chapter 3

Question 1

Permanent life insurance provides coverage over the entire lifetime of the life insured.

Answer 1

It does not expire (as long as the required premiums are paid), and it does not need to be renewed

Question 2

There are three main types or categories of permanent life insurance. They are:

Answer 2

▪ Whole life;
▪ Term-100 (T-100);
▪ Universal life (UL)

Question 3

Whole life insurance provides coverage for the entire lifetime of the life insured, with a premium
that typically remains level over the duration of the contract.

Answer 3

A whole life policy builds up a cash
surrender value (CSV) over time, and if the policyholder surrenders the policy prior to the death of
the life insured, he may be entitled to receive payment of that CSV, less any surrender charges,
if applicable.

Question 4

Term-100 (T-100) life insurance also provides coverage for the entire lifetime of the life insured, but
the policy matures at ______, such that premiums are no longer payable. T-100 policies typically
do not have a CSV.

“Term-to-100” is also a name widely used in the industry for this product

Answer 4

age 100

Question 5

Universal life (UL) insurance provides coverage for the entire lifetime of the life insured, but it also
includes a savings component that is created through the deposit of excess premiums.

Within certain limits, the policyholder can use a UL policy to accumulate savings that are completely
sheltered from tax if they form part of the death benefit, or tax-deferred if they are withdrawn prior
to death.

Answer 5

UL insurance policies are noted for the flexibility they provide the policyholder

Question 6

Mortality costs approximate the insurance company’s cost of paying out policy death benefits. In
the case of a term life insurance policy, the annual mortality cost of the policy is estimated by
multiplying the policy’s face amount by the life insured’s probability of death during that year. With
term insurance, there is a chance that the insurance company will not have to pay out the death
benefit, because the policy term could expire before the life insured dies.

Answer 6

In the case of a whole life insurance policy, the annual mortality cost is still estimated by multiplying
the policy’s face amount by the life insured’s probability of death during the year. However, with a
whole life policy, the insurance company knows that it will eventually have to pay out the death
benefit (unless the policyholder decides to surrender the policy prior to death). When calculating
the premiums for a whole life policy, the insurance company spreads the cumulative annual
mortality costs over the anticipated duration of the life insurance contract.

Question 7

the premiums for a whole life policy have to cover the insurance
company’s expenses, including:
___
___
___
___
___
___
With a whole life policy, the insurance company must make assumptions about these expenses
well into the future.

Answer 7

▪ Cost of selling the policy (e.g., marketing, salaries or commissions to agents);
▪ Underwriting the policy (e.g., processing applications, paying for medical exams);
▪ Issuing and administering the policy;
▪ Paying income taxes;
▪ Investigating claims;
▪ Paying death benefits and the profits sought by shareholders.

Question 8

Life insurance premiums are normally quoted on an ______, and premiums are payable
_________.

Answer 8

annual basis
in advance

Question 9

Victor bought a whole life policy with an annual premium of $956, but he wants to pay the premiums monthly.
If the modal factor is 0.088, his monthly premiums will be ________________
Over the course of one year, he will pay a total of _____________.
This annualized premium is 6% higher than the quoted annual premium.

Answer 9

$84.13, calculated as ($956 × 0.088).

$1009.56 in premiums, calculated as ($84.13 × 12)

Question 10

one of the pricing factors that affect insurance premiums is the rate of return the insurance company expects to get on invested premiums.
When premiums are paid annually in
advance, the insurance company gets the benefit of investing those funds for up to a year.
However, the policyholder can usually choose to pay those premiums semi-annually, quarterly or
monthly.

The insurance company calculates the periodic premium payment by applying a modal factor that reflects the insurance company’s loss of investment income, compared to the income it could have earned on an annual premium.

Question 11

ongoing premiums:
The traditional option involves paying a fixed premium for the duration of the contract (i.e., until
the life insured dies or the policyholder surrenders the policy).
This is sometimes referred to as a
“lifetime-pay policy”.

Answer 11

Helena is 40 years old, a non-smoker and in excellent health. She just obtained a $500,000 whole life policy on her own life. Her premiums will be $11,065 annually and they are guaranteed to never increase.

