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CFP Canada Oct 2022 > Insurance and Risk Management > Flashcards

Insurance and Risk Management Flashcards

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1
Q

What are four methods for managing risk?

A
  1. Loss control - loss avoidance/prevention/reduction.
  2. Risk transfer - shift cost of potential loss (insurance).
  3. Risk financing - accepting cost of risk should it happen (putting money aside).
  4. Shortfall risk - risk of not meeting a specified target.
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2
Q

What are 5 steps to personal risk management?

A
  1. Identify risk.
  2. Evaluate risk.
  3. Control risk.
  4. Finance and management of risk.
  5. Monitor and revise risk management plan.
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3
Q

What is true of deductibles for insurance (think car insurance)?

A
  1. Insured is responsible for any losses up to a certain limit in return for a lower premium. Higher loss coverage = lower premium.
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4
Q

What are 5 fundamentals of Group Insurance?

A
  1. Employee (EE) works actively full-time.
  2. EE cannot determine amount of coverage.
  3. EE contributions made through payroll deductions.
  4. ER must contribute, usually 50%.
  5. Must have enough people in group.
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5
Q

What is a Private Health Services Plan (PHSP)?

A
  1. Alternative to traditional health insurance.
  2. Used by small businesses and self-employed.
  3. Must cover at least 50% of employees.
  4. 100% tax-free to employees.
  5. Provides cost control to ER and flexibility to EE.
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6
Q

What is Workers’ Compensation?

A
  1. Provides benefit for injury sustained at work (e.g. WSIB in ON).
  2. Benefit can replace 85% of after-tax income up to $6,000/month.
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7
Q

What are the 3 types of occupation disability policies?

A
  1. 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.
  2. Regular - Like Own, but provides benefits if insured is not working another job.
  3. Any - Most restrictive. After 2 years of benefits, if you can work any job the insured can stop paying benefits.
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8
Q

What are some common disability benefit provisions?

A
  1. Presumptive - receive full benefits if totally disabled (e.g. loss of speech, hearing, sight or two limbs).
  2. Residual - receive reduced benefits while returning to work part-time.
  3. Partial - unable to perform duties of job at least half of the time.
  4. Recurrent - Receive benefits for second time off work due to same injury from previous claim.
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9
Q
  1. In determining the amount of life insurance, what should advisors focus on?
A
  1. Last expenses - Medical bills, funeral costs, taxes, etc.
  2. Mortgage, education, emergency funds.
  3. Income for survivours - support kids, spouse.
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10
Q

What are the types of life insurance contracts?

A
  1. Two-party.
  2. Third-party.
  3. Group.
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11
Q

What are 8 policy riders for life insurance?

A
  1. Waiver of premium - premium waived if insured becomes disabled.
  2. Level term rider - term insurance added to whole life policy.
  3. Family coverage - insurance added on life of dependent.
  4. Child term rider - insurance for policyholder’s children.
  5. Spousal term rider - insurance for spouse left caring for kids.
  6. Accidental death benefit - coverage paid if death is accidental.
  7. Guaranteed insurability - add insurance periodically without proving insurability.
  8. Cost of living rider - purchase 1-year term insurance equal to increase in cost of living.
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12
Q

How does the cash value build in a permanent/whole life insurance policy?

A
  1. Portion of premium goes to policy reserve (aka cash value).
  2. Can be used to buy annuity when LI is no longer required.
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13
Q

Who is suitable for whole life insurance?

A
  1. People with high incomes who have maxed out tax-deferred accounts.
  2. If you have a disabled dependent who needs care after you die.
  3. Good for individuals who want to leave an estate.
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14
Q

What is the difference between cash value and cash surrender value?

A
  1. Cash value = sum of money building inside policy.
  2. CSV = cash value - surrender charges - policy indebtedness.
  3. Different is usually the charges associated with early termination of policy.
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15
Q

What is the criteria to be eligible for critical illness?

A
  1. Between age 18-65.
  2. Haven’t been diagnosed with a CI previously.
  3. Note: family history doesn’t impact eligibility, but can result in higher premium.
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16
Q

What is critical illness insurance?

A
  1. Pays out one-time lump sum benefit if you survive (at least 30 days) any illness or health condition listed in policy.
17
Q

What is the main benefit of group insurance?

