INSURANCE TO PROTECT BUSINESS (Chapter 5)

Question 1

A&S Terminology

Medical Expense tax credit

Answer 1

• 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.

Question 2

A&S Terminology

Disability buyout insurance

Answer 2

Disability Insurance policy specifically designed to provide capital to meet the needs of the buyout.

Question 3

A&S Terminology

Business loan protection disability insurance

Answer 3

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.

Question 4

A&S Terminology

Key employee

Answer 4

One who contributes materially to the success of the business and whose skills and services would be difficult to replace.

Question 5

A&S Terminology

Business Overhead Expense (BOE)

Answer 5

Insurance policy designed to pay specified ongoing business expenses while the business owner is disabled and unable to generate revenue for the business.

Question 6

A&S Terminology

Business risk (Unsystematic risk)

Answer 6

Factors relating to a specific business that could impact profitability, or survival, of the business.

Question 7

REVIEW

There are about 3 Individual extended health coverage that are parallel to group plan, what are they?

Answer 7

• Medical care;
• Dental care;
• Travel insurance.

Question 8

REVIEW

What are the types of coverage under group extended health plan?

Answer 8

• Prescription drugs;
• Enhanced medical and hospital care;
• Dental care;
• Vision care;
• Accidental death and dismemberment (AD&D).

Question 9

REVIEW

Explain The process of individual & family deductible

Answer 9

• 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.

Question 10

REVIEW

What are the most common methods of classifications that insurance companies use to assume occupational classes?

Answer 10

• 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.

Question 11

REVIEW

What’s the difference between Critical illness (CI) and long-term care (LTC) insurance?

Answer 11

• 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.

Question 12

CHAPTER 5 - Insurance to protect business

What are the 3 forms of business ownership?

Answer 12

• Sole proprietorships;
• Partnerships;
• Corporations.

Question 13

In the operation of a business, what are the risks that business owners will often deal with?

Answer 13

• 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

Question 14

What is the purpose of BOE insurance?

Answer 14

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.

Question 15

Who can qualify for BOE insurance?

Answer 15

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.

Question 16

What is the definition of disability when it comes to BOE insurance?

Answer 16

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

Question 17

What are the expenses that qualify for BOE (name at least four)

Answer 17

• 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

Question 18

What are the expenses that DONT qualify for BOE name some

Answer 18

• 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.

Question 19

TRUE OR FALSE?

BOE policy benefits are normally payable (monthly) on a reimbursement basis.

Answer 19

TRUE

Question 20

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.

Answer 20

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.

Question 21

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.

Answer 21

TRUE

Question 22

Unclaimed BOE benefit maximum room can be carried forward to be used in future months.

Answer 22

TRUE

Question 23

BOE policies may offer a variety of standard or optional provisions (riders) Name at least three

Answer 23

• Waiver of premium;
• Return of premium;
• Future purchase option (FPO);
• A presumptive disability clause;
• A partial disability clause;
• Residual disability benefits.

Question 24

What are the tax implications of BOE premiums and benefits?

Answer 24

• 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.

Question 25

What is the purpose of business loan protection disability insurance?

Answer 25

• 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

Question 26

Who needs the Business loan protection disability insurance?

Answer 26

Sole proprietors, business partners and sole owners of incorporated private businesses.

Question 27

For a loan to qualify for business loan protection coverage, it must meet three criteria, what are they?

Answer 27

• 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.

Question 28

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…

Answer 28

• Mortgages on the premises from which the business operates;
• Equipment loans;
• Lines of credit and account overdrafts

[Ref. 5.3.2.3]

Question 29

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.

Answer 29

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.

Question 30

TRUE OR FALSE?

Business loan protection disability Benefits are only payable in lump-sum.

Answer 30

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]

Question 31

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.

Answer 31

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]

Question 32

What are the Tax treatment of premiums and benefits for Business loan protection disability insurance?

Answer 32

• 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.

Question 33

CHAPTER 5 - Insurance to protect business

What are some insurance needs to address the owners inability to sell a business?

Answer 33

• 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

Question 34

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?

Answer 34

• 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?

Question 35

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)

Answer 35

• 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]

Question 36

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?

Answer 36

• Use of personal assets
• A loan
• Instalment payments from the business profits
• Insurance on the life of the disabled owner

Question 37

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.

Answer 37

TRUE

Question 38

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.

Answer 38

TRUE

Question 39

What is the definition of total disability in a disability buyout insurance?

Answer 39

• regular occupation.
• In some cases that is extended to
  own occupation and not working,

Question 40

CHAPTER 5 - Insurance to protect business

What is the waiting period on a disability buyout insurance?

Answer 40

• 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]

Question 41

What are the benefits and the benefit periods on a disability buyout insurance?

Answer 41

• 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]

Question 42

What is the coverage amount on a disability buyout insurance?

Answer 42

• 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]

Question 43

What are some features of disability buyout insurance? (Contract, benefits riders)

Answer 43

• 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]

Question 44

Explain the tax implications of premiums and benefits within the disability buyout insurance.

Answer 44

• 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.

Question 45

TRUE OR FALSE?

Key person insurance can only be offered through life insurance.

Answer 45

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]

Question 46

CHAPTER 5 - Insurance to protect business

What is the purpose of Key Person Disability Insurance?

Answer 46

• 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.

Question 47

There are different types of situations which the funds from key person disability insurance intends to offset. Name at least two of them.

Answer 47

• 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]

Question 48

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?

Answer 48

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

Question 49

What are the Tax treatment of premiums and benefits on key person disability insurance?

Answer 49

• 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]

Question 50

What are some key points of Employee health trusts? (EHTs)

Answer 50

• 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]

Question 51

What are some key points of Personal health spending plans (PHSPs)

Answer 51

• 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]

Question 52

What is a Grouped disability/critical illness plans

Answer 52

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

Question 53

What are some key points of Grouped disability/critical illness plans for business insurance? (Name at least two)

Answer 53

• 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.

Question 54

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.

Answer 54

TRUE

Question 55

Name a couple types of disability insurance coverages for business

Answer 55

• 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]

Question 56

DI coverage can arise from a large variety of potential sources, name at least four

Answer 56

• 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]

Question 57

The challenge for insurance advisors is to co-ordinate all DI coverage plans of applicants to ensure that

Answer 57

• There are no gaps in coverage protecting the client or the client’s business;
• There is no needless, and expensive, duplication in coverage.