Life Ins SeewhyLearning ++

Question 1

if life expectancy for a 20 yr old is 64 years, when will they likely die?

Answer 1

84 years old

Question 2

max conversion of group life insurance to individual by province?

Answer 2

qc is 400,000$
other provinces: 200,000
(note qc can convert depends too but not other provinces)

Question 3

on Bob’s WL, if Lucy is beneficiary and Belinda is contingent beneficiary, and Lucy dies a week after Bob dies, who gets Bob’s DB?

Answer 3

Bob’s dead so Lucy gets it
if Lucy dies a week later, her estate gets the DB.
Belinda only gets if Lucy was already dead when Bob dies. (i think)

Question 4

whats better for the client with perm needs on a budget?:
a) a smaller coverage perm ins.
or
b) the right coverage term & convertible later

Answer 4

the second one

Question 4

what does LCOI and YRT refer to?

Answer 4

LCOI : level cost of insurance
YRT: yearly renewable term

refers to the cost of each policy, for perm policies (t-100, wl, ul). In ul, its transparent.

Question 5

which between LCOI and YRT can have level premiums?

Answer 5

well, both can have level premiums. in YRT, there’s a bigger chunk of the premiums that goes to the accumulation account in the beginning (costs are less in the beginning)

Question 6

whats the modal factor on quarterly for UL policy?

Answer 6

n/a
aka it’s the same as annual overall
aka 1/4

Question 7

what kind of policies have modal factors

Answer 7

whatever has a annual payment that isn’t UL aka, t-100 and WL usually.

Question 8

what riders and supp benefits are covered with disability waiver of premiums ?

Answer 8

all of them, up to the % dictated by the % of disability table (5.1 AD&D schedule of loss)

Question 9

does accelerated death benefit (for terminal illness) have an interest on it, like a loan? what happens to the DB for the beneficiaries?

Answer 9

sometimes yes, so DB to beneficiaries is face amount minus accelerated DB amount minus the interest on that if applic.

Question 10

is accelerated DB taxable to the terminally ill PH or to the beneficiary?

Answer 10

nope. DB is non-taxable (unless for whatever reason the policy becomes non-exempt, then its a little complicated)

Question 11

how long does the terminally ill person have to die to receive the benefits?

Answer 11

doctor has to say they will die in 1-2 years, and they get accel. DB (a $ amount or %), but if it takes longer, well… nothing.

Question 12

what does it mean if the PH has a terminal illness and named an irrev. beneficiary?

Answer 12

Well the PH needs to get the beneficiary’s consent before applying to remove funds from the DB!

Question 13

what happens to the premiums when the PH becomes terminally ill and gets accelerated DB’s: are the premiums waived?

Answer 13

the DB paid out to beneficiary is the face amount minus the overdue premiums minus whatever interest accumulated on the accelerated portion. the TI clause doesn’t usually require a rider, it’s usually part of the deal, and it doesn’t usually cost more in premiums.

Question 14

if your plan bought before 1982 lapsed and gets reinstated, how do you calculate the ACB? old way or new way?

Answer 14

if it hadnt lapsed, old way, but it lapsed therefore new way! sorryyyyy your fault.

Question 15

how do you calculate prorated acb and whats that for anyway?

Answer 15

thats if you take out a policy load against your CSV. you need a prorated ACB proportional to the % of loan vs CSV.

the taxable policy gain is calculated as the withdrawal amount minus the prorated ACB. then you apply taxes to that portion to determine how much tax to pay.

Question 16

if your policy loan is 60K , your CSV is 70K and your ACB is 46K, what’s your taxable policy gain?

Answer 16

Policy Gain = withdrawal - prorated ACB
prorated ACB = loan/CSV x ACB

PG = 60- (60/70*46) = 20.5 K
taxes on that are accd to MTR

Question 17

why is it called capital retention method? whats it about and whats the formula? whats another name for that?

Answer 17

its a way to calculate insurance needs

other name: Capitalization of income shortfall

its keeping or preserving, or retaining! the capital (you replace a salary with a capital invested on which you live on the returns only)

capital (face value) = gross income / interest rate

gross income is also called the shortfall because its the loss of that income when that person dies.
5% rate = 0.05

Question 18

whats the capital drawdown method?

Answer 18

its when you multiply the shortfall by the time period you need it for.

e.g. monthly income needed x 12 months/year x # years

then you can get a face amount equal to that value. the interest rate doesn’t matter, because it’s a total number of $ coverage.

you’d only divide by interest rate if you need to live off the capital annually, so that there’s a big fund with all the other monies for all the other years…

Question 19

whats this called when you do income minus expenses to see if there’s an actual shortfall (more realistic)

Answer 19

thats how to calculate the shortfall, and you use that to do the capitalization of income approach.

you do an insurance needs analysis
then you do a capital needs analysis where you look at cash in and cash out (or assets and liabilities) to see if there’s a shortfall. It’s useful to do assets vs liabilities right now vs if a person dies to see how big of a need you have now vs in case of death

then you can use shortfall value to do a capitalization of income shortfall ($/yr divided by RO1) to get insurance coverage amount needed.