Question 12

3.2.4.2 Single premium
At the other extreme, it may be possible for the policyholder to pay a single lump-sum premium for
life insurance coverage that will last for the entire lifetime of the life insured. An insurance policy is
said to be “paid-up” if no more premiums are needed to keep the policy in force for the life of the
life insured, so by definition a single premium policy is also a paid-up policy

Question 13

Limited payment
Limited payment whole life insurance is somewhere between these two extremes, with premiums
payable for a specific period of time (e.g., for 10 or 20 years) or to a specific age (e.g., to age 65
or age 100), after which the policy is deemed to be a paid-up policy. Limited payment policies are
discussed in more detail later in this Chapter.

Question 14

Death benefit options
Depending on the insurance company, the policyholder may also have some choice as to how the
death benefit is determined. The policyholder has a choice between __________ and _________

Answer 14

guaranteed whole life and
adjustable whole life

Question 15

Guaranteed whole life
A guaranteed whole life insurance policy offers a death benefit and premiums that are guaranteed
not to change over time, regardless of the insurance company’s experience with mortality costs,
expenses and investment returns.

Answer 15

By offering these guarantees, the insurance company is taking on all of the risk stemming from its assumptions about these pricing factors. This risk can be
significant over the long-time horizon of a permanent insurance policy.

Question 16

Adjustable whole life
an adjustable whole life insurance policy offers a death benefit and premiums that the
insurance company may adjust periodically to reflect its actual experience.
Usually the insurance company will guarantee the death benefit and premiums for a certain period of time initially, such as five years.
At the end of that period, the insurance company will compare its actual experience to its projections, and also update its assumptions about mortality rates, investment returns and expenses.
As a result of this review, it may increase, decrease or maintain the premiums and the death benefit.

This exposes the policyholder to more risk than a guaranteed whole life policy. As a result, the
premiums on an adjustable whole life policy will be lower than the premiums on a comparable
guaranteed whole life policy

Answer 16

Ranjit purchased an adjustable whole life policy 10 years ago, with an annual premium of $6,500 guaranteed for 10 years. As a result of its 10-year review,
the insurance company determined that men who had purchased the same policy as Ranjit are actually living longer than expected, so the company has had to pay out fewer death benefits than expected. The insurance company reduced Ranjit’s premiums to $6,415 annually, guaranteed for the next 10 years.

Helmuth purchased an adjustable whole life policy five years ago, with an annual premium of $11,600 guaranteed for five years.
As a result of its five-year review, his insurance company noted that market interest rates had dropped,
and that as a result they have earned less income on their policy reserves than expected. The insurance company increased Helmuth’s premiums to $12,100,
guaranteed for the next five years

Question 17

Whole life insurance policies are classified as either non-participating or_____________, depending
on how the insurance company handles any surpluses that result from the policies in that category.

Answer 17

participating

Question 18

Insurance companies base whole life insurance premiums on assumptions for mortality costs,
expenses and investment returns. They typically are very conservative in their assumptions to reduce their risk exposure, and this can result in surplus revenues.
For example, surpluses would occur if:
▪ Fewer people died than expected (i.e., actual mortality rates were lower than projected);
▪ Investment returns were higher than expected;
▪ Administrative expenses were lower than expected.

Answer 18

The insurance company retains some of this surplus to boost policy reserves, in case they experience a shortfall in revenue in the future. In fact, regulators specify the level of policy reserves that an insurance company must maintain to fund future liabilities.

Question 19

When non-participating (non-par) whole life insurance policies generate excess revenues, the
insurance company will use some of this excess to keep their policy reserves at the levels required
by the provincial insurance regulators.

To the extent that the excess revenues are not needed for policy reserves, the insurance company keeps the surplus as profit. This profit will be added to the
insurance company’s retained earnings, thereby increasing the company’s shareholders’ equity,
and/or paid as a taxable corporate dividend to the shareholders of the insurance company.

Answer 19

If the insurance company is not conservative enough in its assumptions for its non-participating
policies and it realizes a revenue shortfall, the company alone bears the burden of that shortfall;
the policy and the policyholder are not affected.

