INSURANCE TO PROTECT INCOME PART 2 (Chapter 2) Flashcards
A&S Terminology
Definitions of disability: Own occupation
- The insured considered to be totally disabled if he cannot perform all of the primary duties of his regular occupation.
- Benefits will be paid, even if he has income from other work or duties.
[Ref. 2.2.3.3]
A&S Terminology
Definitions of disability: Regular occupation
- The insured considered to be totally disabled if he cannot perform all of the primary duties of his regular occupation
- If the disabled insured elects to go back to work in any capacity, benefits from the policy will be reduced and could, in fact, be terminated.
A&S Terminology
All-source maximum
- Also known as “group offset amendment”
- The maximum amount of coverage permitted from all direct & indirect sources (EI, CPP, dependent coverage, WC etc…)
- Benefits from all specified sources cannot exceed 85% of the plan members’ pre-disability income
A&S Terminology
Rider: Cost-of-living adjustment (COLA)
Rider that provides for an annual increase in the monthly benefits being paid under DI, starting the second year that benefits are paid.
A&S Terminology
Qualification Period
A set number of days that must expire between the date of employment and the date that the employee qualifies to join a group plan.
A&S Terminology
Rider: Hospitalization benefit
Indemnity rider that provide benefits if the injury or illness that caused the disability results in the life insured having to spend time in the hospital.
A&S Terminology
Group disability Insurance
Insurance agreement between the employer (policyholder) and the employee (life insured & beneficiary) that provide coverage to many individuals under a master contract in exchange for a premium.
A&S Terminology
Benefits: Partial Disability
- Similar to residual disability benefit
- If the insured is unable to perform some of the substantial duties of his job, or is able to perform all of the substantial duties but only for part of the time, he
would receive 50% of the total disability benefit for a period of two to three years.
A&S Terminology
Rider: Future purchase option (FPO)
Rider under DI that guarantees the insured the right to purchase additional coverage in the future, regardless of future changes in the life insured’s health
A&S Terminology
Overall maximum with medical evidence
Group insurance coverage that require medical underwriting for plan members who request additional coverage.
A&S Terminology
Rider: Return of premium (ROP)
Provides for a tax-free return (refund) of premiums paid if the policy expires and the total claims paid over the life of the policy do not exceed the total premiums paid.
example;
- If there are no claims by age 65, when the coverage expires, 70% of all premiums paid are repaid to the policyholder;
- If claims are filed during the life of the policy but the total of benefits paid out is less than the total of premiums paid in, the difference would be paid to the policyholder when the coverage expires;
A&S Terminology
Association groups
Association groups are comprised of individuals who have characteristics in common but who do not work for the same employer.
A&S Terminology
Benefits: Residual disability
DI policy that will pay the disabled a portion of his benefits if he is able to work part-time following a period of total disability.
A&S Terminology
Creditor disability insurance
Collaboration of coverage between life insurance companies & financial institution to ensure that regularly scheduled payments on debts are made even during a period when the debtor is disabled and unable to earn an income.
A&S Terminology
Rider: Accidental death and dismemberment (AD&D)
- Provides additional benefits, over and
above those benefits payable on account of income loss due to disability, should the life insured incur death or specified severe injuries due to an accident.
A&S Terminology
Non-evidence maximum (without medical evidence)
Basic amount of coverage for which medical underwriting is not required
A&S Terminology
Definitions of disability: Total disability according to the Canada Pension Plan (CPP)
- Total disability definition under CPP which defines the inability to perform the functions of any occupation for which the insured is suited by education and experience, on a total and permanent basis.
- Often found in loan and mortgage insurance policies
A&S Terminology
Definitions of disability: Any occupation
- To be considered “disabled,” the insured must be unable to perform the duties of any occupation appropriate to his skills or education
- If the disabled insured qualifies to work in a job that is similar or consistent with his education or occupation (with his current disability), regardless of whether he accepts that job, he will not be entitled to disability benefits.
Disability can be measured as “partial” or “total” and within that range there are four distinct definitions that are employed by different policies what are they?
- Own occupation;
- Regular occupation;
- Any occupation;
- Total disability (according to the CPP).
TRUE OR FALSE?
