Chapter 4: Risk Management and Insurance Flashcards
When purchasing insurance on the lives of children or grandchildren, why would insurers ask if the policy owner owns insurance on their own life first?
It can be an indication of whether the purchaser views insurance as a risk management tool or simply as a means of enriching themselves in case of a claim.
What are 3 groups that can offer critical illness insurance?
- Employers
- Creditors
- Associations
How are premiums for CII as part of group benefits banded?
Normally based on a 5-year banded rate, meaning a plan member will have the same premium for a given 5-year age band. (Example: 33 year old will have the same premium as a 34 year old, then the 35 year old would have a higher premium)
What is the typical guideline used for determining how much CII is appropriate?
1-2 years of household income
Which type of households tend to incur higher costs in the event of a critical illness?
Households with just one income earner, as the income earner ends up taking on caregiving responsibilities that cause the loss of that income source
What is anti selection?
Anti selection is a term often used in conjunction with adverse selection. It is defined as an increase in the chance for a person to take out an insurance contract because they think their health risk is higher than what the insurance company has allowed for in the premium amount.
Why does cancer coverage in CII typically have a 90-day period where claims are not possible?
Due to anti-selection risks (people who may have a strong reason to suspect they will have a claim in the near future)
When is the premium for a LTC policy purchased as part of a CII rider determined?
Likely not until the conversion privilege has been exercised.
Which rider(s) allow for a CII claim if the individual experiences a disability that renders them unable to work in any capacity, without meeting any other definition?
Total disability or loss of independent existence.
Which definition of disability is used for the waiver of premium rider on a CII policy?
Usually “any occupation” definition of disability.
How does inflation protection on a CII policy work?
Some insurers allow a rider that sees the amount of coverage increase periodically, such as a 5% increase in the face amount every 5 years.
What are the 3 basic types of LTC policies?
- Reimbursement
- Indemnity
- Income
How does a reimbursement LTC policy work?
Under a reimbursement plan, the person insured must submit receipts and can receive up to the monthly maximum in reimbursement.
How does an indemnity LTC policy work?
An indemnity policy will pay up to its face amount as an income benefit once the insurer knows the the insured is incurring that much of an expense. If there is a surplus in the difference between the cost of the expense (facility cost) and the face amount, that will usually extend the benefit period.
How does an income LTC policy work?
Like a traditional disability policy. Once a claim has been submitted, the benefit will be paid until the end of the policy’s benefit period.
When do LTCI policies provide benefits?
When the insured can no longer perform 2 activities of daily living or demonstrates a cognitive impairment.
What are the different types of home care that could qualify to be reimbursed under a LTCI policy?
- Professional care (such as an RN)
- Skilled care (such as a home care attendant, PSW)
- Non-skilled care (family member or friend) - while this works with an income type of policy, it may or may not work for a reimbursement or indemnity style.
What is respite care?
Care facilities not being used on a permanent basis, such as dropping off a parent on your way to work and picking them up on your way home. Or to provide care during a shorter period of time, such as a vacation.
For which type of care home might a LTCI policy have a shortened elimination period?
Palliative care/hospice care
What are Instrumental Activities of Daily Living?
IADLs are used in the underwriting process as they are considered early warning signs for a possible concern around ADLs. These include using the phone, managing finances, driving or taking the bus, shopping, doing laundry, housework, managing medications, preparing meals.
Are ratings on LTCI policies common?
No, although a rating could be applied for height/weight.
What does it mean if a LTCI policy is issued on a modified basis?
A policy could be issued with a shorter benefit period in a smaller face amount than applied for. This is a risk management tool for the insurer.
Do insurers typically add exclusions to LTCI policies?
Due to comorbidity concerns (risk that one condition makes another worse), insurers will typically use a decline rather than an exclusion to manage risk. Exclusions may be used for lifestyle risks though, such as a travel exclusion for someone who regularly travels to dangerous places.
What are common LTCI benefit periods?
100 weeks, 150 weeks, 250 weeks, or lifetime benefits.
What are common LTCI elimination periods?
Although policies in the past had elimination periods as long as 1 year, elimination periods are now 90 days or 180 days.
Why are LTCI premiums subject to change and by how much?
It’s a relatively new type of insurance, so insurers do not yet have a lot of claims experience. They reserve the right to adjust premiums based on submitted claims, but normally guarantee premiums for 5-year periods. They may also includ a limit to how much the premiums can increase from one 5-year period to the next.
What is a first payment bonus for LTCI?