Question 20

how does inflation affect capitalization needs analysis?

Answer 20

you take your annual capital and divide it by the NET return rate (aka investment return rate minus inflation rate)

Question 21

whats the real return?

e.g. return = 5% & inflation = 2%? whats the real return?

Answer 21

real return = ((1+return)/(1+inflation))-1

(1.05 / 1.02) -1

1.05: how money has grown in the account this year

1.02: how money’s value has decreased this year

the ratio of this year’s growth vs loss
1.05/1.02 = 1.0294…

which means compared to the value of your money at the beginning of the year (a multiplier of 1), the funds have grown 102.94%. That means you can buy 2.94% more things at the end of the year compared to at the beginning of the year, all else being equal.

remove 1 to calculate the delta and turn that into a percentage to get the ROI

therefore the realllll return is actually 2.94%

Boom.

Question 22

how does exact real return compare to expected real return?

Answer 22

if inflation is 2% and investment ROI is 5%, you expect the real return to be 3% but the REAL real return is always a teeny bit less

because the value of your dollar is now
1.05/1.03 - 1

not 1.05-1.03

Question 23

cross-purchase buy-sell agreement : who owns the policy, pays out the premiums & the DB?

Answer 23

all of the above: the company

Question 24

for a buy-sell, where do the shares go of the deceased shareholder?

Answer 24

to the estate first

Question 25

how do the shareholders get the deceased person’s shares in a buy-sell agreement? (all the steps)

Answer 25

1. the policy is owned by the company, the company pays the shares and receives the death benefit
2. when a shareholder dies, the shares of the deceased go to his estate
3. the insurance company pays the (tax-free) death benefit to the company, which is credited to the Capital Dividend Account (CDA)
4. the remaining shareholders buy the shares from the estate using the promissory note (i promise to pay up)
5. the estate of the deceased transfers the shares to the surviving shareholders so now they own 100%
6. the surviving SH instruct the company to pay each SH a capital dividend (earnings related to the new shares acquired)
7. the remaining SH now owe the estate, so they use their new dividend money to pay the estate’s promissory note.

Question 26

is it okay to issue a TIA if the insured is about to travel to a dangerous country for a few weeks?

Answer 26

no because the TIA is in vigor and this kind of travel is like answering “yes” to one of the questions.

Question 27

when should you not issue a TIA?

Answer 27

when you’re not sure if the insurance company will accept the application or not (there’s some cause for concern)

tia is only used to cover low-risk (temp) needs usually

Question 28

if someone is expected to live 15 years, should they get maximum 15-y term ?

Answer 28

no because you can’t predict that, and the need might be a PERM need not a term need. PERM needs don’t end, or only get triggered at death. you don’t want to be stuck without insurance after 15 years, in case you live an extra day.

Question 29

is avoiding non-exemption on a policy a valid reason to get insurance?

Answer 29

not really. the reason should be to insure someone’s life. insurable interest needs to be there. relatives are automatically interesting, even key persons in your business.

Question 30

if someone’s on a budget and has perm needs, what options should you suggest?

Answer 30

well, you shouldn’t omit term policies if their cash is very tight, but you also shouldnt omit perm policies because the fact is, they have perm needs so what they need is a perm plan, therefore any term they might get would need to be convertible at some point.

Question 31

whats the parent/payer waiver benefit?

Answer 31

that’s if the PH isn’t the person who ends up disabled (isn’t the insured), therefore the premiums can be waived for the payer if the insured gets disabled

well, what if the PH is disabled? well, the PH shouldve gotten a plan for himself! (as the insured)

Question 32

what type of insurance is term-to-life?

Answer 32

dne

Question 33

how much coverage can you get on a minor’s life?

Answer 33

maybe like funeral expenses but that’s it. unless its a famous child.

Question 34

is waiver of premiums in case of disability automatically added to life insurance WL policies?

Answer 34

nope, needs to be added. (makes sense because the disability clauses are riding along with the life insurance, this isn’t disability insurance here! in disability insurance, that provision is likely included)

Question 35

what’s the 50% inclusion rate refering to?

Answer 35

if a capital gain is used to create jobs, then only 50% of it is taxable with MRT rates upon disposition.

Question 36

how much taxes do you pay on capital gain for businesses in canada.

