Insurance

Question 1

Twenty years ago, Jason purchased a universal life insurance policy that has a face value of one million dollars. Jason has decided that given his tight cash flow he doesn’t want to pay the premiums anymore. However, he still wants to maintain some amount of the coverage in the policy. Which of the following non-forfeiture options are available to him if he decides to stop paying the premiums?

1. If the policy has a cash value, the insurance company could provide him with a policy loan to continue paying the premiums
2. Withdraw the full amount of the cash value in the policy and cancel the policy
3. He could exchange the cash value for a fully-paid up policy with a smaller death benefit
4. He could take out a policy loan equal to the cash value of the policy

A. 2 and 3 only
B. 3 and 4 only
C. 1 and 3 only
D. 1 and 2 only

Answer 1

C is correct
A policy loan is available to policy owners to pay the premiums if the policy has a sufficient amount of cash value.

You can replace an existing policy for a fully paid up policy but lower death benefit.

To take out a policy loan you must continue making your premium payments.

You cannot withdraw the full amount of the cash value; you are only entitled to the cash surrender value.

Question 2

Options available to a Universal Life policy holder, if he is unable to afford the premiums:

Answer 2

1. Reducing the Death Benefit: Policyholders can opt to reduce the death benefit to lower the cost of premiums. This allows them to maintain coverage while paying lower premiums. Keep in mind that reducing the death benefit means beneficiaries will receive a smaller payout upon the policyholder’s death.
2. Using the Policy’s Cash Value: Universal life policies typically accumulate cash value over time. Policyholders can use the cash value to cover premium payments temporarily or even indefinitely, depending on the policy’s cash value balance. However, using the cash value to cover premiums may reduce the policy’s overall value and death benefit.
3. Adjusting Premium Payment Frequency: Some universal life policies allow policyholders to change the frequency of premium payments. For example, they might switch from an annual premium payment to a monthly or quarterly schedule to make the premiums more manageable.
4. Taking a Premium Holiday: Some policies permit policyholders to skip premium payments for a specified period without losing coverage. However, this option often relies on the cash value to cover the premiums during the premium holiday, and interest may accrue on any unpaid premiums.
5. Partial Surrender: Policyholders can choose to partially surrender their policy to access a portion of the cash value. This can help cover premium payments or provide needed funds in emergencies. Partial surrenders reduce the policy’s cash value and death benefit.
6. Converting to a Reduced Paid-Up Policy: In some cases, policyholders can convert their universal life policy into a reduced paid-up policy. This means they no longer have to make premium payments, and the policy remains in force with a reduced death benefit based on the accumulated cash value.

Question 3

Eric has a whole life policy that has a face value of $300,000, a cash value of $19,000, and ACB of $5,000, and an annual premium of $2,200 due in July of each year. The insurance carrier declared a $900 dividend in June, which Eric elected to leave on deposit and earn interest. What would be the new ACB after premium payment in July?

Answer 3

6,300 = 5,000 + 2,200 - 900

The impact of receiving dividends and leaving them on deposit in a whole life policy is to decrease the amount of the ACB by the dividend payment and increase the ACB by the amount of any new premiums paid ($5,000 - $900 dividend + $2,200 of annual premium paid = new ACB of $6,300).

Question 4

Eric owns a whole life policy that has a face value of $300,000, a cash value of $19,000, and ACB of $5,000, and an annual premium of $2,200 due in July of each year. The insurance carrier declared a $900 dividend in June, which Eric elected to leave on deposit and earn interest.
How will this dividend be taxed and when?

Answer 4

He will owe taxes on dividend received in the current year. It cannot be deferred to a future year.

Dividends paid by an insurance company are not grossed up as they are different than dividends paid out by a Canadian corporation.