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CFP > INSURANCE PLANNING > Flashcards

INSURANCE PLANNING Flashcards

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1
Q

ASSURANCE PROTECTION FOR SEGREGATED FUNDS

A
  • guarantee (promised benefit) is $60K maximum
  • If the guarantee (promised benefit) > $60K then the insurance coverage is the GREATER OF $60K or 85% of the guarantee.
  • If the guarantee is $X, then insurance coverage is 85% of X in case of insolvency.
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2
Q

3 BASIC SOURCES OF LIFE INSURANCE COVERAGE IN CANADA

A

1) CPP Death Benefit max $2500
2) Individual
3) Group Plan

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3
Q

TOTAL NEEDS PLANNING

A 
M ortgage 
E mergency 
D ependency period 
L ast Expenses
E ducation 
S pouse's income

LAST EXPENSES:

M edical Expenses 
E xecutor fees, probate fees and legal costs
D ebts
I ncome tax unpaid
C urrent bills for household expenses
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4
Q

TOTAL NEEDS EXAMPLE

A

STEP 1 ) Calculate CASH needs (Mortgage, Education, Debt, Last Expense)

STEP 2 ) Calculate INCOME Needs = After-tax Income/After-tax Return
After tax return = interest rate % (1 - tax rate%)

STEP 3) Add both Cash and Income needs as CAPITAL REQUIRED to generate income to meet expenses.

STEP 4) Minus assets available to cover cash and income needs
*** Remember to subtract joint accounts (in 1/2)

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5
Q

TYPES OF LIFE INSURANCE

1) TERM INSURANCE - Renewable, Non-renewable, convertible
2) PERMANENT INSURANCE - Term 100, Whole-life (Non-participating/participating)
3) UNIVERSAL LIFE INSURANCE

A

1) TERM INSURANCE (TEMPORARY)

  • Death benefits may be:
    i) Level = static; no change to coverage
    ii) Increasing = increase in %
    iii) decreasing = decreasing as declining every year like a mortgage

a) Non-Renewable: insurance cancelled at end of term
b) Renewable: guaranteed right to renew w/o medical evidence
- Re-entry term
- Requlify medically and guaranteed option to renew if health has deteriorated

  • Convertible: the right to change the term policy to some form of whole life insurance w/o proof of insurability; treated as extension of old contract for income tax purposes.

Recommended for:

  • cheaper option
  • need for fixed period
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6
Q

2) PERMANENT INSURANCE

A

2) PERMANENT INSURANCE
- beneficiary receives the full face amount

a) Term to 100; as long as premiums have been paid

b) Whole Life Insurance
i) Premiums are paid by the insured for the life of the policy.
ii) Flat regular premium is paid and in the early years; pays too much which results in an accumulated CSV that belongs to the policyholder

.

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7
Q

WHOLE LIFE - FORFEITURE

A

Non-Forfeiture if premiums not paid

C ash
A utomatic premium loan
R educed paid up
E xtended Term

i) Cash: terminate policy and take CSV
ii) Automatic premium loan: insurance company advances any premiums due as a loan against the reserve
iii) Reduced paid-up insurance: CSV is used to purchase reduced paid up policy with a REDUCED FACE AMOUNT.
iv) Extended term insurance: CSV used to pay premiums to purchase the same face value (what parents have)

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8
Q

WHOLE LIFE - Non-Participating vs. Participating Policies

A

1/ Non-Participating: do not have the right to receive dividends

2/ Participating: policies may receive dividends based on the profitability of ins. company.
- Dividends are never guaranteed.

Dividend Options: A PEPSI CAP

A ccumulation of interest

P remium reduction
E nhancement
P remium offset 
S pecial-term addition - buy term insurance equal to the CSV
I nvestment fund (seg or equity fund)

C ash: cheque or deposit
A dditional term
P aid-up additions; but more life insurance

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9
Q

3) UNIVERSAL LIFE INSURANCE (non-participating)

- can use medical w/ underwriting to reduce premiums

A

2 Types of accumulation accounts

1) “INSIDE” UNIVERSAL CONTRACT
- Tax-Exempt account
- Index-linked accounts
- Guaranteed terms 1-10 yrs
- Savings accounts
* ** Tax-Deferred portion of the policy

2) “OUTSIDE” UNIVERSAL CONTRACT
- Annual taxable account
- Seg/mutual funds
- Side funds
* ** Taxable as interest, dividends, or CG

UNIVERSAL LIFE INSURANCE (4)

a) Level Death Benefit
b) Level Death Benefit plus Account Value
c) Level Death Benefit plus Accumulated Deposits
d) Indexed Death Benefit