A
  1. Obtain coverage for all without evidence of insurability.
18
Q

What is a policy loan?

A
  1. If you have a sizable cash value, you can choose to take out a loan against your policy.
  2. Interest rates are lower than traditional bank loans.
  3. Not obligated to replay loan since you’re borrowing from yourself.
19
Q

When does taking out a policy loan make sense?

A
  1. Cannot qualify for standard loan or need cash fast.
  2. Cannot afford policy’s annual premiums - keeps policy in effect.
  3. Other loan options have higher interest rates.
20
Q

What does OSFI do?

A
  1. Monitors solvency of insurance companies and dictates minimum capital and surplus requirements.
21
Q

When are annuities worth considering?

A
  1. Current retirement income is too low.
  2. Annuity can increase income, but you give up principal.
22
Q

What is a straight life annuity?

A
  1. Provides guaranteed monthly/annual income until purchaser dies.
  2. Provides most guaranteed income per dollar of premium paid because payments stop upon death, no residual payments.
23
Q

Who is a straight life annuity suitable for?

A
  1. Someone with no dependents.
  2. Wishes to receive highest payout.
  3. Not concerned with leaving an estate.
24
Q

What is a joint life annuity?

A
  1. Payments made as long as one spouse is alive.
  2. Payments can remain the same or be reduced upon death of one spouse.
25
Q

What is a fixed-term (term-certain) annuity?

A
  1. If annuitant dies before term ends, the estate/bene received unpaid balance of annuity as lump sum or installments.
26
Q

What is an integrated annuity?

A
  1. Offered to early retirees to bridge the income gap until they receive benefits from OAS and CPP.
27
Q

How do you calculate the present value of an annuity?

A
  1. PVa = [1 - (1 + r)^-n] / r
28
Q

What are the unique features of segregated funds?

A
  1. Maturity guarantees (usually 75% after 10-year holding period or 100%).
  2. Death benefits.
  3. Creditor protection.
29
Q

What are the 3 types of guarantees?

A
  1. Deposit-based - each deposit gets its own guarantee amount and maturity date.
  2. Yearly policy-based - groups all deposits from each year and gives them same maturity date (simplicity).
  3. Policy-based - bases all guarantees on date policy was first issued (most generous).
30
Q

Who does the reset date for maturity guarantees benefit?

A
  1. The contract holder:
    - in rising markets, holder can lock in gains.
    - in falling markets, holder is protected by guarantee based on previous highs.
31
Q

How are top-up amounts taxed on segregated funds at maturity or at death?

A
  1. At maturity:
    - Non-registered plan - taxable as capital gain.
    - Registered plan - not taxable at deposit, but included on T4RSP when withdrawn.
  2. 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.
32
Q

What are Guaranteed Minimum Withdrawal Benefits (GMWB)?

A
  1. Provides steady stream of retirement income each year, regardless of market condition.
  2. Has maximum annual withdrawals limits until initial deposit recouped over minimum 20-year period.
  3. (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).
33
Q

What is the maximum amount that can be withdrawn from the cash value as a policy loan?

A
  1. 90% of the cash value.
34
Q

What is the tax implication of a parent transferring ownership of a life insurance policy to their child (who is the life insured)?

A
  1. Not taxable, transferred at ACB.
35
Q

What are 4 risk management issues that business owners can potentially face?

A
  1. Key persons that are vitally to operation of business dying/leaving.
  2. Minimum insurance to cover business assets/liabilities in case of potential losses.
  3. Bull-sell agreement in place in case of death of owner/partner.
  4. Use of segregated funds to invest while offering creditor protection.
36
Q

What are 4 health-related risk management issues that individuals can pursue?

A
  1. Medical insurance/coverage if not available via employer.
  2. LTC insurance
  3. Life insurance (term/permanent).
  4. CI insurance.
37
Q

When is the bank loan interest tax deductible from an insurance policy?

A
  1. Only when the loan was used to earn investment/business income.
38
Q

When is it appropriate to obtain a Business Overhead Disability insurance policy?

A
  1. To cover for potential staff payroll and office expenses that a business owner might incur.

CFP Canada Oct 2022 (7 decks)

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