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