CSI FP2 Dumps Questions Answers

Policy C combines the two features that create the greatest potential liability for the insurer: an own-occupation definition and the shortest elimination period of 30 days.

An own-occupation disability definition is particularly valuable for a highly specialized professional such as a surgeon. Under an own-occupation structure, inability to perform the material duties of the insured's particular occupation can qualify as disability even where the individual may remain capable of performing some other occupation. An “any occupation” definition is more restrictive and therefore normally represents lower insurance risk. Canadian disability-plan documentation similarly distinguishes own-occupation eligibility from broader any-occupation standards.

The elimination period is the period between the commencement of disability and the point at which benefits become payable. A shorter elimination period causes the insurer to begin paying earlier and therefore normally increases the premium. A 60-day waiting period shifts more short-duration disability risk back to the insured.

Policy C provides both the broader own-occupation definition and the shorter 30-day elimination period. Policy D has comparable occupational protection but delays benefits for 60 days.

FPII reference/topic: Insurance Planning — disability insurance; definitions of disability; elimination periods; determinants of premiums.

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Capitalization of earnings is the appropriate answer because a going-concern business is valued principally on its ability to generate maintainable future earnings.

Under the capitalization approach, the valuator first determines a representative or maintainable level of normalized earnings. Non-recurring items, unusual owner compensation, discretionary expenses, and other distortions may be adjusted. Those maintainable earnings are then capitalized using an appropriate capitalization rate reflecting business and financial risk. In simplified form:

Business value = Maintainable earnings ÷ Capitalization rate

CRA valuation policy recognizes earnings and asset-value approaches as principal valuation methods and notes that earnings are particularly important when valuing operating businesses. It further states that going-concern valuation is normally appropriate where a business is a continuing enterprise capable of earning a reasonable return.

Discounted cash flow is another valid income-based method, but it generally requires explicit forecasts of future cash flows and terminal value and is often used where future performance can be projected with sufficient reliability.

Adjusted book value is more asset-oriented, while liquidation value assumes assets are being realized rather than the business continuing as an operating enterprise.

FPII reference/topic: Financial Planning for Small Business — business valuation; capitalization of maintainable earnings; going-concern versus asset-based valuation.

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George has identified a specific short-term capital requirement: money will be needed to purchase a vehicle in two years. The first investment consideration is therefore liquidity.

Liquidity refers to the ability to convert an investment into cash quickly, predictably, and without a material loss of value. Because George needs the funds within a short and defined period, the portfolio used for this objective should not ordinarily be exposed to substantial market volatility or assets that may be difficult or costly to liquidate at the required time.

A two-year horizon materially constrains investment selection. Capital preservation and ready access to the funds become more important than pursuing aggressive long-term growth. Suitable vehicles may therefore emphasize cash equivalents, high-quality short-term fixed-income investments, or other low-volatility instruments matched to the expected purchase date.

Tax consequences remain relevant, particularly when selecting between registered and non-registered savings alternatives, but taxes should be considered after determining the fundamental time horizon and liquidity requirement. George has already stated that the vehicle is needed, so the scenario provides sufficient indication that it is a meaningful financial goal.

FPII reference/topic: Investment and Tax Planning — investment objectives; liquidity; time horizon; capital preservation; matching investments to financial goals.

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