Question 20

When participating (par) whole life insurance policies generate excess revenues, the insurance
company will still use some of this excess to keep their policy reserves at the levels required by the
provincial insurance regulators. However, to the extent that the excess revenues are not needed
for policy reserves, the insurance company may distribute some or the entire surplus as policy
dividends to the participating policyholders.
While they are called “dividends,” policy dividends should not be confused with the regular
dividends that a corporation might pay to its shareholders because they are taxed differently.
If the insurance company is not conservative enough in its assumptions for its participating policies
and it realizes a revenue shortfall, the company still bears the burden of that shortfall alone.
Participating policyholders do not assume any risk for shortfalls; they will not be asked to pay
additional premiums and their death benefits will not be reduced.

Answer 20

In summary, participating policyholders have the potential to share in revenue surpluses while
non-participating policyholders do not.

For this reason, the premiums for participating policies are typically higher than the premiums for comparable non-participating policies.

Most participating whole life insurance products include the word “participating” in the product
name. Also, participating policy contracts will clearly specify how and when policy dividends will
be paid, and will include a caveat that policy dividends are not guaranteed and are only paid at the
discretion of the insurance company’s Board of Directors.

Question 21

Dividend payment options for participating policies

Depending on the insurance company and the specific insurance product, the policyholder may
have the choice of several dividend payment options. The policyholder usually makes this choice
when he first purchases the insurance, but in most cases, he can switch to another option at a
later date.

The most common dividend options are listed and described below:
▪

Answer 21

Cash;
▪ Premium reduction;
▪ Accumulation;
▪ Paid-up additions (PUA);
▪ Term insurance;
▪ Impact on death benefits and cash values.

Question 22

dividend Cash
Under the cash option, the insurance company will pay policy dividends to the policyholder in cash,
by either cheque or direct deposit. Cash dividends are normally paid ________ The policyholder
can then spend or invest this money in any manner he chooses.

Answer 22

annually.

Question 23

dividend: Premium reduction
If the policyholder chooses the premium reduction option, the insurance company will apply the
policy dividend to reduce the premiums payable for the coming year. The policyholder will receive
a premium notice for the balance of the premiums due.
In the early years of a policy, the policy dividend is usually less than the premium. However, if the
policy has been in force for quite some time, the policy dividend may entirely offset the annual
premium. If the policy dividend exceeds the premium, the excess can be paid out or allocated
according to one of the other dividend options chosen by the policyholder.
The premium reduction option is sometimes referred to as a premium offset option. Premium offset
policies used to be a popular marketing concept,

Answer 23

The premium reduction option is sometimes referred to as a premium offset option. Premium offset
policies used to be a popular marketing concept,

Question 24

dividend Accumulation
If the policyholder chooses the accumulation option, the insurance company will deposit the policy dividends into a separate accumulation account (also known as a “side account”), which is invested to provide additional growth.

While the policy dividends may or may not be taxable, income earned as a result of the investment
of these dividends will be______ to the policyholder.
The policyholder can withdraw the policy dividends and accumulated investment income at any time.

Investment options
Funds in the accumulation account normally earn interest income. Some insurance companies
also provide the option of investing the policy dividends in their _______. The number of segregated fund units that can be purchased will depend on the ___ and ____

Answer 24

taxable

segregated funds

amount of the policy dividend and the fund’s unit value at the time of purchase.

Question 25

Upon death
While the policyholder can withdraw funds from the accumulation account at any time, he is not
required to do so. Any funds left in the accumulation account on the death of the life insured are
typically paid to ____.

Answer 25

the beneficiary of the policy

Question 26

Paid-up additions (PUA)
Under the paid-up additions (PUA) option, the annual policy dividend is used as a _____
to buy additional whole life coverage that is paid-up.
This additional insurance takes the same
form as the base policy, and will have its own death benefit and cash surrender value (CSV). The
policyholder can usually surrender a PUA separately from the main policy, and receive its CSV
without affecting the main policy.
New medical evidence of insurability is not required to take advantage of the PUA option, because
the insurance company takes the potential increase in coverage via PUAs into account when underwriting the base policy. PUAs provide a great way to increase the amount of coverage on the life insured, even if his health has deteriorated to the point where he would not normally qualify for new coverage.

Answer 26

single premium

For this reason, PUAs are the most popular dividend payment option, with over 90% of whole life policies sold using the PUA option.
The amount of the PUA depends on the size of the dividend. While the PUA does not require any
evidence of insurability, the amount of coverage acquired will depend on the size of the dividend
and the attained age of the life insured at the time of purchase.

