Insurance and Risk Management Flashcards
What are four methods for managing risk?
- Loss control - loss avoidance/prevention/reduction.
- Risk transfer - shift cost of potential loss (insurance).
- Risk financing - accepting cost of risk should it happen (putting money aside).
- Shortfall risk - risk of not meeting a specified target.
What are 5 steps to personal risk management?
- Identify risk.
- Evaluate risk.
- Control risk.
- Finance and management of risk.
- Monitor and revise risk management plan.
What is true of deductibles for insurance (think car insurance)?
- Insured is responsible for any losses up to a certain limit in return for a lower premium. Higher loss coverage = lower premium.
What are 5 fundamentals of Group Insurance?
- Employee (EE) works actively full-time.
- EE cannot determine amount of coverage.
- EE contributions made through payroll deductions.
- ER must contribute, usually 50%.
- Must have enough people in group.
What is a Private Health Services Plan (PHSP)?
- Alternative to traditional health insurance.
- Used by small businesses and self-employed.
- Must cover at least 50% of employees.
- 100% tax-free to employees.
- Provides cost control to ER and flexibility to EE.
What is Workers’ Compensation?
- Provides benefit for injury sustained at work (e.g. WSIB in ON).
- Benefit can replace 85% of after-tax income up to $6,000/month.
What are the 3 types of occupation disability policies?
- Own - Most common, preferred, expensive. Considered disabled as long as insured is unable to perform duties at work, even if they could at another job.
- Regular - Like Own, but provides benefits if insured is not working another job.
- Any - Most restrictive. After 2 years of benefits, if you can work any job the insured can stop paying benefits.
What are some common disability benefit provisions?
- Presumptive - receive full benefits if totally disabled (e.g. loss of speech, hearing, sight or two limbs).
- Residual - receive reduced benefits while returning to work part-time.
- Partial - unable to perform duties of job at least half of the time.
- Recurrent - Receive benefits for second time off work due to same injury from previous claim.
- In determining the amount of life insurance, what should advisors focus on?
- Last expenses - Medical bills, funeral costs, taxes, etc.
- Mortgage, education, emergency funds.
- Income for survivours - support kids, spouse.
What are the types of life insurance contracts?
- Two-party.
- Third-party.
- Group.
What are 8 policy riders for life insurance?
- Waiver of premium - premium waived if insured becomes disabled.
- Level term rider - term insurance added to whole life policy.
- Family coverage - insurance added on life of dependent.
- Child term rider - insurance for policyholder’s children.
- Spousal term rider - insurance for spouse left caring for kids.
- Accidental death benefit - coverage paid if death is accidental.
- Guaranteed insurability - add insurance periodically without proving insurability.
- Cost of living rider - purchase 1-year term insurance equal to increase in cost of living.
How does the cash value build in a permanent/whole life insurance policy?
- Portion of premium goes to policy reserve (aka cash value).
- Can be used to buy annuity when LI is no longer required.
Who is suitable for whole life insurance?
- People with high incomes who have maxed out tax-deferred accounts.
- If you have a disabled dependent who needs care after you die.
- Good for individuals who want to leave an estate.
What is the difference between cash value and cash surrender value?
- Cash value = sum of money building inside policy.
- CSV = cash value - surrender charges - policy indebtedness.
- Different is usually the charges associated with early termination of policy.
What is the criteria to be eligible for critical illness?
- Between age 18-65.
- Haven’t been diagnosed with a CI previously.
- Note: family history doesn’t impact eligibility, but can result in higher premium.
What is critical illness insurance?
- Pays out one-time lump sum benefit if you survive (at least 30 days) any illness or health condition listed in policy.
What is the main benefit of group insurance?
- Obtain coverage for all without evidence of insurability.
What is a policy loan?
- If you have a sizable cash value, you can choose to take out a loan against your policy.
- Interest rates are lower than traditional bank loans.
- Not obligated to replay loan since you’re borrowing from yourself.
When does taking out a policy loan make sense?
- Cannot qualify for standard loan or need cash fast.
- Cannot afford policy’s annual premiums - keeps policy in effect.
- Other loan options have higher interest rates.
What does OSFI do?
- Monitors solvency of insurance companies and dictates minimum capital and surplus requirements.
When are annuities worth considering?
- Current retirement income is too low.
- Annuity can increase income, but you give up principal.
What is a straight life annuity?
- Provides guaranteed monthly/annual income until purchaser dies.
- Provides most guaranteed income per dollar of premium paid because payments stop upon death, no residual payments.
Who is a straight life annuity suitable for?
- Someone with no dependents.
- Wishes to receive highest payout.
- Not concerned with leaving an estate.
What is a joint life annuity?
- Payments made as long as one spouse is alive.
- Payments can remain the same or be reduced upon death of one spouse.
What is a fixed-term (term-certain) annuity?
- If annuitant dies before term ends, the estate/bene received unpaid balance of annuity as lump sum or installments.
What is an integrated annuity?
- Offered to early retirees to bridge the income gap until they receive benefits from OAS and CPP.
How do you calculate the present value of an annuity?
- PVa = [1 - (1 + r)^-n] / r
What are the unique features of segregated funds?
- Maturity guarantees (usually 75% after 10-year holding period or 100%).
- Death benefits.
- Creditor protection.
What are the 3 types of guarantees?
- Deposit-based - each deposit gets its own guarantee amount and maturity date.
- Yearly policy-based - groups all deposits from each year and gives them same maturity date (simplicity).
- Policy-based - bases all guarantees on date policy was first issued (most generous).
Who does the reset date for maturity guarantees benefit?
- The contract holder:
- in rising markets, holder can lock in gains.
- in falling markets, holder is protected by guarantee based on previous highs.
How are top-up amounts taxed on segregated funds at maturity or at death?
- At maturity:
- Non-registered plan - taxable as capital gain.
- Registered plan - not taxable at deposit, but included on T4RSP when withdrawn. - At death:
- Non-registered - same treatment as at maturity.
- Registered - not taxable at deposit, but included on T4RSP and estate/spouse are taxed when withdrawn.
What are Guaranteed Minimum Withdrawal Benefits (GMWB)?
- Provides steady stream of retirement income each year, regardless of market condition.
- Has maximum annual withdrawals limits until initial deposit recouped over minimum 20-year period.
- (e.g. $100,000 annuity with 5% GMWB rider. If markets decline and annuity is now valued at $75,000, you can still count on withdrawing $5,000 (5% of $100,000, not $75,000).
What is the maximum amount that can be withdrawn from the cash value as a policy loan?
- 90% of the cash value.
What is the tax implication of a parent transferring ownership of a life insurance policy to their child (who is the life insured)?
- Not taxable, transferred at ACB.
What are 4 risk management issues that business owners can potentially face?
- Key persons that are vitally to operation of business dying/leaving.
- Minimum insurance to cover business assets/liabilities in case of potential losses.
- Bull-sell agreement in place in case of death of owner/partner.
- Use of segregated funds to invest while offering creditor protection.
What are 4 health-related risk management issues that individuals can pursue?
- Medical insurance/coverage if not available via employer.
- LTC insurance
- Life insurance (term/permanent).
- CI insurance.
When is the bank loan interest tax deductible from an insurance policy?
- Only when the loan was used to earn investment/business income.
When is it appropriate to obtain a Business Overhead Disability insurance policy?
- To cover for potential staff payroll and office expenses that a business owner might incur.