To be well protected in case of disability, an insured must choose an insurance that covers both injury and illness.
Otherwise, he could become disabled as a result of an illness and not get any benefits.
TRUE
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.
TRUE OR FALSE?
Without applying for a new disability insurance policy, the insured can request a reclassification if his risk decreases over time.
TRUE
- For example, if he is a new salesperson, he will be in class 2A. After 5 years in the same occupation demonstrating stability and increasing income, he could be reclassified to 3A without changing jobs.
[Ref.2.2.3.4]
TRUE OR FALSE?
3A occupation would command a higher premium than a 4A occupation for the same coverage.
TRUE
TRUE OR FALSE?
An applicant in the 2A class can qualify to acquire “own occupation” coverage or a non-cancellable contract.
FALSE
An applicant in the 2A class would not usually qualify to acquire “own occupation” coverage or a non-cancellable contract.
[Ref.2.2.3.4]
TRUE OR FALSE?
DI contracts have an occupational clause that specifies that the insurance company has the right to increase premiums or adjust benefits if the insured changes occupations to one in a higher-risk classification during the term of the policy.
TRUE
TRUE OR FALSE?
For DI policies, waiver of premium is a rider as it is with life insurance policies
FALSE
For DI policies, waiver of premium is not a rider as it is with life insurance policies but is an intrinsic provision of the contract for which no additional premium is charged.
[Ref. 2.2.3.5]
Explain the waiver of premium provision under disability insurance with some key factors
- Provisions that void (waive) the policyholder’s obligation to pay premiums during the time that the life insured under the policy is on disability claim
- Typically the premium must be paid by the policyholder during the first 90 days of claim and then the waiver commences
- Many policies will refund the premium paid during the 90-day waiting period
- The premium will be waived for the duration of the disability claim, or for a period of anywhere from 2 to 5 years, to the end of the benefit period (or even to the life insured’s age 65)
What are some of the riders that are applicable with disability insurance?
- Future purchase option (FPO)
- Cost-of-living adjustment (COLA)
- Accidental death and dismemberment (AD&D)
- Partial and residual disability benefits
- Return of premium (ROP)
- Hospitalization benefit
The Future purchase option under disability insurance is also known as…
Guaranteed insurability benefit
What are two rules that apply to the future purchase option under DI?
- The current option may not be exercised if the insured’s current income has not changed since policy issue or exercise of the last option, and the coverage currently in force equals 60% of current income.
- If the insured’s current income is such that 60% is greater than the current coverage in force, the current option may be exercised, to a maximum of the current option or an amount that would bring the coverage up to 60% of current income.
Benefits with a COLA rider is payable by one of two methods, what are they?
Simple
The benefit is indexed by a flat rate (2.00 or 4.00%, for example) based on the initial benefit payable.
Compound
After the first year of claim, the benefit is indexed to the rate of inflation, on a compound basis (Based on the Consumer Price Index)
FILL IN THE BLANK
For a claim to be receivable under AD&D benefit, the death or loss must occur within _______ of the accident in question and the death/loss must be directly attributable to the accident.
a) Two years
b) 295 days
c) 7 weeks
d) 365 days
For a claim to be receivable under AD&D benefit, the death or loss must occur within 365 days of the accident in question and the death/loss must be directly attributable to the accident.
[Ref.2.2.4.5]
TRUE OR FALSE?
Medical underwriting is required under the AD&D benefit at time of issue of the rider.
FALSE
Because benefits are only payable in the event of accidental loss, no medical underwriting is required at time of issue of the rider.
TRUE OR FALSE?
If the disabled worker has a residual disability benefit and is able to return to work, perform some of the substantial duties of his job, or all of the substantial duties but only for part of the time, he will have two sources of income: part of his employment income and part of his disability benefits.
TRUE
TRUE OR FALSE?
Earnings between 20% and 80% of
pre-disability income will result in a pro-rata benefit, proportional to the percentage of income lost to disability.
TRUE
What are the calculations for Residual disability benefits
Pre-disability income — part-time income ÷ Pre-disability income = Percentage%
($80,000 — $32,000 ÷ $80,000 = 60%)
While working part-time after suffering a disability, 60% of maximum disability benefit can be claimed, combined with the part time income post disability.