Question 27

dividend: Term insurance
Under the term insurance option, the annual policy dividend is used as ______ to buy ________.

As with the PUA option, medical evidence of insurability is not required.
The amount of term insurance acquired depends on the ______

Answer 27

a single premium

one-year term insurance

size of the dividend and the attained age of the life insured.

Question 28

Dividend: Impact on death benefits and cash values
Depending on which payment option the policyholder chooses, participating policy dividends may
affect the death benefit and the CSV of the policy (including any additions).

Answer 28

For example:
▪ The paid-up additions (PUA) option may increase both the CSV and the death benefit;
▪ The accumulation option may increase the death benefit (assuming the policyholder does not
withdraw all of the funds in the accumulation account);
▪ The term insurance option may temporarily increase the death benefit (for the duration of the
one-year term only).

Question 29

Non-forfeiture benefits

When a policyholder cancels a term life insurance policy or when the term expires, the policyholder
is left with _____.

Whole life insurance policies typically offer non-forfeiture benefits, which are benefits that the policyholder does not forfeit, even if he _____.

Non-forfeiture benefits are made possible because of _________ in the policy.

As a result, the non-forfeiture benefits usually increase in value the longer the policy is in force. During
the first few years of the policy, non-forfeiture benefits will be negligible because the policy has not
yet had a chance to build up a CSV. As the CSV is depleted (e.g., via withdrawals or automatic
premium loans (APL)), the non-forfeiture benefits will also be reduced.
Depending on the insurance company and the contract, the policyholder may be able to take
advantage of one or more of the non-forfeiture benefits described below.

Answer 29

nothing of value

stops paying the premiums

the buildup of the CSV

Question 30

Non-forfeiture benefits: Cash surrender value (CSV)
If a policyholder cancels his life insurance coverage, he is said to have surrendered the policy. The
cash surrender value (CSV) of a life insurance policy is the amount that the insurance company
will pay to the policyholder if the policyholder surrenders the contract. A portion of the CSV will be
taxable when received by the policyholder

In the early years of a whole life insurance policy, the premiums exceed the insurance company’s
actual costs for the policy, and some or the entire surplus is used to help create a policy reserve.
The CSV represents the fair or equitable portion of the policy reserve and any paid-up additions
(PUA) that the insurance company will return to the policyholder if he surrenders the policy.

Answer 30

A whole life insurance policy will typically specify what the guaranteed CSV will be at the end of
each policy year. If it is a participating policy with a PUA option, the illustration may also show an
additional non-guaranteed CSV amount that could potentially result from the policy’s dividends

Question 31

Surrender charges
It costs an insurance company a significant amount of money to issue an insurance policy, including
underwriting and administrative costs and agent commissions. As a result, they usually levy
surrender charges against a policy’s cash value to discourage a policyholder from surrendering
or cashing in his policy before they can recoup their expenses. The surrender charges usually
decrease over time and are eventually eliminated entirely.
For whole life insurance policies, the surrender charges are usually not specifically spelled out in
the insurance contract. Instead, the illustration of the policy’s guaranteed CSVs will show $0 for
the first three to ten years, depending on the policy, before beginning to increase gradually.
3.5.1.2 Policy loans
When a policyholder owns a life insurance policy, he can usually obtain a policy loan from the
insurance company of up to 90% of the policy’s CSV. While policy loans do not have a specific
payback schedule, the policyholder will be charged interest at current rates. If the policyholder
surrenders the policy, the amount he would have otherwise received as the CSV will be reduced
by the outstanding balance of the loan, plus accrued interest. Similarly, if the life insured dies while
a policy loan is outstanding, the death benefit will be reduced by the loan balance plus interest.

Answer 31

Yolanda owned a $500,000 whole life policy on her own life with a CSV of $120,000. She took an $80,000 policy loan to use as the down payment for a
cottage, and the loan’s interest rate is 5%, compounded annually.
Two years later, she decided to surrender the policy. At that time, the CSV had increased
to $136,000 and she still had not made any payments on the loan.
Yolanda will receive $47,800 upon surrendering her policy, which is calculated as the CSV of $136,000, minus the $80,000 outstanding loan and minus
accrued interest of $8,200.
If she had died instead of surrendering the policy, her beneficiary would have
received $411,800, which is calculated as the death benefit of $500,000, minus
the $80,000 loan and the $8,200 in accrued interest.

