INSURANCE TO PROTECT BUSINESS (Chapter 5) Flashcards
A&S Terminology
Medical Expense tax credit
- Non-refundable tax credit that you can use to reduce the tax that you paid or may have to pay
- If you paid for healthcare expenses, you may be able to claim them as eligible medical expenses on your tax return.
A&S Terminology
Disability buyout insurance
Disability Insurance policy specifically designed to provide capital to meet the needs of the buyout.
A&S Terminology
Business loan protection disability insurance
Insurance for businesses and business owners that allow them to purchase disability insurance intended solely to make business loan payments during a period of disability.
A&S Terminology
Key employee
One who contributes materially to the success of the business and whose skills and services would be difficult to replace.
A&S Terminology
Business Overhead Expense (BOE)
Insurance policy designed to pay specified ongoing business expenses while the business owner is disabled and unable to generate revenue for the business.
A&S Terminology
Business risk (Unsystematic risk)
Factors relating to a specific business that could impact profitability, or survival, of the business.
REVIEW
There are about 3 Individual extended health coverage that are parallel to group plan, what are they?
- Medical care;
- Dental care;
- Travel insurance.
REVIEW
What are the types of coverage under group extended health plan?
- Prescription drugs;
- Enhanced medical and hospital care;
- Dental care;
- Vision care;
- Accidental death and dismemberment (AD&D).
REVIEW
Explain The process of individual & family deductible
- Once any member of the family has filed claims sufficient to use up his individual deductible, no further deductible will apply to that person for the current year
- Application of the individual deductible to claims arising from any member of the family will, in turn, reduce the family deductible.
- Once the family deductible has been used up, individual deductibles will no longer apply to any family members for the current year regardless of whether their individual deductibles have been used.
REVIEW
What are the most common methods of classifications that insurance companies use to assume occupational classes?
- 4A: Professionals, such as doctors, lawyers, dentists and senior executives.
- 3A: Administrative office workers who face few, if any, workplace hazards, such as clerical staff.
- 2A: Supervisors in low-risk environments, salespersons and like occupations.
-
A: Skilled manual workers who face few or no workplace hazards, or those working, for
instance, as courier truck drivers - B: Manual labourers who work in hazardous environments, such as home construction workers.
REVIEW
What’s the difference between Critical illness (CI) and long-term care (LTC) insurance?
- Critical illness policies are designed to provide a tax-free sum of money to assist an insured in adapting to his changed circumstances caused by a life-threatening illness.
- Long-term care policies provide tax-free funds for care services for those insured persons who can no longer care for themselves independently, due to illness, injury or the effects of aging.
CHAPTER 5 - Insurance to protect business
What are the 3 forms of business ownership?
- Sole proprietorships;
- Partnerships;
- Corporations.
In the operation of a business, what are the risks that business owners will often deal with?
- Risk of being unable to work due to disability;
- Risk of being unable to sell the business—a need triggered by disability;
- Loss of a key employee to disability
What is the purpose of BOE insurance?
It’s designed to help business owners meet operating expenses and keep the business and business assets viable, so that the disabled business owner will have a business to return to upon recovery.
Who can qualify for BOE insurance?
Sole proprietorships and partnerships or closely held corporations with five employees or fewer may qualify
If there is a co-owner or employee whose services could replace those of a disabled owner, then the business might only qualify for a lesser amount of coverage, or be disqualified entirely.
What is the definition of disability when it comes to BOE insurance?
Regular occupation
- An owner who cannot perform regular duties will trigger a decline in business revenues and a likely inability for the business to meet its ongoing obligations
What are the expenses that qualify for BOE (name at least four)
- Rent of the business premises;
- Property taxes on owned business premises;
- Business income taxes;
- Utilities (heat, water, natural gas, electricity);
- Vehicle leases;
- Salaries of (most) employees;
- Phone, Internet and other communications charges;
- Loan interest;
- Lawyers’ and accountants’ fees
What are the expenses that DONT qualify for BOE name some
- Capital portion of loan payments;
- New capital expenditures;
- Salary of the disabled owner;
- Salary of someone hired to temporarily replace the services of the disabled owner;
- Salaries of employees who are able to independently continue to generate revenue for the
business; - Salaries of relatives of the disabled owner who were brought into the business after the onset of
the disability.
