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CFP Exam > Insurance Planning > Flashcards

Insurance Planning Flashcards

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1
Q

What are the two basic categories of Life Insurance?

A
  1. Permanent - no end date and premiums never change
    -Universal and Whole Life are permanent
  2. Temporary - end date and premiums can increase
    -Term insurance is temporary
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2
Q

Who is Term Insurance good for?

A
  • people who need coverage but have limited cash flow
    -expires without value but has terms of 1, 5, 10 or 20 years
    -Term 100 viewed as permanent but no cash values
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3
Q

Who is Whole Life insurance good for?

A

-People who want permanent insurance, a cash value to accumulate, essentially another savings/investment vehicle
-policies generally level
-cash value can be accessed through policy loans

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4
Q

Who is Universal Life Insurance good for?

A

-Suitable for wealthy individuals who have excess cash flow, have maxed their RRSPs and are looking for other investment products that offer potential tax deferred growth
-Have “unbundling of options” such as flexible premiums and flexible benefits

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5
Q

WHo is Joint Life Insurance good for?

A
  • when spouses or business associates need life insurance joint is usually less costly
    -usually paid on first to die
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6
Q

Group Life Insurance

A
  • cheaper, usually no medical exam, easier to get, more generic, lower premiums
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7
Q

What is Renewable Term?

A
  • some policies provide that a person can renew for the same plan without a new medical exam but rates based on age
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8
Q

What are common Life Insurance Policy Riders?

A
  • Waiver of Premium: if someone becomes disabled premiums waved for 6 months
    -Guaranteed insurability: allows holder to buy more insurance at various times without evidence of the insurability
    -Accidental Death: face amount of base given due to accidental death
    Cost - of-living adjustment: increase in pension benefit with cost of living increase
    Family Riders:
    Level Term: most policies are level term and amount doesn’t decrease
    Spousal Term
    Child Term
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9
Q

What is the best life insurance to buy on the exam? Term or Permanent?

A

Depends on clients:
a) Short and longer term needs
b) Preferences for flexibility and risk

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10
Q

Things to consider regarding Term Insurance and why it might be a fit for a client:

A
  • A client on a budget with a young family
    -Temporary needs - well suited option, low cost
    -Changing needs - term is a good option as it offers the ability to convert to permanent insurnace
    -Planning for a childs future
    -Biz partners planning
    -Paying estate taxes, leaving a legacy (although its easy to outlive a term policy so not recommend for this reason)
    -Supplementing retirement income (most term do not have cash values so it cannot meet this need)
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11
Q

What is NCPI and how do you calculate it?

A

…is Net Cost of Pure Insurance

The net amount at risk is the difference between the death benefit and the reserve of the policy and multiplying the net amount at risk by a mortality rate.

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12
Q

What are the most common structures for insurance contracts?

A
  1. Non- Cancellable, Guaranteed renewable: most robust insurance contract from consumers perspective. Promises renewal will be available for some period under original terms.
  2. Guaranteed Renewable: allows insurer to renew as long as certain changes arent made. Many disability contracts like this.
  3. Optionally Renewable : many disability contracts structured this way
  4. Commercial or Cancellable - Most restrictive , least expensive
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13
Q

Insurance with beneficiaries avoids what?

A

Probate and taxes

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14
Q

What is a convertible Insurance policy?

A

Slightly more expensive but can later be converted from term to permanent (life) without anymore underwriting. Premiums increase significantly - pros: option to switch later but have manageable premiums today - good for young couple

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15
Q

What are the three compenents of whole life insurance?

A
  1. investment - generates a policy reserve and used to fund the death benefit, growth NOT taxed in most cases
  2. protection
  3. insurer’s expenses
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16
Q

What are the two types of Whole Life Insurance?

A

Participating (more expensive and allows you to participate in the profits associated with the pool of whole life policy owners)

and Non Participating (traditional)

17
Q

Universal Life Insurance

A
  • Most complex
  • offers great flexibility
    -comes at a cost and it has TWO COMPONENTS (Life insurance and Investments)
18
Q

What are the two components of Universal Life Insurance?