Question 32

Automatic premium loans (APL)
Most whole life insurance policies offer an automatic premium loan (APL) option once the policy
has developed enough of a cash surrender value (CSV). Under this option, if the policyholder fails
to make a scheduled premium payment, the insurance company will automatically make a loan
against the CSV for the amount of the missed premium.

The APL option prevents the policy from lapsing if the policyholder forgets to make a premium
payment, or if he needs to take a break from paying premiums for personal financial reasons.

The APL provision can be used for more than one missed premium. In fact, if the policyholder misses
multiple premium payments, the APL provision will be applied repeatedly, until the total of the
policy loans plus interest equals the maximum set by the policy (usually between 90 and 100% of
the CSV). Once this limit is reached and after a 30-day grace period, the policy will be terminated
and the residual CSV, if any, will be paid to the policyholder.

Answer 32

Ella owns a $500,000 whole life insurance policy with a CSV of $226,000
and annual premiums of $11,500. She has been forced into early retirement,
resulting in a substantial drop in income. She would like to keep the policy in
force to meet her estate planning needs, but she cannot afford the premiums
until her Canada Pension Plan (CPP) and Old Age Security (OAS) benefits
commence in about five years. Ella can skip premiums for the next five years by
using the APL provision because she has enough CSV to support this option.
While this will reduce the death benefit by the amount of the unpaid premiums
plus interest, it will allow her to keep the policy. She will also always have the
option of repaying the loan and interest if/when she can afford to, which would
restore the death benefit.

Question 33

Reduced paid-up insurance
The reduced paid-up insurance option allows the policyholder to stop paying premiums entirely,
while still keeping some life insurance coverage in place for life. Basically, the policyholder uses
the CSV as a single premium to buy a reduced amount of paid-up life insurance coverage. The
amount of paid-up coverage will depend on the size of the CSV and the attained age of the life
insured.
No medical evidence of insurability is required, because the amount of paid-up coverage will be
less than the coverage provided by the original whole life policy

Answer 33

If Ella feels that she will never again be able to afford the $11,500 in annual
premiums on her $500,000 whole life policy, she may be able to use the
CSV of $226,000 (assuming she never exercised the APL option) as a single
premium to purchase a paid-up permanent insurance policy. The exact amount
of the death benefit will depend on her age, but it will be less than the $500,000
provided by her original policy

Question 34

Extended term insurance
The extended term insurance option allows the policyholder to stop paying premiums entirely,
while keeping the same level of coverage in place in the form of a term insurance policy instead of
a permanent policy. The duration of the term will depend on the CSV of the whole life policy, and
the attained age of the life insured.

Answer 34

EXAMPLE (CONT.):
If Ella feels that she will never again be able to afford the $11,500 in annual
premiums on her $500,000 whole life policy but she wants to keep coverage
for the full $500,000 in place as long as possible, she may be able to use the
CSV of $226,000 (assuming she never exercised the APL option) as a single
premium to buy $500,000 of term insurance. The exact term of that policy will
depend on her age

Question 35

Limited payment life is a whole life insurance policy that provides lifelong insurance coverage,
while only requiring premiums for a specified guaranteed period of time.

Answer 35

Hamish bought a 25-pay life policy on his own life when he was 45 years old.
He only has to pay premiums for 25 years, at which point he will be 70 years
old. However, the coverage will continue past age 70, right up until his death.

Question 36

advantage of whole life insurance
▪ Premiums are guaranteed for ______;
▪ Coverage continues for ____, regardless of the
age or health of the life insured;
▪ Participating whole life policies may result in
______________, which the policyholder can
receive in____, choose to _________ in an
investment account (i.e., side account), or use
to buy _______or ____________
▪ A whole life policy builds up a ____________________over time, which the policyholder may receive if he cancels or surrenders the policy;
▪ In the later years, whole life policy premiums
will likely be _____ than the premiums for the
same amount of term insurance on a person
of the same age;
▪ A whole life policy may offer ___________
benefits in addition to the CSV, including
___________, ___________, and _____________;
▪ Policyholder may be able to obtain a _____ against the CSV of the policy;
▪ Compared to more traditional guaranteed
investments, the dividend payment rate on
participating policies has historically had a
lower standard deviation (i.e., lower volatility
in the returns).