TRUE OR FALSE?
BOE policy benefits are normally payable (monthly) on a reimbursement basis.
TRUE
TRUE OR FALSE?
BOE policies typically have a long waiting period before benefits begin, sometimes as short as 90 days and seldom longer than 130 days.
FALSE
BOE policies typically have a fairly short waiting period before benefits begin, sometimes as short as 15 days and seldom longer than 90 days.
TRUE OR FALSE?
A BOE policy might provide $6,000 a month for 24 months. But the $6,000 a month is a maximum monthly reimbursement benefit. The full $6,000 is only payable in a given month if at least $6,000 of qualifying expenses is claimed.
TRUE
Unclaimed BOE benefit maximum room can be carried forward to be used in future months.
TRUE
BOE policies may offer a variety of standard or optional provisions (riders) Name at least three
- Waiver of premium;
- Return of premium;
- Future purchase option (FPO);
- A presumptive disability clause;
- A partial disability clause;
- Residual disability benefits.
What are the tax implications of BOE premiums and benefits?
- As the policy only covers qualifying expenses, the premiums are a tax-deductible business expense for the payor.
- Any benefits paid to the policyholder, or on the policyholder’s behalf, are treated as taxable income.
What is the purpose of business loan protection disability insurance?
- To help periodic interest payments required under a business loan
- Helps to discharge periodic or lump-sum business loan payment obligations on behalf of a disabled business owner
Who needs the Business loan protection disability insurance?
Sole proprietors, business partners and sole owners of incorporated private businesses.
For a loan to qualify for business loan protection coverage, it must meet three criteria, what are they?
- The loan must be essential to the successful operation of the business.
- Interest paid on the loan must be tax-deductible. That is to say, the loan must have been undertaken for the purpose of earning income from business or property.
- The loan must have been issued by a financial institution: bank, trust company, credit union or loan company.
In regards to business loan protection disability insurance, and eligible loans, a loan to qualify for business loan protection coverage, it must some criteria.
In addition, the purpose for which a loan is undertaken must be related to the business operations such as…
- Mortgages on the premises from which the business operates;
- Equipment loans;
- Lines of credit and account overdrafts
[Ref. 5.3.2.3]
TRUE OR FALSE?
In order to qualify for a business loan protection disability policy, the business must have a history of profitable operation; typically at least a year or two.
FALSE
In order to qualify for a business loan protection disability policy, the business must have a history of profitable operation; typically at least three years.
TRUE OR FALSE?
Business loan protection disability Benefits are only payable in lump-sum.
FALSE
Benefits may be payable in one of two ways: periodic (monthly) or lump-sum
- Periodic payments, of up to $10,000, are the most common and typically may run for up to 24 months. Lump-sum payouts, of up to $250,000, are possible.
[ Ref. 5.3.2.5]
TRUE OR FALSE?
Similar to business loan protection, BOE insurance covers the interest on a business loan. However, claims cannot be made under both types of insurance for the same loan, even if the business has both types of coverage.
TRUE
- Only one claim can be filed, and the insured must select the contract it will make the claim under.
[ Ref.5.3.2.7]
What are the Tax treatment of premiums and benefits for Business loan protection disability insurance?
- Premiums paid on these policies are not tax-deductible by the business.
- Benefits received (the discharge of loan principal and interest), on the other hand, are tax-free.
CHAPTER 5 - Insurance to protect business
What are some insurance needs to address the owners inability to sell a business?
- Buy-sell agreements (Cross-purchase, criss-cross, share redemption)
- Disability buyout insurance
- Key-person insurance
- Employee health trusts (EHTs)
- Personal Health Spending plans (PHSP)
- Group disability / critical illness plans
The key to an effective buy/sell agreement is certainty: the parties to the agreement must know in advance. What are some Elements of an agreement?
- Under what circumstances is the agreement triggered?
- Will the current owner be required to sell the business interest?
- Who is required to buy the business interest?
- When must the purchase and sale take place?
