dividends.
Indicate the type of insurance policy Vivian purchased.
A. Variable life insurance.
B. Participating life insurance.
C. Limited-pay life insurance.
D. Non-participating life insurance - ANS B. Participating life insurance.
Choose the type of insurance that combines term and whole life for a predetermined contract
period and guarantees a sum of money for either the beneficiar(ies) or at the end of the term
for the contract holder.
A. Variable life insurance.
B. Universal life Insurance.
C. Permanent life Insurance.
D. Endowment life insurance. - ANS D. Endowment life insurance.
1 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
,Endowment life insurance is a combination of term life and whole life. It provides coverage for
a specified period of time (usually to age 65) and builds cash value. If the insured should die
during the period of coverage, the beneficiary receives the face amount of coverage. If the
insured does not die during the period of coverage, the policy owner receives the entire face
value of the policy as a cash payment and the insurance coverage ceases. Reference: Module 4,
Section 2.
Select the type of insurance that can be extended, at the option of the policyholder, at the end
of the term without medical evidence of insurability.
A. Level term insurance.
B. Decreasing term insurance.
C. Convertible term insurance.
D. Renewable term insurance. - ANS D. Renewable term insurance.
Renewable term insurance allows for the policy to be extended for another term of equal
length without the insured having to provide medical evidence of insurability.
Henry, a 48 year-old director of engineering at an environmental firm, has $50,000 in Canada
Savings Bonds on which he earns 3% interest annually. He has paid off the mortgage on his
house but he has an outstanding $30,000 bank loan (taken out for home improvements) on
which he pays 6% interest. His marginal tax rate is 50%. Select the action an advisor is most
likely to recommend to Henry?
A. Cash in $30,000 of CSBs and pay off the bank loan. 0%
B. Don't do anything; let the situation remain as it is.
C. Cash in $30,000 of CSBs and pay off the bank loan, then borrow $30,000 and invest it in a
conservative balanced fund.
D. Cash in $30,000 of CSBs and pay off the bank loan, then borrow $50,000 and invest it in an
aggressive equity fund. - ANS C. Cash in $30,000 of CSBs and pay off the bank loan, then
borrow $30,000 and invest it in a conservative balanced fund.
2 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
, The most likely recommendation involves paying off the bank loan by cashing in CSBs and then
borrowing the previous loan amount and investing it so that interest on the new loan becomes
tax deductible. While borrowing more than the previous loan amount (in C.) could be an option,
it would change the risk profile and risk tolerance level, and that may not be the best route to
take.
Jacob who is about to retire, strategically moves a major portion of his investment portfolio
into Canada Savings Bonds (CSBs), guaranteed funds and money market funds. Select the loss
control technique he implemented to reduce his exposure to potential equity market declines
in his retirement years.
A. Loss reduction.
B. Loss carryover.
C. Loss prevention.
D. Loss avoidance. - ANS D. Loss avoidance.
Loss avoidance is not exposing one's self to a particular risk. The loss of capital due to a stock
market crash can be avoided by investing in guaranteed term deposits rather than in equities.
What type of risk retention is a form of "self-insurance" or handling the unavoidable risk
internally?
A. Active risk retention.
B. Tangible risk retention.
C. Passive risk retention.
D. Intangible risk retention. - ANS A. Active risk retention.
With active risk retention, the client is aware of the risk and deliberately plans to retain all of
part of it. A car owner with an older, low value vehicle retains the risk of loss by choosing not to
insure it against collision damage.
3 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
WITH 100% CORRECT ANSWERS |
LATEST VERSION 2025/2026.
Vivian buys a life insurance policy in which the insurer pays policyholders dividends based on
how well the life insurer is doing. If the insurer is profitable, Vivian will receive dividends. If the
insurer underperforms financially, Vivian and other policyholders will receive fewer dividends.
Indicate the type of insurance policy Vivian purchased.
A. Variable life insurance.
B. Participating life insurance.
C. Limited-pay life insurance.
D. Non-participating life insurance - ANS B. Participating life insurance.
Choose the type of insurance that combines term and whole life for a predetermined contract
period and guarantees a sum of money for either the beneficiar(ies) or at the end of the term
for the contract holder.
A. Variable life insurance.
B. Universal life Insurance.
C. Permanent life Insurance.
D. Endowment life insurance. - ANS D. Endowment life insurance.
1 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
,Endowment life insurance is a combination of term life and whole life. It provides coverage for
a specified period of time (usually to age 65) and builds cash value. If the insured should die
during the period of coverage, the beneficiary receives the face amount of coverage. If the
insured does not die during the period of coverage, the policy owner receives the entire face
value of the policy as a cash payment and the insurance coverage ceases. Reference: Module 4,
Section 2.
Select the type of insurance that can be extended, at the option of the policyholder, at the end
of the term without medical evidence of insurability.
A. Level term insurance.
B. Decreasing term insurance.
C. Convertible term insurance.
D. Renewable term insurance. - ANS D. Renewable term insurance.
Renewable term insurance allows for the policy to be extended for another term of equal
length without the insured having to provide medical evidence of insurability.
Henry, a 48 year-old director of engineering at an environmental firm, has $50,000 in Canada
Savings Bonds on which he earns 3% interest annually. He has paid off the mortgage on his
house but he has an outstanding $30,000 bank loan (taken out for home improvements) on
which he pays 6% interest. His marginal tax rate is 50%. Select the action an advisor is most
likely to recommend to Henry?
A. Cash in $30,000 of CSBs and pay off the bank loan. 0%
B. Don't do anything; let the situation remain as it is.
C. Cash in $30,000 of CSBs and pay off the bank loan, then borrow $30,000 and invest it in a
conservative balanced fund.
D. Cash in $30,000 of CSBs and pay off the bank loan, then borrow $50,000 and invest it in an
aggressive equity fund. - ANS C. Cash in $30,000 of CSBs and pay off the bank loan, then
borrow $30,000 and invest it in a conservative balanced fund.
2 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
, The most likely recommendation involves paying off the bank loan by cashing in CSBs and then
borrowing the previous loan amount and investing it so that interest on the new loan becomes
tax deductible. While borrowing more than the previous loan amount (in C.) could be an option,
it would change the risk profile and risk tolerance level, and that may not be the best route to
take.
Jacob who is about to retire, strategically moves a major portion of his investment portfolio
into Canada Savings Bonds (CSBs), guaranteed funds and money market funds. Select the loss
control technique he implemented to reduce his exposure to potential equity market declines
in his retirement years.
A. Loss reduction.
B. Loss carryover.
C. Loss prevention.
D. Loss avoidance. - ANS D. Loss avoidance.
Loss avoidance is not exposing one's self to a particular risk. The loss of capital due to a stock
market crash can be avoided by investing in guaranteed term deposits rather than in equities.
What type of risk retention is a form of "self-insurance" or handling the unavoidable risk
internally?
A. Active risk retention.
B. Tangible risk retention.
C. Passive risk retention.
D. Intangible risk retention. - ANS A. Active risk retention.
With active risk retention, the client is aware of the risk and deliberately plans to retain all of
part of it. A car owner with an older, low value vehicle retains the risk of loss by choosing not to
insure it against collision damage.
3 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