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10
Q

TAXATION OF INSURANCE POLICIES

A
  • Death benefits are rec’d Tax free in Canada
  • Policies must pass the “exemption test” to avoid annual taxation on the build-up of cash values. (After Dec 2, 1982)
  • Any portion of a policy loan that is in excess of ACB (premiums paid) is treated as 100% taxable.
    Example:

ACB CSV = Total premiums minus NCPI (Net Cost of Pure Insurance)

TAXABLE: Loan (% against CSV) minus ACB CSV

➡️Policy dividends ⬅️are “not taxable” up to ACB b/c considered ROC which is the unused portion of the premium.
- ➡️Interest income earned from reinvest the dividends is fully taxable.

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11
Q

COMPARISON

A

Has CSV:

  • Term: No
  • Term 100: No (unlikely)
  • Whole Life: Yes
  • Universal: Yes

Has Dividends:

  • Term: No
  • Term 100: No
  • Whole Life: Only if Participating
  • Universal: No

Has Loan Values:

  • Term: No
  • Term 100: No
  • Whole Life: Yes
  • Universal: Yes

Has Level Premiums:

  • Term: Yes/No
  • Term 100: Yes/No
  • Whole Life: Yes
  • Universal: Yes/No

Will it lasp if premium not paid?:

  • Term: Yes
  • Term 100: Usually
  • Whole Life: Usually
  • Universal: Usually
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12
Q

LIFE INSURANCE CONTRACT PROVISIONS

A
  • 10 days after policy delivery to keep or cancel (“10-day free look”)
  • Suicide clause: after 2 years
  • 30 day Grace Period to Pay premiums
Void ability
2 years MRS
M Misrepresentation
R Reinstatement
S Suicide
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13
Q

SETTLEMENT OPTIONS TO BENEFICIARY IF LIFE INSURED DIES

A

L umpsum
I nterest
L ife Income
I nstalments (fixed period or fixed amount)

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14
Q

BENEFICIARIES

A

Irrevocable beneficiary: appointed while alive; protection against creditors

Revocable Beneficairy: at death; no protection when policy proceeds is payable to the estate.

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15
Q

LIFE INSURANCE POLICY ASSIGNMENT

A

1) ABSOLUTE ASSIGNMENT - Gifting to Charity or Buy-Sell
- gift in its entirety with no futher control/interest in the policy

2) COLLATERAL ASSIGNMENT - to bank to secure a loan
- bank gets paid upon death and residual goes to beneficiary

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16
Q

LIFE INSURANCE POLICY BENEFITS AND RIDERS (FIVE)

A

1) WAIVER OF PREMIUM RIDER - disability; insurance company pays for premiums
2) PARENT’S (PAYER’S) WAIVER OF PREMIUM RIDER - parent owns child policy; if parent becomes disabled; premiums are waived until recovery, dies or when child reaches prescribed age.
3) ACCIDENTAL DEATH AND DISMEMBERMENT RIDER - at death, by accident or dismemberment or loss of sight/hearing/speech
4) GUARANTEED INSURABIITY RIDER - contractual right to purchase more insurance at specific dates. (up to 50-100% of initial face amount)
5) TERM INSURANCE RIDER - adds an additional level of temporary term ins. coverage for example Spouse (until 65) or Children’s term (until predetermined age.)

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17
Q

ACCIDENT AND SICKNESS INSURANCE

A

Elimination period: waiting period for which no benefits are payable
- the longer the elimination period, the lower the disability insurance premium.

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18
Q

BENEFIT FOR RESIDUAL DISABILITY

A
  • Residual Benefit = Income Lost/Predisability Income x Regular Benefit
  • Maximum monthly benefit = % of insurance will provide x Earned income/12 months
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19
Q

DISABILITY POLICIES

A

1) Guaranteed Renewable
2) Non-cancelable and Guaranteed renewable
3) Commercial or canceable

20
Q

OPTIONAL DISABILITY RIDERS

A
  • Long-term Injury Protection and Illness Protection Rider: $3K-$4K/month; any occupation; up to age 65 or 70
  • Hospitalization Benefit Rider: $25-$200/day
  • Accidental Death and Dismemberment Rider: $10K-$300K
  • Future Income Option Rider (FIO): up to 70% of income until age 50
  • COLA Rider: 2%-10% annually lifetime capped at 2x salary
21
Q

CONTRACTUAL EXCEPTIONS

A

NOT PAID:

  • self harm, AIDS, dangerous sports, aircraft travel (except paying passenger), service an armed forces at war, normal pregancy, travelling outside of Canada/USA
22
Q