Answer 36

if the biz qualifies for CCPC and the 800,000 tax exemption amount (LCGE) was never previously used, you take the total capital gain (MV - ACB) and you substract LCGE. only 50% of that amount is taxable (50% is the inclusion rate).
taxable capital gain

(ps the inclusion rate % will increase in june 2024 to 66.67%)

Question 37

for a biz buy-sell agreement, can the premiums be deducted from the income?

Answer 37

the word deducted indicates from taxable income.

premiums are not tax-deductible, even for a business. but death benefits are tax-sheltered! yay

which premiums can be deducted from income taxes though? in a group life insurance plan, the sponsor can do this because it’s creating money elsewhere…?

in the policy loans section, it says that if policy loans are used to create property income (dividends, returns), then the accumulated loan interest are tax-deductible

premiums are generally not tax-deductible because they are being paid with after-tax dollars.

Question 38

what’s criss-cross insurance? and what’s complex about it?

Answer 38

it’s when SH of a company agree to buy the shares of the deceased SH.

its complex if each member has a different level of insurability and therefore the premiums for each shareholder are different

Q? but it said elsewhere that the policy is owned by the company and the company also pays the premiums….???

Question 39

is criss-cross insurance the same as buy-sell agreement?

Answer 39

dunno

in one place, it was saying the company owns the policy, pays the premiums and pays out the DB

in another place it says that each SH has different levels of insurability and therefore different premiums

OH here’s the answer: criss cross insurance is used to fund B-S agreements. aka C-C insurance is each SH taking out life insurance on the other SHs of the company.

Question 40

when are premiums tax deductible?

Answer 40

when the insurance is used to secure a loan for business or investment purposes. (it’s like extra income, and paying back the loan is like reducing your income)

Question 41

which needs analysis is for an indefinite # of years?

Answer 41

capitalization of income

Question 42

where does the FPO rider go ?

Answer 42

its “future purchase option” and its for disability or A&S, so not life, so ha! trick question!

Question 43

whats the diff in taxation between CG and PG?

Answer 43

CG is 50% taxable (property, business or dividends, intended for growth/profit)
PG is 100% taxable at MTR
PG = CSV-ACB

Question 44

whats the maximum CPP/QPP death benefit?

Answer 44

2500$ (taxable)

Question 45

is the entire RRSP considered “disposed of” at death, or just the part of it that grew in the account (total minus contributions)

Answer 45

the whole thing. The only exception is spousal rollover, where the spouse need not pay taxes when receiving the rrsp.

Question 46

how risky are interest-bearing deposits?

Answer 46

very low, thats an interest rate in exchange for depositing your money there, like a savings account.

Question 47

whats the sales tax on group insurance premiums?

Answer 47

9% in QC

Question 48

what are the conditions of joining a group life insurance?

Answer 48

be an active member, satisfy probationary period, be actively at work when the plan starts, and enroll during the enrollement period. Also pay premiums if there are some… that’s it!

Question 49

what happens to the DB if the person died in a criminal activity?

Answer 49

DB gets paid out anyway, as long as underwriting is done, no fraud, no suicide before the 2-year period is up, and no AD&D benefits get triggered, because crimes isn’t really accidental.

Question 50

if you have 0.909% of dying, and you die, youre 1 in …. how many people?

Answer 50

0.909/100 = 0.00909
inverse of that: 110
aka 1 in 110 = 0.00909

Question 51

whats the max charity donation you can claim to reduce income taxes paid? and what if you died that year?

Answer 51

75% of net income

if you died, your estate would be doing your taxes, and you could claim 100% of charity donations of that year and the year before!

Question 52

if you’re buying a life insurance policy on your spouse but you’re concerned about making payments if you become disabled… who gets the underwriting?

Answer 52

both people need underwriting. me: my risk of disability
spouse: risk of death

Question 53

whats the anti-dump-in rule?

Answer 53

you thought that was a fake name but its not! it’s also called anti dump and 250% rule.

10th year accumulation fund value cant be 250% or more than 7th year

Question 53

how flexible are group insurance plans?

Answer 53

not very.

Question 54

can you use life insurance as an asset to pay off your mortgage?

Answer 54

yes, life insurance DB is an asset. mortgage is a liability.

Question 55

what QC document reduces risk of twisting and churning? what are those things anyway?

Answer 55

its not the LIDR, but the Notice of Replacement …

twisting is convincing the client to switch to a new plan in another company for own benefit, churning is same company.

Question 56

how do you calculate after-tax rate of return? and how would you calculate capitalization of net income?

Answer 56

net rate of return (ROI)
equals
gross rate of return (gross ROI)
minus
taxes on the rate of return (gross ROI x average weighted tax rate)

i.e.
gross % (1- average %)

thereform capitalization of that would be
net income
divided by
net (after-tax) return %

Question 58

What’s cheaper for term insurance: renewable with or without re-entry term?