A
  1. Life Insurance
  2. Investments
19
Q

What are the 5 characteristics of Universal Life Insurance?

A
  1. Flexible Premiums
  2. Flexible Benefits
  3. Flexible Coverage
  4. Consumer Accountable
  5. Trasparent or “Unbundled”
20
Q

What is the most “flexible” form of life insurance?

A

Universal Life

21
Q

What are Life Insurance Riders?

A
  • Features added to the base contract usually at a cost
22
Q

Disability insurance is designed to..

A

replace after-tax income list to a disability

23
Q

What are Government Sources of Disability Benefits?

A
  1. Workers Comp - given to someone injured on Job, tax free but must report on return
  2. Canada Pension Plan - quite restrictive.
    -It must be severe and prolonged
    -paid as late as age 65
    -usually between $700-1300 per month and $235 per child
    -taxable benefit
    -should be considered as a last resort due to the its small nature
  3. Employment Insurance
    - replaces no more than 55%
    -two week waiting period
    -EI is taxable income
  4. Provincial Disability Support
    - most restrictive
    -permanent disabilities
    -considered a last resort, similar to CPP
24
Q

What are the Three Total Definitions of Disability?

A
  1. Own Occupation THINK SURGEON- most generous, promises as long as insured cannot perform their job they will be paid a benefit (eg Surgeon can’t do surgery. but can perform other jobs, they will still be paid for loss of surgery work in addition to other income)
    - usually restricted to two years
    - only top occupations usually qualify
  2. Regular Occupation - paid as long as they can’t do their job related to their industry - used under most disability sitches
  3. Any Occupation - most restrictive, if disabled can return to any job benefits cease
    - used in lower occupation classes
25
Q

What are Living Benefits Insurance Riders?

A

Added Riders that Add costs and flexibility
Eg:
- return on premium
-waiver of premium
cost of living adjustment etc

26
Q

What is the basic taxation of Life Insurance?

A

Premiums are not tax deductible and are paid in after-tax dollars and almost always paid tax free

27
Q

When Presented With an Insurance Needs Analysis Question how much you go about it?

A
  1. First determine what ongoing expenses would be in the event of premature death
    -eg childcare or housekeeping arrangements
    2.Then we need to determine what ongoing income would be
  2. This is a TVM equation
28
Q

When determining Insurance Needs the TVM to know is:

A

YOU ARE SOLVING FOR PRESENT VALUE.

FV is always 0 in calc 1, however there might be a second need in the future where FV would be relevant

I/Y is the discount rate net of tax and inflation (I would assume given)

PMT is positive (i think) and the monthly or annual amount needed

29
Q

What problems does insurance coverage help solve?

A
  • Final Expenses
  • Payment of Debts
  • Estate Preservation to pass to next gen
  • Estate creation
  • Estate Equalization , usually where there is a large illiquid investment
  • Charitable Gifting
    -Bereavement loss (loss of work caring/grieving)
  • Investment
    -Retirement Planning
    -Key Person
  • Buy / Sell Agreement - creates conditions for purchases in the event that an unexpected event should befalls one of the owners or business
30
Q

Needs Analysis for other Insurance Products?

A

-Critical Illness
- Disability
-LTC Insurance

31
Q

Term vs permanent?

A

-Term is cheaper
-Term is good for temporary

Permanent:
-goes to death regardless of age
-Cash values are a benefit
-

32
Q

Assuris covers…

A

85% of disability benefits when benefits exceed $2k/Month

33
Q

List some Disability Insurance Riders:

A
  1. Own occupation - removes contingency of being able to work another job
  2. Regular occupation - extends regular occupation benefit from max two years to length of entire benefit period
  3. COLA rider (cost of living adjustment rider) - maintains your purchasing power
  4. Future increase options rider - lets you buy more without qualifying again
    5.
34
Q
A

CFP Exam (18 decks)

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