Insurance and Estate Planning

Insurance
1a
1. A -I and II only
2. C –The insurer will reimburse the insured only to the extent of the insured’s financial loss
3. C –Risk shifting and transfer
4. C –They usually replace all lost earnings
5. A –Select a long waiting period or elimination period
6. D –Temporary annuity
7. B –The interest rate actually earned exceeds assumed interest rates
8. B –Retiring an installment debt obligation at death
1b
i) It means utmost good faith. Insurance contracts abide by this. Since insurance companies share the
risk, it is expected that the insured will act in good faith. That is they will disclose all material information
that is relevant to the policy (Inestopedia, 2018).
ii) Uberrimae Fidei is important to underwriting because it ensures that the company will charge an
appropriate premium commensurate to the level of risk. An insurance company may protect itself from
non disclosure by rejecting to pay a claim if it arises or cancelling the policy (Inestopedia, 2018)
1c
The waiver of premium is a rider in life insurance policies. For an additional premium, the company will
pay your life insurance premium in the event that you are totally disabled and qualify. A total permanent
disability policy pays for the portion of your income in the event of a disability (Kuhn, 2018).
1(d) Policies
(i.) Contract a major illness
Julian Lim’s Term plan which includes $500,000 Critical Illness benefit
The amount that would be paid would be up to a maximum of $500,000 to Poh Eng, provided
the illness she contract is one of the sicknesses that are insured under the policy.
Poh Eng’s whole life plan. The plan covers her for accelerated Critical Illness with a benefit of
up to $50,000 provided the illness she contract is one of the sicknesses that are insured under
the policy.

(ii.) Pass away one year later
Julian Lim’s $600,000 Term plan .The amount that would be paid would be up to a maximum of
$600,000 to Julian Lim
Poh Eng’s whole life plan up to $70,000 will be paid to her beneficiaries
mortgage reducing term insurance will pay out the outstanding loan balance
2(a)
TRUE The owner of a convertible bond has the option to become a shareholder.
TRUE The expected return of a portfolio return is a weighted average of the component expected
return.
FALSE A large reverse split will reduce the number of shareholders.
TRUE A warrant gives its owner the right to sell shares back to the company at a predetermined
price.
TRUE A retail food chain is a cyclic stock.
FALSE A forward PE is sometimes less than a trailing PE.
FALSE If a firm’s asset turnover increases, its return on assets also increases, assuming everything else
remains constant.
TRUE A stock that breaks through support level gives a bullish signal.
FALSE Increased margin buying has historically been associated with recently rising markets.
TRUE Small firms tend to outperform those with larger capitalization

2(b)
(I)
Breakeven = Strike Price – Premium
=$3.00 -$0.30= $2.70
$2.70 per share
That means the price per share must fall below $2.70 for Julian Lim to make a profit.
(ii) maximum loss to be incurred by Julian Lim in this put option strategy.
The maximum loss is equal to the premium paid per share
Therefore max loss is $30 ( 0.3 *100)
(iii) maximum gain to be produced for Julian Lim by this put option strategy.
= Strike price - Premium
=3.00 – 0.30
=$2.70 per share
Therefore max gain is $270 ( 2.70 *100) for 100 shares.
(c) a profit/loss table.
Stock Price Value of Put at expiration
=max($3-Stock price,0)
cost of $3 put profit or
loss (b-c)
$ - $ 3.00 $ 0.30 $ 2.70
$ 0.30 $ 2.70 $ 0.30 $ 2.40
$ 0.60 $ 2.40 $ 0.30 $ 2.10
$ 0.90 $ 2.10 $ 0.30 $ 1.80
$ 1.20 $ 1.80 $ 0.30 $ 1.50
$ 1.50 $ 1.50 $ 0.30 $ 1.20
$ 1.80 $ 1.20 $ 0.30 $ 0.90
$ 2.10 $ 0.90 $ 0.30 $ 0.60