INCOME TAX IMPLICATIONS OF DISABILITY BENEFITS

A
  • If individual pays, premiums are not tax deductible and benefits are received TAX FREE.
  • If employer pays, premiums ARE tax deductible to employer, and is TAXABLE BENEFIT to employee.
23
Q

CPP DISABILITY - pension is flat rate + 75% of CPP until age 65

A
  • condition severe and prolonged; inability to pursue gainful employment
  • To be eligible; under 65 and contributed to CPP in at least 4 of the last 6 years.
    (If contributed for at least 25 years, 3 of the last 6 years).
  • also benefits of disabled children under 18.
24
Q

EI and WCB

A

EI:
- minimum 600 hours of insruable earnings; work less than 20% EI insurable earnings or 15 hours per week do not qualify!
- tax-deductible to employer; i.e. taxable when earned by employee but receives EI TAX CREDIT for premiums paid for every paycheque.
- up to 15 weeks of benefits
- can receive average of 55% of average insurable earnings up to $595/week
Weekly benefit = Total earnings in the last 26 continuous weeks/ (greater of) # of wks worked OR divisor X 55%

WCB:

  • one week waiting period
  • ***Benefits are NON-TAXABLE
  • max EI sickness benefit is 2/3 of WCB
25
Q

CRITICAL ILLNESS (CI)

A
  • benefit paid in lump sum
  • must be “living” for at least 30 days after diagnosis
  • Big 4, Top 10, or Comprehensive

Big 4 - Heart attach, stroke, cancer, coronary bypass surgery

26
Q

LONG-TERM CARE (LTC)

A
  • Elimination period is 0-180 days
  • Benefits payable in either ccase of cognitive impairment OR can no longer perform unaided 2 out of 5 or six acitvities of daily living. (feeding, dressing, bathing, incontient, toileting, transferring)
  • Policy premiums may qualify as eligible medical expenses or tax credits.
  • Exclusions include: self harm, war, army/navy, chronic alcoholism or substance abuse, commit crime, disorders w/o organic cause, illegal occupation, AIDS
27
Q

GROUP INSURANCE: (taxable deduction AND taxable income to employer)

A

GROUP LIFE INSURANCE
- either flat rate (times salary or flat rate)
Settlement - Lump-sum, Interest, Life Annuity, Installments (LILI)
- 31 days after termination of employment to apply for conversion from group to ind.

GROUP DEPENDENT; covers family

GROUP DISABILITY PLANS

  • Own (Regular) Occupation for first 2 yrs
  • Any Occupation (2 yrs up to age 65)

GROUP RECUURRENT DISABILITY

  • period of LTD is 6 months
    example: If a reoccurence of the same disability happens w/n 6 months of return, after being on disability claim, then 2nd claim is considered an extension of first and a 2nd waiting period is not required.
28
Q

BUSINESS INSURANCE

A

Business Applications

1) Tax Deferral: an exempt life insurance policy can be used for excess corporate capital
2) After-tax premium costs: b/c low tax rate for CCPCs (9% on first $500K of profit)
3) Shareholders: b/c tax free flow through to shareholder, sole shareholder who needs life insurance could hold the policy inside the corporation.

29
Q

Business and Life Insurance

A

Why should businesses buy life insurance?

  • to pay the liabilites of deceased business owner or owner or shareholder.
  • to permit survivors to keep operating business
  • to assist survivrs with reaching long-term goals

4 main roles of ins. in business planning:

i) business continuation
ii) buy-sell agreements: premiums paid are not tax-deductible and benefits are tax-free.
iii) key person insurance
iv) tax-free treatment of life insurance proceeds

30
Q

BUSINESS OVERHEAD EXPENSE DISABILITY INSURANCE

A
  • coverage is limited to 24 months
  • own occupation
  • covered office expenses such as mtg/rent, property tax, utilities, cleaning, interest costs on purchae of equipment, insurance, professional dues, legal and accounting costs, salaries and fringe benefits.

insured must be:

  • self employed
  • own minimum 20% of business and have no more than 3-5 employees
  • have business that has been in operation for at leat 6-12 months
  • “premiums” ARE tax-deductible by business and “benefits” ARE taxable
31
Q

ANNUITIES

A

1) DEFERRED ANNUITIES: regular payments typically until retirement and annuity benefit starts in the future.
- regular payments to purchase annuity
- lump sum payment to purchase annuity

2) IMMEDIATE ANNUITIES: bought with a lump sum payment with annuity payments at next period

32
Q

IMMEDIATE ANNUITIES (10 TYPES)