Answer 58

With.

The re-entry term would result in a lower premium during the first term. This is because the insured has retained part of the risk. Upon renewal, the insured will have to provide evidence of insurability, and if his or her health has deteriorated, it would result in a higher than otherwise renewal rate.

Question 59

Samuel purchased a non-participating adjustable whole life policy. How would an increase in interest rates affect his policy?

Answer 59

Increased rates could mean increased stock return rates (but this is a whole life not universal)

But the insurer invests your premiums into growth accounts , so they might be getting higher returns than expected

Therefore you could be getting lower premiums because they are making more money from your previous premiums.

____

When the insurer established the premium, they considered three things:

Mortality rates.
Expected investment return received on invested premiums.
Expected costs associated with running the policy.
Assume a 2% investment return was estimated, but in actuality 3% was earned. This would allow the insurer to lower the amount that is required to fund the policy (premium).

Note: Samuel has a non-participating policy, which does not pay dividends at all.

Question 60

Explain : extended term insurance non-forfeiture option

Answer 60

Non forfeiture is if you didn’t die during the term , you can use your plan (cash value) for something else…

Extended term insurance is when you add term insurance at the end of the original term

So extended term non forfeiture option is when you cancel your life insurance and instead use your csv to add term at the end without premiums

(3-004) LIFE

Michael owns a whole life policy that has a face value of $800,000 and a cash value of approximately $100,000. The annual premium on the policy is $8,000, payable until age 100. Michael is considering taking a five-year sabbatical to tour the world and write a thesis.
While he is not concerned about the loss of income or increased expenses during that time, he asks if there is some way he can have relief from paying the premium on his policy. His only stipulation is that he would like to have the same level of coverage for a minimum of five years. He is adamant that if he dies within the next five years, his beneficiary must receive exactly $800,000.
Which of the following options would meet Michael’s needs?
Result
Answers
You answered incorrectly.
Incorrect
He could have the premiums paid by automatic premium loan (APL).

Correct Answer
He could choose the extended term insurance non-forfeiture option.

Under the extended term insurance non-forfeiture option:

• The premium is eliminated.
• Coverage (face value) remains the same.
• The policy is now term insurance.
  Under this option, if Michael no longer wants to pay premiums (ever), the insurance company will use the cash value available to buy a new policy that is completely paid for. The new policy will have the same coverage/face value but will be for a specific term (hence the word “term” in “extended term”). For example, Michael’s $100,000 cash value may purchase him $800,000 worth of paid-up term insurance for 22.12 years. Note that the length of this term would be based on his age, mortality rates, and the amount of cash value available, but it would not be subject to evidence of insurability.

Note: The length of this term would be based on his age, mortality rates, and the amount of cash value available, but it would not be subject to evidence of insurability.

By looking at the current cash value of $100,000 and the current premium of $8,000 per year, we can be confident that there is enough cash to provide at least five years of coverage under the extended term insurance option.

Let’s explore why the other answers are wrong:

The automatic premium loan (APL) feature would not result in the full $800,000 being paid to the beneficiaries because the outstanding loan would be deducted from the death benefit. For this reason, APL is not the best option for Michael.
The reduced paid-up insurance non-forfeiture option would result in a reduced amount of coverage (less than $800,000).
Surrendering his policy would result in no coverage because surrendering the policy means it is cancelled.

Question 61

How does taxation work in a participating WL policy?

Answer 61

The sharing of a surplus with policyholders is referred to as a “dividend”. Dividends on a participating policy are considered a partial refund of premium, and are therefore taxed differently from dividends on an investment. In fact, dividends on participating policies are often received tax free.

Question 62

Does the GIB ever require proof of insurability? What happens to premiums if you get additional insurance ? How does PUA compare?

Answer 62

Yeah if it’s added later than during the initial underwriting period.

Premiums increase when you activate GIB.

PUA Is paid up so it doesn’t affect premiums.

Question 63

What’s Reduced Paid-Up Non-Forfeiture Option ?

Answer 63

Use csv to :

• Premium is eliminated.
• Coverage (face value) is reduced.
• New coverage is still permanent (whole life).

Question 64

What are the non forfeiture options?

Answer 64

Whole life insurance has the following non-forfeiture benefits/options:

• Cash surrender value (CSV)
• Automatic premium loan (APL)
• Reduced paid-up insurance (not PUA - that’s a dividend option!!)
• Extended term insurance

Memory aid: The insurance company really does “CARE” about you, so they give you four non-forfeiture options.

Question 65

What can you do with dividends?? In par policies

Answer 65

do with any dividends that might be paid.

The five options are as follows:

Cash

Premium reduction

Paid-up additions (PUAs)

Accumulation

Term Insurance (one year)

Memory Aid: Can Participating Policies Accumulate Term?