Some insurers provide an additional benefit once the first claim is accepted to make up for any costs the person incurred during the elimination period or for renovations/assistive decides.
This may be automatically included in the base premium or may be an additional rider.
What are the two non-forfeiture provisions that are available on some LTCI policies?
- Extended term insurance - policy may simply stay in force for a period of time if a policyowner stops paying premiums.
- Reduced paid-up insurance - depending on how long premiums have been paid, the insurer could keep the policy in force at a reduced face amount.
What do many LTCI insurers do to reduce the chance of an LTCI policy lapsing?
Many insurers will notify a third party, such as a policyowner’s child, if that policy owner misses a premium (requiring consent at time of application or later).
Do LTCI policies typically offer return of premium?
Normally only at death.
What are the two types of inflation protection riders that can be added to a LTCI policy and which is more expensive?
Automatic inflation protection each year or indexing only once a claim has started. The latter is less expensive.
How does the LTCI future purchase option work?
Some insurers offer the insured the ability (through a rider) to elect to have their coverage amounts increased in certain increments (such as $100 per week) at certain intervals (such as every 3 years) with no medical underwriting required (although financial underwriting may be required).
What are the 3 different types of “go” years in retirement?
Go-go years
Slow-go years
No-go years
What are the 2 important historical dates when determining the taxation of life insurance policies?
December 1, 1982
January 1, 2017
For policies issued between December 1, 1982 and December 31, 2016, how is the ACB calculated?
ACB = premiums paid (excluding ratings, riders + benefits, but including term riders) - dividends received - net cost of pure insurance (cost of a term policy less any policy fees)
How did the rules change with regards to the ACB of life insurance on January 1, 2017?
As of 2017, a rating or smoking status will increase the “net cost of pure insurance” NCPI. This means that policies issued to riskier insureds as of January 1, 2017 will have lower ACBs.
What is the ACB for life insurance policies issued prior to December 2, 1982?
Premiums paid - dividends received
(Net Cost of Pure Insurance) NCPI has no impact on the ACB.
Which events create a taxable disposition of a life insurance policy?
- Policy loan
- Complete surrender
- Partial surrender
- Absolute assignment
- Annuitization
- Lapse
What are the tax consequences of a lapsed life insurance policy?
Although this is considered a disposition, there are typically no tax consequences as the cash values would have been reduced to zero by APL provisions before the policy would have lapsed.
How are policy loans taxed?
The amount borrowed is taxable as income. If repaid, there will be a tax deduction for any previously taxed amounts. Loans made for business or investment use would mean that the interest is not tax deductible.
How is the ACB of a life insurance policy impacted by interest payments made for a policy loan?
If the loan is for personal use, interest payments made will increase the ACB (but will not reduce the loan). If made for business/investment purposes, interest payments will not increase the ACB.
How is a partial surrender of a life insurance policy taxed?
Taxed as income on the proportion of the cash value withdrawn. For example, if a policy owner wanted to withdraw $20K cash value from a total of $40K, they are withdrawing 50%. If the ACB was $10K, then the taxable income would be… $40K - $10K = $30K x 50% = $15K taxable income.
How are absolute assignments of life insurance policies taxed?
It is a taxable event, taxed like a complete surrender. However, a spouse can elect to receive the policy at the original owner’s ACB. A parent absolutely assigning a policy to a child (or grandchild) where the life insured is the child, can also do so without tax consequences.
What are the tax consequences for a person who chooses to annuitize a life insurance policy?
This is normally taxed as a complete surrender as the individual is essentially surrendering the policy in exchange for a cash flow.
Exception: if the person has suffered a permanent and severe disability, the annuity stream would be taxed as a series of partial surrenders.
What are the tax consequences of a life insurance policy lapsing?
Although this would technically be considered a disposition, the cash values would have been reduced to zero by automatic premium loan provisions before the policy would be allowed to lapse. As a result, there should be no real tax consequences.
What are the tax consequences of a collateral assignment of a life insurance policy?
This is not a tax-triggering event.
When can a policyowner deduct some or all premiums in the case of a collateral assignment?
If the loan is made for business or investment purposes, the loan is from a recognized institution of lending, and the lender has set a condition that there must be life insurance in place.
In the case of a collateral assignment of life insurance, how much of the policy premiums can be deducted by the policy owner (assuming all conditions are met)?
The limit to what can be deducted is the lesser of the net cost of pure insurance (NCPI) or the actual premium paid. The amount must also be proportional to the amount of the loan.
