Insurance Planning

Question 1

What are the steps to calculate insurance needed?

Answer 1

1. Determine Cash Needs at Death (last expenses, mortgage, personal debt, education funds, other)
2. Determine Ongoing Needs (annual income needed less income from spouse)
3. Calculate the Capital needed to provide this level of income (Amount/rate of return)
4. Total All Assets Available
5. Calculate the Additional Life Insurance Needed

Question 2

How much is the CPP Death Benefit?

Answer 2

$2,500

Question 3

Describe Term Life Insurance

Answer 3

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.

Question 4

Describe Whole Life Insurance

Answer 4

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.

Question 5

Describe Universal Life Insurance

Answer 5

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.

Question 6

Describe Joint Life Insurance

Answer 6

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.

Question 7

Describe Group Life Insurance

Answer 7

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

Question 8

What is the incontestable clause in life insurance?

Answer 8

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.

Question 9

What is the grace period life insurance policy provision?

Answer 9

Period of time after the due date of the premium payment, during which policy remains in force without penalty - usually 30 days.

Question 10

What is the reinstatement life insurance policy provision?

Answer 10

Life insurance company puts back into force a policy that had lapsed because of nonpayment of renewal premiums. Usually 2 years.

Question 11

What is the suicide clause in life insurance?

Answer 11

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.

Question 12

Who can be an owner of a life insurance policy?

Answer 12

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.

Question 13

What are non-forfeiture options in a life insurance policy?

Answer 13

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

Question 14

What happens if there is a misstatement of age on a life insurance policy discovered at death?

Answer 14

Individual life insurance policy - policy’s benefit amount will be adjusted

Group life insurance policy - policy’s premium amount will be adjusted

Question 15

What is the difference between exempt and non-exempt policies?

Answer 15

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.

Question 16

What is taxable on surrender of a life insurance policy?

Answer 16

Cash surrender value less adjusted cost basis. Entire amount taxable - not treated as a capital gain.

Question 17

What factors affect the adjusted cost base of insurance?

Answer 17

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)

Question 18

How to calculate the net cost of pure insurance (NCPI)

Answer 18

Net Amount at Risk x mortality rate

Net amount at risk = death benefit less account reserves

Question 19

How are dividends received from an insurance policy treated for income tax purposes?

Answer 19

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.

Question 20

What is the treatment of the death benefit for income tax purposes?

Answer 20

Beneficiary receives death benefit tax free. 2 exceptions:

1. 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.
2. 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.

Question 21

How is the Adjusted Cost Basis for insurance calculated?

Answer 21

=Premiums - Dividends - Loans

If acquired last since December 1, 1982:

=(Premiums - NCPI) - Dividends - Loan + Interest

Question 22

How do life insurance policy loans work?

Answer 22

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.

Question 23

What is and is not considered a taxable disposition of a life insurance policy?

Answer 23

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.

Question 24

What is the amount of disability coverage an individual can purchase?

Answer 24

Up to 66% of gross wages.

Question 25

What are the two types of payments under Workers Compensation to compensate injured workers?

Answer 25

1. Non-economic loss payments (NELPs) to recognize permanent clinical impairment
2. 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.

Question 26

Is worker’s compensation taxable?

Answer 26

Not taxable - but must be reported to the CRA.

Question 27

What is the Canada Pension Plan disability benefit?

Answer 27

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

Question 28

Is the CPP benefit taxable?

Answer 28

YES

Question 29

When do CPP disability benefits begin being paid?

Answer 29

four months after the date SDC determined you were found to be disabled under CPP rules

Question 30

When can people receive EI benefits?

Answer 30

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.

Question 31

How long can you receive EI?

Answer 31

From 14 weeks to a maximum of 45 weeks.

2 week waiting period.

Question 32

Is EI taxable?

Answer 32

YES

Question 33

Are employer contributions to health and dental plans taxable?

Answer 33

NO

Question 34

Is disability insurance taxable?

Answer 34

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.

Question 35

Is employer provided life insurance taxable?

Answer 35

Employer paid contributions are taxable benefits.

Insurance benefit received non-taxable

Question 36

What type of automobile insurance is required?

Answer 36

$200,000 in Third Party Liability coverage

Question 37

What are the different types of home insurance?

Answer 37

1. Standard - protects against named perils, such as fire, lightening, windstorm, etc.
2. 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.
3. Comprehensive - provides all risks coverage on both the dwelling and the contents.

Question 38

What is Actual Cash Value coverage in insurance?

Answer 38

You receive the value of the item, less depreciation

Question 39

What is Replacement Value coverage in insurance?

Answer 39

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).

Question 40

What does personal liability insurance protect from?

Answer 40

Protects you from having to pay damages to people, if you’ve been found responsible for unintentionally injuring them or damaging their property.

Question 41

What does property insurance usually protect from (home)?

Answer 41

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.

Question 42

How does liability insurance provide protection (home)?

Answer 42

Protects you financially if you unintentionally cause bodily injury or property damage to others, at your home or anywhere in the world.

Question 43

What is the difference between “All Perils” and “Specified Perils” coverage?

Answer 43

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.

Question 44

What is “no fault” insurance (auto)?

Answer 44

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.

Question 45

What are the different types of automobile insurance coverage?

Answer 45

1. 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.
2. 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)
3. 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.
4. Specified Perils - insures your vehicle agains specific situations only.

Question 46

When can you convert your insurance to a permanent policy without a medical?

Answer 46

With term life insurance.

Question 47

When can you convert your group term life insurance to a permanent policy?

Answer 47

When the employee ceases to be a member of the group (i.e. retirement or termination)

Question 48

What kind of coverage does any occupation disability insurance provide?

Answer 48

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.

Question 49

What is partial disability rider for disability insurance?

Answer 49

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)

Question 50

What is future earnings disability protection?

Answer 50

Appropriate for a new business where growth of earnings is anticipated.

Question 51

What is presumptive disability insurance provision?

Answer 51

Provides full benefits paid if any of the qualifying conditions occur (loss of sight, speech, hearing).
Not dependent on loss of income.