Answer 36

life
life

policy dividends
cash

accumulate
paid-up additions (PUA) or one-year
term insurance

cash surrender value (CSV)

less

non-forfeiture
automatic premium loans (APL), reduced paid up additions, and extended term insurance

policy loan

Question 37

Disadvantage of whole life insurance

▪High initial cost. In the early years of the policy, the premiums for whole life insurance will be
higher than those for the same amount of term
insurance, which may make it cost-prohibitive for people with limited cash flow;
▪ Policyholder has little or no choice over how the policy reserve is invested;
▪ For participating whole life policies, policy
dividends are not guaranteed. Even a small
change in the dividend scale can significantly
alter the long-term performance results;
▪ There is a theory that suggests buying term insurance and investing the difference may result in a better financial outcome (provided the policyholder is disciplined to invest the difference);
▪ The way the policy reserve is invested/ managed is not entirely transparent to the public.

Question 38

As a general rule, whole life insurance is more suitable than term insurance for addressing risks of unknown or long duration.
Some of the issues that need to be considered when determining if whole life insurance is appropriate include how long the coverage is needed, how much the
policyholder can afford to pay in premiums, his income stability, his willingness to pay premiums
for life, his need for increasing coverage, and his investment objectives.

Question 39

Taxes upon death
Probably one of the strongest arguments for whole life insurance revolves around managing the
income taxes that come due upon death. This is particularly true for people who own cottages (i.e.,
cabins), business shares or other investment assets that they want to leave intact to their children,
and that are expected to appreciate significantly prior to death.

Answer 39

Henry is 50 years old and he is in great health. He is widowed with one son,
Jack, who is currently 14 years old. Henry and Jack enjoy the time they spend
together at the cottage, and Henry would like Jack to receive title to the property when he dies. Based on his family history, Henry believes he will live until at least age 90

Question 40

Future insurability
One of the benefits of whole life insurance is that it can provide lifetime protection at a guaranteed
fixed price. Furthermore, if the insurance is acquired when the life insured is relatively young and
before any health problems occur, it can be quite affordable.

Answer 40

EXAMPLE:
Eric is already 45, and he had not even considered life insurance until his recent marriage and the birth of his son, Oliver, last year. Eric’s sedentary lifestyle has resulted in him being overweight, with high blood pressure and the onset of Type 2 diabetes. He was dismayed to learn how much the life insurance would cost because of his health, and even more dismayed to learn how much cheaper it would have been had he bought it when he was young and healthy.
This prompted him to purchase a whole life policy on Oliver’s life, so he would always have insurance protection. When Oliver is an adult, Eric can transfer
ownership of the policy to him, with the added benefit that Oliver will be able to take out a policy loan against the CSV if needed for his education or for the down payment on a home.

Question 41

Increasing coverage
Participating whole life insurance can provide an easy way to increase insurance coverage without
increasing premiums, even if the health of the life insured declines.

Answer 41

Tony is 33 years old with a young family, and he would like to obtain life
insurance coverage for 10 times his salary. His salary is currently $60,000,
but he expects it to increase dramatically over the coming years. He would
like his new insurance coverage to keep pace with the increases in his salary,
preferably without increasing his premiums.
While Tony is currently in good health and would have no trouble obtaining life
insurance, he knows that his father and his uncle both started experiencing
significant health issues at about age 40. Tony is worried that if his health
follows family history, he might be unable to buy additional coverage at an
affordable cost in the future.
A $600,000 participating whole life policy with a paid-up additions (PUA) option
would be a good choice for Tony. The PUAs will increase his coverage without
increasing his premiums, and without requiring proof of insurability. If it turns
out that the PUAs add more coverage than Tony needs, he can always use
the additional coverage to address other estate needs or surrender part of the
policy and use the resulting cash surrender value (CSV) for other purposes.

Question 42

Term-100 (T-100) life insurance, also called “Term-to-100” in the industry, combines elements of
term insurance and permanent insurance.