- At what price will the purchase and sale take place?
- How will funding for the sale be affected?
A buy/sell agreement should commit the buyer and the seller to a price that will not be subject to negotiation at the time that the buy/sell is triggered. This is normally affected in one of three ways, what are they? (name at least three)
- A fixed price
- Price Formula
- Use of a third-party valuator
- use of personal assets
- loan
- Instalment payments from the business profits
- Insurance on the life of the disabled owner
[ Ref.5.4.1.3]
A mandatory purchase and sale at a predetermined price is only of value to the parties involved if the purchaser has the financial capacity to meet his obligations under the agreement.
The agreement is most
often funded in one of four ways, what are they?
- Use of personal assets
- A loan
- Instalment payments from the business profits
- Insurance on the life of the disabled owner
TRUE OR FALSE?
If a partnership buys out a partner’s interest the transaction is a capital transaction, resulting in a capital gain or loss reported to the seller for the year of sale.
TRUE
TRUE OR FALSE?
If an incorporated company purchases its shares directly from a shareholder, the portion of the proceeds equal to the paid-up capital (PUC) value of the shares is treated as a tax free capital transaction.
TRUE
What is the definition of total disability in a disability buyout insurance?
- regular occupation.
- In some cases that is extended to
own occupation and not working,
CHAPTER 5 - Insurance to protect business
What is the waiting period on a disability buyout insurance?
- Disability buyout plans usually have a waiting period of 12 months, sometimes as long as 18 to 24 months.
- The long waiting period is to give the disabled business owner time to recover and return to active participation in the business, if possible.
[Ref. 5.4.2.3]
What are the benefits and the benefit periods on a disability buyout insurance?
- Benefit Periods for disability buyouts are often only one day: a lump-sum benefit is paid out to fund any buyout at the end of the waiting period.
- Some contracts provide for part of the benefit (50%) to be paid in a lump-sum, with the balance paid out in equal instalments over as many as 60 months (5 years)
- Once the waiting period has been met, the buyout is triggered and the payment begins, regardless of the subsequent health of the owner.
- Disability buyout plans usually have a waiting period of 12 months, sometimes as long as 18 to 24 months.
[Ref. 5.4.2.3]
What is the coverage amount on a disability buyout insurance?
- Disability buyout policies often provide coverage for as much as $1,000,000, with some contracts extending the coverage to as much as $2,000,000.
[Ref. 5.4.2.3]
What are some features of disability buyout insurance? (Contract, benefits riders)
- Disability buyout contracts are conditionally renewable and non-cancellable
- Policies often have a reducing benefit schedule after the life insured attains age 60, reducing by 20% of the original face amount
- Most contracts will include a future purchase option (FPO), guaranteeing the right to increase coverage at pre-set dates
[Ref. 5.4.2.5]
Explain the tax implications of premiums and benefits within the disability buyout insurance.
- Disability buyout policies are owned by, paid for by and payable to the prospective buyer of the business
- Premiums paid are not tax-deductible by the policyholder. Nor are they reported as a taxable benefit to the covered life insured.
- Benefits received by the policyholder, in the event of disability of the life insured, are received tax-free.
TRUE OR FALSE?
Key person insurance can only be offered through life insurance.
FALSE
Key person insurance is a life insurance, critical illness (CI) insurance or DI policy on the life of a key person.
- The intent is to protect the employer in the event of the loss of services of the key person due to death, disability or critical illness.
[Ref. 5.4.2.5]
CHAPTER 5 - Insurance to protect business
What is the purpose of Key Person Disability Insurance?
- Designed to provide the employer with cash flow to offset a number of potential losses to the business arising from the key person’s absence from work due to disability.
There are different types of situations which the funds from key person disability insurance intends to offset. Name at least two of them.
- A decline in productivity due to the loss of the key person’s services;
- A decline in productivity of other employees due to the loss of the key person’s support or guidance;
- A decline in sales or networking contacts;
- The cost of recruiting and training a replacement for the key person, if necessary.
[Ref. 5.5.1.2]
CHAPTER 5 - Insurance to protect business
What are some key points in the term of the contract, riders, benefits, and waiting period on key person disability insurance?
