Insurance Planning Flashcards
What are the steps to calculate insurance needed?
- Determine Cash Needs at Death (last expenses, mortgage, personal debt, education funds, other)
- Determine Ongoing Needs (annual income needed less income from spouse)
- Calculate the Capital needed to provide this level of income (Amount/rate of return)
- Total All Assets Available
- Calculate the Additional Life Insurance Needed
How much is the CPP Death Benefit?
$2,500
Describe Term Life Insurance
Least expensive - appropriate for individuals who need coverage but have limited cash flow.
Provides protection for a limited number of years and expires without value if the insured survives the stated period.
Term-to-100 - seen as permanent, but characteristics the same as other term insurance. Provide death benefit to age 100, if the policy is kept in force, and have level premiums.
Describe Whole Life Insurance
Also known as permanent insurance.
Protects an individual for their whole life, from the day they purchase the policy until the day they die, as long as premiums are paid.
Generally, after the first year, begins to accumulate a cash value - builds on a tax-deferred basis.
Cash value can be assessed through policy loans or withdrawals, which will reduce the death benefit. Offer potential to each dividends.
Premiums are level and guaranteed to never increase.
Describe Universal Life Insurance
Offers unbundelling of options - flexible premiums and benefits.
2 part contracts - contains renewable term insurance or permanent insurance, and a cash value that earns interest at a higher rate than a traditional policy.
Suitable for wealthy individuals who have excess cash flow, have maximized their RRSP contributions, and are looking for other investment products that offer the potential for tax deferred growth.
Describe Joint Life Insurance
For spouses or business associates - often cheaper than buying separate policies.
Death benefit usually only paid on the first to die, leaving the other without coverage.
Describe Group Life Insurance
issued usually without medical examinations, on a group of people under a master contract
Premiums usually lower than those on individual policies.
Quite generic in coverage, so may not be tailored to the needs of the individual
What is the incontestable clause in life insurance?
States that after a certain time period, usually two years, the insurance company may not render a policy void for any misstatements on the application.
What is the grace period life insurance policy provision?
Period of time after the due date of the premium payment, during which policy remains in force without penalty - usually 30 days.
What is the reinstatement life insurance policy provision?
Life insurance company puts back into force a policy that had lapsed because of nonpayment of renewal premiums. Usually 2 years.
What is the suicide clause in life insurance?
If the insured commits suicide within a specified period, usually 2 years, after the day of issue, the company’s liability will be limited to a return of premiums paid.
Who can be an owner of a life insurance policy?
The owner is the payor on a policy, has the right to name beneficiaries.
Owner must have a vested interest in another person in order to take life insurance out on their life (loaning money). A business partner, spouse, or children are also valid candidates.
What are non-forfeiture options in a life insurance policy?
Choices available to a policy holder if they discontinue premium payments on a policy that has a cash value. Choices are:
Take cash value in cash
Apply cash to purchase “reduced paid-up” insurance or “extended term” insurance
Use cash value as security for a loan against the policy to pay the premium or premiums due
What happens if there is a misstatement of age on a life insurance policy discovered at death?
Individual life insurance policy - policy’s benefit amount will be adjusted
Group life insurance policy - policy’s premium amount will be adjusted
What is the difference between exempt and non-exempt policies?
Policies issued after December 1, 1982 - may be considered exempt or non-exempt.
A policy is considered exempt if its emphasis is benefits on death. Proceeds received on death, including investment income, are not taxable.
Non-exempt policies are those that offer a substantial lifetime investment. Tax on non-exempt policies must be paid at least every 3 years. Upon death, investment income generated from this policy that has not yet been taxes will be considered taxable income.
What is taxable on surrender of a life insurance policy?
Cash surrender value less adjusted cost basis. Entire amount taxable - not treated as a capital gain.
What factors affect the adjusted cost base of insurance?
Increase:
Premiums paid
Policy loan repaid
Policy loan interest paid.
Decrease:
Policy’s acquired after December 1, 1982 - NCPI
Policy Loan taken
Dividends (unless used to pay premium)
How to calculate the net cost of pure insurance (NCPI)
Net Amount at Risk x mortality rate
Net amount at risk = death benefit less account reserves
How are dividends received from an insurance policy treated for income tax purposes?
If received in cash or paid out of the policy but left to accumulate interest, may be taxable.
Not taxable if used to buy paid-up insurance or term insurance.
What is the treatment of the death benefit for income tax purposes?
Beneficiary receives death benefit tax free. 2 exceptions:
- Non-exempt policy - subject to taxation on growth in cash value in excess of growth on ACB from the last reporting death to the date of death. Remainder would be tax free.
- A policy registered as a Retirement Savings Plan - subject to taxation in the year of death on the greater of the sum of premiums paid or the cash value.
How is the Adjusted Cost Basis for insurance calculated?
=Premiums - Dividends - Loans
If acquired last since December 1, 1982:
=(Premiums - NCPI) - Dividends - Loan + Interest
How do life insurance policy loans work?