The underwriting department has three options for dealing with the application if there is health or lifestyle issues that result in applicant being assessed as a higher risk than “standard,” Name the 3 options.
- Decline to issue the policy;
- Impose a premium rating;
- Add an exclusion rider to the policy
The difference between Hospitalization benefit rider & Hospital Indemnity rider
HOSPITALIZATION BENEFIT
- Designed to bridge the gap between the first day of hospitalization and the first day that disability benefits begin (often 90 days later)
- The rider has no waiting period, requires a minimum hospital stay of from 24 to 72 hours for benefits to be payable
HOSPITAL INDEMNITY
- The hospital indemnity rider provides a daily benefit, usually between $50 and $250 a day, to cover specific expenses incurred as a consequence of hospitalization
- Can cover child care expenses for a spouse visiting a hospitalized spouse on a regular basis over a prolonged
period of hospitalization or parking costs at the hospital.
TRUE OR FALSE?
Premiums paid for individual disability income replacement policies are not deductible for income tax purposes and benefits received do not have to be included in taxable income.
TRUE
- This is the case for disability benefits, treatments paid for by the insurer on behalf of the insured and waiver or return of premium (ROP) benefits.
- There are some exceptions to these rules, such as business overhead expense (BOE) insurance
[Ref.2.2.5.1]
TRUE OR FALSE?
If a DI policy is taken out by an incorporated employer on the life of an employee and the benefits are payable to the employee, then the premiums will likely be tax-deductible by the employer and the benefits will be taxable for the employee.
TRUE
- Either the premiums paid by the employer, or the benefits received by the employee (but not both) will be treated as taxable income in the hands of the employee.
[Ref.2.2.5.1]
What are key differences in Taxation between personally owned and corporately owned disability insurance (DI) policies?
INDIVIDUAL
- Premiums paid for individual disability income replacement policies are not deductible for income tax purposes and benefits received do not have to be included in taxable income.
BUSINESS
- If a DI policy is taken out by an unincorporated employer on the life of an employee and the benefits are payable to the employee, then the premiums will likely be tax-deductible by the employer and the benefits will be taxable for the employee
- If a corporately owned DI policy is insuring an employee’s ability to work and the employee is the beneficiary of any policy benefits, the premiums paid will be a deductible business expense for the employer but a taxable benefit for the employee.
- If the life insured under a corporately owned policy is a shareholder of the company (or both an employee and a shareholder), the Canada Revenue Agency (CRA) is likely to rule the premiums paid to be a shareholder benefit, non-deductible by the employer but taxable in the hands of the shareholder.
Ref: 2.2.5.1
TRUE OR FALSE?
The conversion privilege with BOE will permit the life insured to transfer the policy and coverage into his own name, without medical underwriting.
TRUE
TRUE OR FALSE?
Non-cancellable DI policies don’t offer the policyholder the option to convert the contract to a guaranteed renewable policy at age 65.
FALSE
Non-cancellable DI policies offer the policyholder the option to convert the contract to a guaranteed renewable policy at age 65, with a limited duration and benefit period.
Providers of group disability insurance provide coverages to group members who have some element of commonality and exhibit some common trait such as…
- Work for the same employer;
- Work in the same industry;
- Are members of the same association;
- Are alumni of the same university;
- Belong to the same union, etc.
[Ref.2.3.1]
Why do employers find that it is essential to offer current and prospective employees competitive group coverage in order to attract and retain good employees?
BECAUSE
Many job-seekers will not consider a prospective employer unless the employer offers an attractive employment package, including salary, vacation days, a pension plan and group insurance benefits.
Name the two most common type of group disability insurance.
- Short-term disability (STD)
- Long-term disability (LTD)
What are some key factors within a short-term disability (STD) Policy?
(name at least 3)
- Found in group insurance
- Provide benefits for disabilities of short duration
- Benefits are based on a percentage of salary
- Employer pays 100% of the premiums
- Benefits are taxable income
- Benefits are likely to be in the range of 70–75% of pre-disability income.
- The definition of disability for short-term group insurance coverage is generally own occupation.