Question 66

What’s more conservative: lcoi or yrt?

Answer 66

Lcoi because it doesn’t get more expensive with him AND because you’re not investing as much at the beginning (so less risky)

Lcoi is similar to t-100 in the cost over time

Question 67

What’s: Minimally Funded UL Policy

Answer 67

A minimally funded policy is one in which the policyholder has paid only just enough premium to cover the actual insurance costs and expenses of the policy but nothing more. The cash value of a minimally funded policy will be zero. This policy would have the greatest likelihood of lapsing.

Question 68

Can a UL be participating or non?

Answer 68

Nope, neither

Question 69

Why doesn’t ul have dividend options?

Answer 69

A UL policy is already unbundled (mortality cost, expenses, and investment return); therefore, there is no such thing as a “participating” UL policy. In other words, the UL policyholder accepts all the risk but also receives all of the rewards, so there is no need for the insurer to share any surplus as they would with a participating whole life policy.

Question 70

How do you get premium offset with a UL policy?

Answer 70

Purchase a UL policy and grow the cash value of the policy to a sufficient level that it can cover the mortality and expense deductions indefinitely.

Question 71

How’s the premium tax calculated:

Answer 71

% on the total “deposit” amount

Question 72

UL and Modal factor

Answer 72

It’s a trap. UL modal factor is 1:1 aka monthly is 1/12 = 0.0833
Aka 66.67$ / Month

Question 73

Modal factor: what does annualized payment mean?

Answer 73

It’s like when you add up all the monthly payments for a year, not what you’d pay if it was once a year

Question 74

Which of these keeps the coverage the same and removes premiums?

He could choose the extended term insurance non-forfeiture option.

He could have the premiums paid by automatic premium loan (APL).

He can exercise the reduced paid-up non-forfeiture option.

He could surrender his policy.

Answer 74

Extended term insurance non forfeiture option

Question 75

What kind of exemption did the exemption test refer to?

Answer 75

Tax exempt!

One of the advantages of being a tax-exempt life insurance policy is that any investment income earned within the policy is tax sheltered within certain limits. But all permanent insurance policies, and specifically UL, are subject to an exemption test. The exemption test is very detailed, but in layman’s terms, the test determines if the value of the investment account is reasonable considering the amount of coverage and how long the policy has been in force.

Maximum-Funded UL Policy

A maximum- (fully) funded policy is one in which the cash value (investment portion) within the policy is as high as it can be without failing the exemption test.

This is an exaggeration, but what do you think Canada Revenue Agency (CRA) would think if you had a UL insurance policy that offered only $5,000 in actual life insurance coverage, but the policyholder had made such large deposits (premiums) that there was $1,000,000 in the investment component? CRA would definitely argue that the policy looks more like an investment vehicle than a life insurance policy, and the policy would therefore not enjoy the tax-exempt status that life insurance policies typically do.

Question 76

In a ul if your investments exceed your death benefit, what amount does the beneficiary get at death?

Answer 76

The higher between the death benefit and the investment value.

Question 77

How do you calculate NAAR?

Answer 77

To determine the NAAR, ask yourself the following questions:

What would the death benefit be if the life-insured died today?
How much has accumulated in the investment component of the policy?
What is the difference?

Question 78

Mortality deductions and the investment component are interrelated, how?

Answer 78

Less mortality deductions means more money in the investment account

More complex investment means higher mortality costs

Deposits and rate of returns change investments and NAAR probably…. I dunno it’s all very interwoven

____

The following would increase the value of the investment component:

Larger deposits to the policy (more money going in)
Better investment returns (more money going in)
Smaller mortality deductions (less money coming out)
Lower policy expenses (less money coming out)
The following would decrease the value of the investment component:

Smaller deposits to the policy (less money going in)
Lower investment returns (less money going in)
Larger mortality deductions (more money coming out)
Higher policy expenses (more money coming out)

Question 79

How do you calculate NAAR?

Answer 79

NAAR = Death benefit – Investment account

Question 80

whats the prorated ACB?

Answer 80

prorated means proportional. so prorated ACB means the portion of ACB that’s proportional to the policy CSV, so it related to the policy loan.

prorated ACB is (policy loan value / CSV) x ACB

and ACB means Adjusted cost basis, and it’s used to calculate policy gain, which is taxable

Question 81

what’s the formula for ACB?

Answer 81

premiums paid minus NCPI plus/minus whatever in the table in chapter 7

Question 82

what does “last acquired” mean when we’re talking about taxation of policy gains?

Answer 82

There are two ways to calculate a policy’s ACB, depending on when the policy was last acquired.