A

1) STRAIGHT LIFE ANNUITY: guaranteed until death; highest amt of guaranteed/$ paid
2) LIFE W/ MINIMUM GUARANTEED PAYMENT PERIOD: e.g. 10 years
3) LIFE W/ AN INSTALLMENT REFUND FEATURE: refund paid back to beneficiary in instalments
4) LIFE W/ A CASH REFUND FEATURE: refund paid back as lump-sum cash
5) JOINT AND LAST SURVIVOR: like MPP 100% life to spouse
6) JOINT AND LAST SURVIVOR W/ REDUCED PAYMENTS: like MPP with reduced to spouse
7) INDEXED: annuity payments increase annually
8) VARIABLE: no guarantee of the amount of payments; fluctuations based on market
9) FIXED-TERM (TERM CERTAIN): income payments are to continue for a pre-determined fixed period
10) IMPAIRED LIFE: individuals w/ health problems and reduced life expectancy

33
Q

TAXATION OF NON-REGISTERED IMMEDIATE ANNUITIES

A

1) PRESCRIBED ANNUITY: interest and principal portion are fixed.
- must be non-reg.
- payments must be regular and equal
- guaranteed payment period must not surpass 91 years old.
* ** borrowing to invest (interest is NOT tax-deductible)

2) NON-PRESCRIBED ANNUITY (ACCRUAL): payments are structured like a mortgage; where early payments are made up mostly of interest (w/ small amount ROC)
- since heavy interest in beginning, more heavily taxed at beginning
- proportion of interest shifts over time
* ** can be leveraged and interest will be tax-deductible

34
Q

OTHER TYPES OF INSURANCE

A

1) MEDICAL BENEFITS; travel insurance, vision, hearing aids, group dental,
2) TRUSTS

3) SEG FUNDS; at least 75% guarantee
- Linear
- Proportional

4) GUARANTEED MINIMUM WITHDRAWL BENEFIT OR LIFETIME INCOME BENEFIT PLANS
5) HOMEOWNER/TENANT
6) AUTOMOBILE : comprehensive, collision, 3rd party

*** Personal umbrella: increases the liability coverage an ind. has w/ auto and home policies that are not covered. ~$1MM

35
Q

SEGREGATED FUNDS - LINEAR METHOD (Units redeemed / ACB)

A

LINEAR METHOD

step 1:
% Reduction in Guarantee = Withdrawal amount/ACB x 100

step 2:
Dollar reduction in Guarantee = Guarantee x % Reduction

step 3:
New Guarantee = Original Guarantee - Dollar Redution in guarantee

36
Q

SEGREGATED FUNDS - PROPORTIONAL METHOD ( Units redeemed / FMV)

A

Step 1:

% redeemed = Withdrawal amount/FMV

step 2:
Guarantee Amount = Guarantee x % Redeemed

step 3:
New Guarantee = Original Guarantee - Dollar Redution in guarantee

37
Q

GMWBs and ESTATE PLANNING

A 
Advantages: 
has feature of life insurance which includes:
- potential for creditor protection 
- ability to bypass probate
- privacy protection
- for those with longevity risk 
- max 75-95 purchase age

Disadvantages:

  • the effect of withdrawals on the death benefit guarantee
  • poor market perfomance resulting in no resets
  • high fees
38
Q

Equations: PV, FV

“How much life insurance is needed?!!”

A

I/Y = Real after tax return
(nominal rate - inflation/ 1+ inflation)

PMT = After tax income required per year 
N= # of years income is required for
FV= 0
PV= ?  (Beginning mode)
39
Q

How much paid to beneficiary if Wrong premiums paid

A

Wrong premium/ right premium x face amount

40
Q

Determining ACB and policy gain

A

Step 1: premiums paid minus dividends received from policy

Step 2: cash value minus ACB

41
Q

250% Rule on Universal life

A
  • 3 year look back each test year

- CSV cannot exceed 250% of the CSV value 3 years prior.

42
Q

Types of disability policies

A

1) commercial: open-ended contract; low premiums
2) Guaranteed Renewable: not fully guaranteed
3) Non-cancellable and guaranteed renewal; cannot change riders, benefits, cancel but fully guaranteed.

43
Q

Disability Rider -

1)COLA - cost of living adjustment

A
  • adjusts benefit payout based on CPI.
44
Q

Disability Rider - Future Income Option

A
  • protects future income insurability
  • cannot exceed 70% of income
  • up to age “50”; after that, Insurance company may refund 75% of unused
45
Q

Disability residual benefit

A

Residual benefit = income lost/pre-disability income x Regular benefit

CFP (6 decks)

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