Loan proceeds are first received from ACB of policy, then from the gain portion of the cash value. Up to ACB can be borrowed without tax consequences. When loans repaid - policy holder is eligible for a tax deduction up the amount of taxable income previously included in income.
What is and is not considered a taxable disposition of a life insurance policy?
Taxable:
Surrender
A loan
Maturity of Policy
Not taxable: Assignment for purposes of securing debt Lapse of policy for non-payment Payment of certain disability or accidental death benefits Payment of death benefit.
What is the amount of disability coverage an individual can purchase?
Up to 66% of gross wages.
What are the two types of payments under Workers Compensation to compensate injured workers?
- Non-economic loss payments (NELPs) to recognize permanent clinical impairment
- Economic Loss payments (ELPs) to recognize disability or the impact a work-related injury/illness may have on a worker’s capacity to earn wages.
Is worker’s compensation taxable?
Not taxable - but must be reported to the CRA.
What is the Canada Pension Plan disability benefit?
A monthly payment, available to people who contribute regularly to CPP while they worked (4 of the last 6 years), and became unable to work at any job on a regular basis because of a disability.
Disability must be considered severe and prolonged
Is the CPP benefit taxable?
YES
When do CPP disability benefits begin being paid?
four months after the date SDC determined you were found to be disabled under CPP rules
When can people receive EI benefits?
When they have paid into the EI account, and are unemployed. Have to have lost job by no fault of their own. Can also receive maternity, parental and or sickness benefits if pregnant, caring for a newborn or adopted child, or sick.
How long can you receive EI?
From 14 weeks to a maximum of 45 weeks.
2 week waiting period.
Is EI taxable?
YES
Are employer contributions to health and dental plans taxable?
NO
Is disability insurance taxable?
If employer paid - contributions are non-taxable benefits, but the disability benefits are taxable income.
If the employer paid - then disability benefits are non-taxable income.
Is employer provided life insurance taxable?
Employer paid contributions are taxable benefits.
Insurance benefit received non-taxable
What type of automobile insurance is required?
$200,000 in Third Party Liability coverage
What are the different types of home insurance?
- Standard - protects against named perils, such as fire, lightening, windstorm, etc.
- Broad - improves named perils coverage to all risks coverage, but leaves the contents coverage on a named perils basis. All risks provides protection from anything that you can cause you loss or damage, unless the policy specifically excludes that cause of damage.
- Comprehensive - provides all risks coverage on both the dwelling and the contents.
What is Actual Cash Value coverage in insurance?
You receive the value of the item, less depreciation
What is Replacement Value coverage in insurance?
You receive the amount it costs to replace them with similar items (what it costs to replace them, not what they were actually worth in their used state).
What does personal liability insurance protect from?
Protects you from having to pay damages to people, if you’ve been found responsible for unintentionally injuring them or damaging their property.
What does property insurance usually protect from (home)?
Cover all contents in the house itself, and detached structures like fence or storage shed.
Will cover personal belongings such as jewels, artwork, furniture, computers, carpets.
Includes third-party liability coverage - protects you if someone is injured while or your property or if you accidentally cause damage to someone else’s property.
How does liability insurance provide protection (home)?
Protects you financially if you unintentionally cause bodily injury or property damage to others, at your home or anywhere in the world.
What is the difference between “All Perils” and “Specified Perils” coverage?
All perils protects your insured property against the widest range of risks, and only excludes the perils specifically listed in your policy.
Specified perils protects your insured property against the most common risks, which will be listed in your policy.
What is “no fault” insurance (auto)?
Everyone involved in an accident submits a claim to their own insurance company. If you are not at fault and had to pay a deductible, your insurance company may seek to recover your deductible from the at-fault driver’s insurance company.
What are the different types of automobile insurance coverage?
- Collision - helps pay for the cost of repairing or replacing your vehicle up to the actual cash value if it hits another vehicle, the ground, or an object on the groudn.
- Comprehensive - helps pay for the cost of repairing or replacing your vehicle up to the actual cash value if it is damaged by unexpected situations such as falling or flying objects, vandalism, theft, etc (but not collision)
- All Perils - provides protections provided by both comprehensive and collision coverage - and also insures your vehicle against loss or damage should it be stolen by someone living in your home or someone you have hired to drive, service or repair your vehicle.
- Specified Perils - insures your vehicle agains specific situations only.
When can you convert your insurance to a permanent policy without a medical?
With term life insurance.
When can you convert your group term life insurance to a permanent policy?
When the employee ceases to be a member of the group (i.e. retirement or termination)
What kind of coverage does any occupation disability insurance provide?
Would provide payment when disability stops you from being employed in any occupation.
Would not receive disability if re-employed in any occupation. Not good for specialized jobs.
What is partial disability rider for disability insurance?
Calls for payment of a portion of benefit for a specified period if loss of time or duties occurs (not dependent on loss of income)
What is future earnings disability protection?
Appropriate for a new business where growth of earnings is anticipated.
What is presumptive disability insurance provision?
Provides full benefits paid if any of the qualifying conditions occur (loss of sight, speech, hearing).
Not dependent on loss of income.