“Last acquired” means the latest of the following dates:
 When the policy was first purchased;
 When ownership of the policy was transferred to the current policyholder
 When coverage under the policy was last modified or reinstated.

The last acquired date is also an important factor when determining a policy’s exempt or non-
exempt status, as discussed later in the Section Taxation of exempt vs. non-exempt policies.

For policies last acquired prior to December 2, 1982, in general the entire premium is added to the
policy’s ACB. For policies last acquired after December 1, 1982, only the portion of the premium that is added to the investment account is added to the policy’s ACB.

Question 83

is CPP death benefit taxable?

Answer 83

yes. unlike insurance plans DB.

Question 84

if an RRSP is worth 30K at death, and the person only contributed 10K (the rest is growth), how are estate taxes calculated?

Answer 84

MRT x RRSP total amount

it doesn’t matter how much of that was deposits, because it grew based on your intelligent choices.

Question 85

when your child is expected to live 15 years, and his costs are 3000$/year, what kind of insurance would be needed? term or perm?

Answer 85

perm!
what happens if he lives longer than 15 years? he still needs 3000$/yr minimum

Question 86

what’s the only type of insurance premiums that will keep the death benefit tax-free ?

aka, in which case can you deduct premiums from income?

aka in which case are insurance premiums tax-deductible?

BONUS: how much can you deduct from income???

Answer 86

only if you’re using the insurance to secure a loan for business or investments

otherwise, you must pay the premiums , even if it’s a business expense. it’s not tax-deductible.

BONUS answer: you can deduct the portion (prorated) of the coverage’s cost (only the NCOI portion of the premium) that you need to cover the biz expense (aka the loan) :

aka: lets say the loan is 1000$ and the policy is 1350$, then the portion is 1000/1350 = 74.07%

so if your premium is 750$/month of which 465$/month is the NCPI, then you can deduct from your monthly income: 74% of 465$/month

Question 87

what’s the difference between criss-cross insurance and business-owned insurance?

bonus: process by which shares and monies get transfered between beneficiaries and surviving partners…?

Answer 87

criss-cross insurance is when each biz partner is insured on the life of the other partner on the amount required to buy their shares if they die.

if there are more than 2 partners in the biz, it’s more appropriate to get a business-owned insurance, where the business gets the money and the people left split the shares… its a little complex, there’s a special word for that… i forget…

bonus points if you remember!

its also called a cross-purchase buy-sell agreement, business owned (therefore the business pays the premiums, owns the policy, and is the beneficiary of the DB), and the transfer stuff is done with a promissory note. the owners are the lives insured.
the insurance company pays the tax-free DB to the company (in a capital divident account CDA)

Question 88

if you need NET 4000$/month
and the ROI is 5%
and the MRT is 30%,

how much insurance do you need?

Answer 88

(4000$x12)/(0.05*(1-0.3))

net income/year
divided by
net return/year

48 000 / 0.035 = 1371428

Question 89

do WL policies generally include a disability clause where they allow you to pause premiums if you’re disabled?

Answer 89

no… if you have participating WL then you can add a waiver-of-premium dividend option for if you have disability (partial / total percentages apply)

or else, if you have non-par, then a waiver of premium rider i guess (not dividend)

Question 90

on a par WL plan, can you trust the dividend to pay the premium if you become totally disabled?

Answer 90

only if you have the premium waiver dividend option
AND
only if there is a dividend paid
AND
the amount will reduce the premium, but not necessarily pay it all.

Question 91

if the question is $$$$ table and how much would he receive after taxes if he surrendered the policy, what’s the approach here?

Answer 91

the approach is first calculate ACB (prorated on loan) or as per the ch. 7 table,

then you calculate policy gain

then you’re taxed on that according to MTR

Question 92

if you get totally disabled and you have waiver of premiums for total disability, which type of premiums still need to be paid (for riders etc)

Answer 92

none of the riders and suppl benefits need to be paid when you have the waiver of premiums rider for total disability and you’re totally disabled.

EXCEPT if the person who’s paying the premiums is not the same person whose life is insured…. because the disabled waiver of premiums rider is for the person paying. So if its say your parent whos paying, then you can have a parent waiver of premium (if the parent is disabled, or if you’re disabled and you want the parent to have a break too)

Question 93

what amount of taxes are paid on capital gain?

Answer 93

only 50% of CG is taxable, that means you take the MTR and apply it to 50% of the CG . that’s the amount of taxes you pay.

taxes paid: CG x 50% x MTR %

50% of CG is not a tax you’re paying , it’s the taxable AMOUNT

Question 94

whats the accumulating fund?

Answer 94

its the investment portion of a UL policy.

Question 95

what kind of risk does an interest-bearing deposit fund have?

Answer 95

that’s a low-risk thing, like my eSavings bank account. It’s a trade between me and my bank, i promise to put money here in exchange for a low but guaranteed interest.