Question 43

Duration of coverage
T-100 provides coverage for life. Some T-100 policies mature at age 100, meaning the death
benefit is paid when the life insured reaches age 100 or dies, whichever comes first.
Other T-100 policies only pay the death benefit when the life insured dies, but premiums cease at
age 100, so the policy essentially becomes a paid-up policy.

Answer 43

Premiums
Premiums for a T-100 policy cease when the life insured reaches age 100, even if the death benefit
has not yet been paid out.
Because T-100 policies generally do not accumulate a CSV and do not provide non-forfeiture
benefits, the premiums are typically lower than those for the same amount of regular whole life
insurance. However, because T-100 provides protection for life, premiums are higher than those
for the same amount of term insurance coverage that stops at age 75 or 80.

Because T-100 policies generally do not accumulate a CSV, the policyholder cannot rely on
automatic premium loans (APL) to cover any missed premium payments. This means that
if the policyholder accidentally misses a payment and does not rectify this within the allowable
grace period of 30 days, the policy will lapse. Essentially, the policy will be worthless, even if the
policyholder has been faithfully paying premiums for decades up until that point.
Some T-100 contracts allow policyholders to reactivate lapsed policies, provided they do so within
a specified timeframe (usually two years) and they also pay the missed premiums.

Question 44

Level cost of insurance (LCOI)
Most T-100 policies guarantee that the premiums will remain level for the duration of the contract
(i.e., until age 100), and they do not provide for the accumulation of any cash surrender value or
other non-forfeiture benefits. The level premium schedule for this type of T-100 policy is referred to
as level cost of insurance (LCOI).
Although T-100 premiums remain constant for life once a policy is implemented, it is important to
note that those premiums will depend on the attained age of the life insured at the time the policy
is issued. The younger the life insured is at the time of issue, the lower the premiums for life.

Answer 44

3.11.2.2 Limited payment T-100
T-100 policies can also be issued on a limited-pay basis, meaning that coverage is provided for
life, but premiums are only payable for a limited number of years (e.g., 10 or 20 years) or until a
predetermined age (e.g., age 65). At the end of the payment period, the policy becomes a paid-up
policy. Limited payment T-100 policies are not widely available in Canada today, but they have
been issued in the past and these policies do still exist.
Limited payment T-100 insurance commands a higher premium than the same amount of straight
T-100 coverage, because the premiums are being paid over a shorter period of time. These
premiums are held in reserve to help offset the higher costs of insurance as the life insured ages.
As with the whole life policies discussed earlier in this Chapter, this policy reserve generally results
in a cash surrender value (CSV) that the policyholder can access if he surrenders the policy after it
has been in force for a certain amount of time.
Limited payment T-100 policies may also offer the option for automatic premium loans (APL),
which could help prevent the policy from lapsing if the policyholder misses any premium payments.

Question 45

T-100 Death benefit
The death benefit of a T-100 policy is fixed for the duration of the contract

Upon age 100
What happens when the life insured reaches age 100 depends on the insurance company and the
details of the contract. Some policies specify that the death benefit will be paid to the beneficiary
when the life insured turns 100. Other policies specify that the payment of premiums ceases at
age 100, but coverage continues until death.
3.11.5 Availability from insurers
Basic T-100 policies (those without a CSV and with premiums payable until age 100) are readily
available from major insurance companies and other financial institutions.
Limited-payment T-100 policies are no longer common in Canada, but they are available in the US market.
3.11.6 Using Term-100
Term-100 insurance may be appropriate when the following conditions apply:
▪ The policyholder requires a fixed amount of insurance to cover a need that is not expected to
increase prior to death, regardless of when that death might occur;
▪ The policyholder is certain that he will never want to surrender the policy;
▪ The policyholder has no need of the investment opportunities provided by universal life (UL)
insurance.

Answer 45

Trevor recently lost his wife after a long battle against cancer. He was overwhelmed by the support that the local Hospice Centre provided to his wife,
himself and their children during the last two months before she died.
Trevor is absolutely determined to donate $500,000 to the Hospice Centre upon his own death.
Trevor decided to buy a $500,000 T-100 policy now, while the premiums are still affordable, because this will insure that he will be able to make that gift
even if he lives to be 110 and depletes all of his own resources. He has no intention of ever cancelling the policy, so he does not need a policy that builds
up a cash surrender value (CSV).