TERM OF THE CONTRACT
- Regular occupation
- Renewable
RIDERS
- Waiver of premium
- Recurrent disabilities
- Replacement expense benefit rider (additional payout to cover the costs associated with hiring a replacement employee)
BENEFITS
- Restricted to no more than 100% of the life insured’s annual salary
- Paid monthly, to a maximum of about $15,000 a month
WAITING PERIODS
- 30 to 90 days
- Benefit periods are usually no more than 12 months
What are the Tax treatment of premiums and benefits on key person disability insurance?
- Key person disability policies are usually owned by, paid for by and payable to the employer.
- Premiums paid are not tax-deductible by the policyholder, nor are they reported as a taxable benefit to the covered employee.
- Benefits received by the employer, in the event of disability of the insured employee, are tax-free.
[Ref. 5.5.1.7]
What are some key points of Employee health trusts? (EHTs)
- Permit employer contributions to an EHT in order to provide accident and sickness (but not life insurance) benefits for employees
- Benefits for employees are tax-deductible for the employer, but are not treated as a taxable benefit for the employee
- EHTs are used by medium-to-large employers, because of the complexity and cost of administration.
- Contributions to the trust cannot revert to the employer and must be used to provide specified benefits for the employee and his family, usually for the payment of premiums on individual or group accident and sickness (A&S) insurance plans.
[Ref. 5.6.1]
What are some key points of Personal health spending plans (PHSPs)
- Also referred to as private health services plans (PHSPs)
- Designed to provide health care benefits for sole proprietors, partners and their families
- Contributions are made to the plan, to a prescribed maximum, and may be used to directly pay for health care services, (such as prescription drugs, vision and dental care, etc…)
- Any service or product qualifying for the medical expense tax credit qualifies for these plans
- The plans offer tax advantages not otherwise available and are beneficial to the business owner.
- Employer contributions that fund purchases of qualifying health care products and services are 100% tax deductible for the employer
- Include travel insurance coverage and an exceptional expense riders
[Ref. 5.6.1]
What is a Grouped disability/critical illness plans
Employer agrees to acquire, fund and hold DI or CI contracts, for the benefit of two or more (one employee does not constitute a “group”) of its employees, rather than using a group insurance plan offered by an insurance company
What are some key points of Grouped disability/critical illness plans for business insurance? (Name at least two)
- Benefits claimed under the policies are paid directly to the disabled employee
- The employees who are beneficiaries of a grouped plan must be members of a given class of employees within the organization
- However, shareholders may be members of the group, along with non-shareholder employees, so long as the shareholders are also employees of the company
- The employer can tax-deduct premiums in the year in which they are paid
- Employees do not have to report these employer paid premiums as income
- If the employees claim benefits from the plan. Those are deemed to be taxable benefits.
TRUE OR FALSE?
There is no credit to the corporation’s capital dividend account, as there is with life insurance proceeds. Funds distributed to shareholders by way of a dividend would be treated as a taxable dividend in their hand.
TRUE
Name a couple types of disability insurance coverages for business
- Disability business overhead
expense (BOE) insurance - Business loan protection
- Disability buyout insurance (Entity purchase agreement)
- Disability buyout insurance (Cross-purchase agreement)
- Key person insurance
- Employee health trusts (EHTs)
- Personal health spending
plans (PHSPs) - Grouped DI/CI insurance
plans
Refer to the LLQP A&S manual for the tax implication characteristics on each coverage
[Ref. 5.7, Table 5.1]
DI coverage can arise from a large variety of potential sources, name at least four
- Canada Pension Plan (CPP);
- Government Employment Insurance (EI);
- Provincial Workers’ Compensation Plans;
- Group or grouped plans provided by an employer;
- Disability benefits attached to life insurance contracts;
- BOE plans;
- Business loan protection plans;
- Disability buyout coverage;
- Key person coverage
[Ref. 5.8]
The challenge for insurance advisors is to co-ordinate all DI coverage plans of applicants to ensure that
- There are no gaps in coverage protecting the client or the client’s business;
- There is no needless, and expensive, duplication in coverage.