Question 96

if your assets are in investment accounts, what should you consider when getting a life insurance?

Answer 96

among other things…., if they are in investments and are expected to grow, then you might want either an increasing insurance, or a GIB rider to increase your coverage later, or something like that.

Question 97

if you have a business loan of 1 000 000$ and a policy with a DB of 1350000$, and your monthly premiums are 750$/month, and the NCPI portion of that is 465$/month, then how much can you deduct from your monthly business income (for taxes)?

Answer 97

BONUS answer: you can deduct the portion (prorated) of the coverage’s cost (only the NCOI portion of the premium) that you need to cover the biz expense (aka the loan) :

aka: lets say the loan is 1000$ and the policy is 1350$, then the portion is 1000/1350 = 74.07%

so if your premium is 750$/month of which 465$/month is the NCPI, then you can deduct from your monthly income: 74% of 465$/month

Question 98

whats the difference between marginal tax rate and average tax rate?

Answer 98

average tax rate is the tax rate that is usually applied to earnings that are separate from total income taxes. So, like, for a calculation of insurance amount, the amount received each year

Question 99

whats the right of rescision?

Answer 99

you have a 10 day free look period to not take the thing without penalty

Question 100

whats the max $ in charitable donations that you can claim on your taxes?

Answer 100

75% of your annual (net) income that same year, that’s your max, but you can roll over unused tax credits 5 years back max.

you can use tax credits to reduce your total taxes paid but you can’t use it to collect a refund.

if your annual donation max is 10 000$ (75% of your income) and last year (up to 5 years ago) you donated 500$ and you didn’t claim your tax credit, you can claim it this year

Question 101

when can you not claim donation tax credit?

Answer 101

you can’t use it to get a refund, only to reduce the amount you need to pay.

you can’t claim more than 75% of your yearly net income (total, aka last year’s limits dont add on)

you can’t claim tax credits from over 5 years ago

Question 102

what happens to the charity tax credit if the tax payer has died?

Answer 102

the donation tax credit changes from 75% of income to 100% , for the year they died AND the previous year. ( you’d have to file an updated tax return for that year)

the dead person can only file a tax return the year of death, not any future years, because all that goes to the estate at time of death (no longer income)

Question 103

is a term rider free?

Answer 103

no it adds a premium cost, but it’s added to an existing policy so everything is managed together and there are no admin fees, so its cheaper.

Question 104

whats the difference between a CI policy and a dread-disease benefit rider?

Answer 104

the second one is like an accelerated DB and it’ll reduce the overall DB at death and might have interest on it. a CI plan is separate, and the benefit is additional.

Question 105

when you reduce your policy coverage, what happens? are you taxed?

Answer 105

reducing the coverage is like a partial surrender of the cash value. That means that the % surrendered is the same % of cash value, which will be received by the PH.

then you have to pay taxes on the policy gain which is partial CSV minus prorated ACB = poligy gain. and you’re taxed according to MTR.

Question 106

how is policy gain calculated when you have a policy loan?

Answer 106

you’re taxed on the policy gain, which is the policy loan (a portion of the CSV, like a partial surrender) minus the prorated ACB ( % loan/csv x total ACB). then taxes are calculated using MTR on the PG value.

Question 107

how do you prorate policies acquired before Dec 2 1982?

Answer 107

For policies last acquired prior to December 2, 1982, no prorating is required. !!!Withdrawals only
result in a policy gain once cumulative withdrawals exceed the entire policy’s ACB !!!

Question 108

what happens if the policy loan is less than the ACB (for example APL paying for premiums, but its less than ACB)?

and what happens to the ACB?

Answer 108

then poligcy gain formula (= loan - ACB) is negative which means you’re NOT taxed. it’s just like zero PG.

the ACB of the policy is reduced by the loan amount (because you’re no longer covered for the loan $ portion of the coverage).

Question 109

what happens when you repay the policy loan, or part of it?

and what happens if you repay more than you needed to in the first place?

Answer 109

when you take out a policy loan, you are taxed on the policy gain amount (loan - ACB)

so when you pay back the loan, it’s like you’re adding money, coverage, and value back into the account, with after-tax dollars, therefore
you can deduct the repayment from your taxable
income, up to the amount of the policy gain that you had to report when you took out the loan in the first place.

If you repay more than this amount, the excess will increase the policy’s ACB.

Question 110

lets say you took out a loan on your policy and the PG ended up being 20K. so the ACB was reduced and you were taxed on the PG amount.

Let’s say you pay back the entirety of your loan, what happens to your taxes and the ACB?