- Benefits often start after a 7-day waiting period in the case of disabilities arising from illness and on the first day for disabilities arising from an accident.
- The maximum benefit is almost always 12 months.
FILL IN THE BLANK
EI has a maximum ________ benefit period after a waiting period of one week
a) 7-day
b) 15-day
c) 15-week
d) 25-day
EI has a maximum 15-week benefit period after a waiting period of one week
[Ref.2.3.2.1]
TRUE OR FALSE?
EI is the first payor to many other forms of disability coverage, including group plans.
FALSE
EI is a second payor to many other forms of disability coverage, including group plans.
What are some key factors within a Long-term disability (LTD) Policy (name at least 3)
- Takes over when benefits under the short-term disability coverage expire with the plan member still being disabled.
- The waiting period for the LTD coverage is the benefit period for the STD coverage.
- The amount of LTD monthly benefits is generally lower than that paid under STD
- Benefits are payable for a period of 2 years, 5 years or 10 years, or to age 65
- Short-term disability benefits are mostly taxable while long-term disability benefits are tax-free
TRUE OR FALSE?
Disability during a leave of absence may be granted on compassionate grounds, to permit an employee to care for an ailing family member.
TRUE
Or a leave may be granted to permit an employee to do independent research, or just to permit a break from work routine.
[Ref. 2.3.2.3]
TRUE OR FALSE?
Most group DI plans don’t require a new employees to undergo a qualification period due to CLHIA guidelines.
FALSE
Most group DI plans require a new employee to undergo a qualification period before they can join the group plan.
A plan member could find his participation in the group DI plan terminated for reasons such as…
- The master contract itself might be terminated, at the initiation of either the employer or the insurance company;
- The member might cease to be an employee of the sponsoring employer;
- The member might cease to meet the definition for membership in the class of the covered group (for example, his weekly employment hours might be reduced below the minimum requirement for group plan membership);
- The employee/group plan member might retire.
The amount of disability benefit available to group disability insurance (DI) plan members is subject to restriction on several different levels such as…
- A non-evidence maximum amount (without medical evidence) that is absolute, spelled out in the
master contract, regardless of the plan member’s qualifying income; - A maximum overall amount based on a percentage of the group member’s qualifying income (with medical evidence);
- An “all source” maximum” that is governed by group offset rules set out in the master contract.
TRUE OR FALSE?
In the case of employer/employee group DI plans, STD coverage is usually fully paid for by the employer and benefits received by the employee are treated as taxable income.
TRUE
TRUE OR FALSE?
Premiums paid by the employer for the STD coverage are a deductible business expense for the employer.
TRUE
[Ref. 2.3.5]
TRUE OR FALSE?
In the case of LTD coverage if the premiums
are paid by the employer, the benefits received by the employee will be taxable income
TRUE
TRUE OR FALSE?
As with STD, the employer-paid premiums are a not deductible expense for the employer.
FALSE
- As with STD, the employer-paid premiums are a deductible expense for the employer
- However, if the employee/plan member pays 100% of the premium, it is non-deductible for the employee and the benefits are tax-free
[Ref. 2.3.5]
TRUE OR FALSE?
In circumstances where both the employer and the employee contribute to the premiums for LTD The employee’s benefits (if any) are assumed to be a tax-free refund of premium up to the amount of aggregate premium paid by the employee since his last claim.
TRUE
- Any benefits received in excess of that amount are treated as a taxable benefit in the hands of the employee.
TRUE OR FALSE?
Under the group creditor disability insurance, the definition of disability qualifying the insured for benefits is “total disability.”
TRUE
TRUE OR FALSE?
The benefits available under group creditor disability insurance for a loan are tied to an annual loan payment.
FALSE
The benefits available under group creditor disability insurance for a loan are tied to the monthly loan payment, including principal and interest
[Ref. 2.4.1]
TRUE OR FALSE?
The tax treatment of group creditor DI premiums is simple and straightforward, mimicking the treatment of individual disability insurance.
TRUE
- Premiums paid are a personal, non-deductible expense, unless the purpose of the loan in question was to earn income from business or property.
- Benefits are received (paid to the creditor on behalf of the debtor) tax-free.
[Ref. 2.4.1]