Answer 110

you paid taxes on the PG, and you no longer have a loan, so you gain back those taxes paid, by claiming the PG amount on your income taxes (your refund would be the MTR % of the PG)

the ACB, which was reduced for the time you had the loan, but if it’s repaid, the ACB goes back to its original value.

Question 111

which kinds of interest on policy loans are tax deductible?

Answer 111

only interest on loans that are used to create property or business income. not personal!

the interest in that case is deducted from the taxable income.

Question 112

are exempt policies tax deferred?

Answer 112

yes, tax-deferred means that the income earned on these policies are not taxable during the year it was earned.

Question 113

how long do you have to cancel creditor insurance and get your premiums back? & who puts the rules in place?

Answer 113

20 days is the minimum free-look period, defined by the CLHIA , for creditors insurance (and set by insurer)

Question 114

whats the fast way of calculating odds of death using risk of mortality by next bday?

Answer 114

100/ (number of people to die out of 100) or
100/(% prob of death).

e.g. 1/0.909%
= 1/(0.909 x100)
= 100/0.909 <==
=110
aka you have 1 chance in 110

or
1/ (prob of death, number out of 1, not %, which is out of 100)
e.g. 1/0.909%
= 1/ 0.00909
= 110

Question 115

whats the anti-dump rule?

Answer 115

its to prevent big deposits starting on the 7th year of a policy that’s been minimally funded until that point.

every year from 10th anniversary onward, the coverage is compared to the amount from 3 years prior and has to be under 250%

if that happens, the ETP is reset to the value on anniversary 3 years ago, which means MTAR is lower, which is the max reasonable value of the policy on a given year.

Question 116

which is cheaper? converting your term insurance to permanent or applying for a new policy?

Answer 116

well, we don’t really know, so it’s always best to inquire first than just converting without checking your choices.

Question 117

if you get 150K creditor insurance, but you only have 138K left to pay off at the time of your death, what happens to that 12K difference?

Answer 117

nothing. the creditor insurance is usually at the bank so the bank pays itself the outstanding loan (138K) and that’s it. no one gets 12K extra.

Question 118

when does the TIA expire?

Answer 118

earliest of :
- policy approved and DELIVERED
- 60/90 days (whatever the policy states)
- the applicant being informed in writing that he was denied the policy and that the TIA is no longer in force.

Question 119

what does insurer like to hear more: that the insured works in a low risk job, or that someone does many marathons and fitness activities?

Answer 119

the first one, because having good fitness and cardio health doesn’t mean you don’t have other health issues.

Question 120

does age misrepresentation make a policy void, in quebec?

Answer 120

no, you just adjust the fees and coverage according to new age, when discovered.

if the age was supposed to be not covered but they made a mistake, like if the PH is above 65 and the policy says under 65 then the insurer has 3 years from issue date to cancel the policy.

Question 121

when can the insurer void the contract?

Answer 121

• the PH is actually older than the policy’s maximum age
  AND
• life insured is still alive
  AND
• the error was noticed within 3 years of issue date
  AND
• the insurer voids the policy within 60 days of noticing the error

Question 122

if you acquired your policy in 1980 and you took out a loan for 4000$ and the ACB was 8000$ and the CSV is 12000$, whats the policy gain?

Answer 122

unless the loan is > ACB, no policy gain. ACB doesn’t get prorated, it just stays the same, so only if surrender or loan is > than ACB, then there’s a policy gain.

Question 123

how does taxation work on policy loans?

Answer 123

1. if policy loan > ACB:

policy gain = PL - ACB
taxes to pay = MRT% x PG

ACB set to 0

2. if PL < ACB:
   policy gain = 0
   taxes to pay = MRT% x 0 = 0
   ACB is original ACB minus PL amount

Question 124

who gets death benefit first: lenders or beneficiaries?

Answer 124

lenders first, then beneficiaries get the rest.

Question 125

whats reduced paid-up insurance (for WL)?

what’s the difference with Extended term insurance?

Answer 125

the premium is eliminated, but the coverage is reduced. and the policy is still permanent

ETI is when the coverage is the same, the premiums are eliminated, and the coverage went from Perm to Term/.

Question 126

non-forfeiture options?

Answer 126

CARE:

CSV
APL
Reduced paid-up ins.
Extended Term ins.

Question 127

when CG taxes are triggered, whose MRT are we using: the one who died or the beneficiary?

Answer 127

death is like selling your assets so the CG tax is on 50% of the CG, using the MTR of the deceased/

Question 128

if death benefit of 250K was paid out 6 months after the death, how much does the benefiicary get?

Answer 128

250K + any acrued interest over the 6 months.

Question 129

is lying cause for denying a claim, 5 years after the policy was issued?

Answer 129

yeah, fraud is fraud.

Question 130

when do taxes on non-exempt policies need to get paid?

Answer 130

every year the policy is in force and before the life insured dies.