LIFE INSURANCE 1

Question 1

**USING LIFE INSURANCE

To calculate the amount of capital required to meet a client’s financial needs, you would:

[List 3]**

Answer 1

[1] First, prepare an asset inventory, detailing the value of the assets that would form the individual’s estate at death.

[2] Second, determine the estate’s obligations at death, based on the immediate cash needs at death.

[3] Third, calculate the ongoing income needs of the survivors.

Question 2

**NOTES / INSURANCE CONTRACTS

Insurance contracts, unlike other business contracts, are not subject to negotiation and redrafting. The purchaser—the person who makes a contract with an insurer—must accept the entire contract, with all of its terms and conditions. Thus, insurance contracts are considered contracts of adhesion and any ambiguities or uncertainties are normally interpreted by the courts in favour of the purchaser.**

Answer 2

**NOTES / INSURANCE CONTRACTS

Insurance contracts, unlike other business contracts, are not subject to negotiation and redrafting. The purchaser—the person who makes a contract with an insurer—must accept the entire contract, with all of its terms and conditions. Thus, insurance contracts are considered contracts of adhesion and any ambiguities or uncertainties are normally interpreted by the courts in favour of the purchaser.**

Question 3

**USING LIFE INSURANCE

A _ _ _ _ is used to estimate the amount of insurance a client will require to meet the immediate and future financial needs of surviving dependants.**

Answer 3

A capital needs analysis is used to estimate the amount of insurance a client will require to meet the immediate and future financial needs of surviving dependants.

Question 4

**USING LIFE INSURANCE

What financial needs should be considered when estimating replacement income?

[List 6]**

Answer 4

[1] Final Expenses
[2] Mortgage
[3] Education Funds
[4] Emergency Funds
[5] Income for Survivors
[6] Special Bequests

Question 5

**USING LIFE INSURANCE

The most common use of life insurance is to replace the income stream lost to a family if a member dies. However, life insurance has several other business and personal applications, which include:

[List 4]**

Answer 5

**[1] Buy-sell agreements

[2] Key person insurance

[3] Income taxes on RRSPs/RRIFs at death

[4] Income taxes on the family cottage**

Question 6

**NOTES / BUY-SELL AGREEMENT

[1] Buy-sell agreements are useful if two or more individuals share the ownership of a private corporation.

[2] The buy-sell agreement provides for the orderly transfer of shares from one shareholder to another, in the event of premature death, disability, retirement, or disagreement among shareholders.

[3] If a buy-sell agreement is set up and one shareholder dies, the surviving shareholder(s) purchases all the shares of the deceased at a specified price.**

Answer 6

**NOTES / BUY-SELL AGREEMENT

[1] Buy-sell agreements are useful if two or more individuals share the ownership of a private corporation.

[2] The buy-sell agreement provides for the orderly transfer of shares from one shareholder to another, in the event of premature death, disability, retirement, or disagreement among shareholders.

[3] If a buy-sell agreement is set up and one shareholder dies, the surviving shareholder(s) purchases all the shares of the deceased at a specified price.**

Question 7

**USING LIFE INSURANCE

An arrangement should be made for funding the share purchase. Life insurance is usually the most cost-effective way to ensure that the funds are available when needed. A _ _ _ _ _ownership approach is frequently used.**

Answer 7

**USING LIFE INSURANCE

An arrangement should be made for funding the share purchase. Life insurance is usually the most cost-effective way to ensure that the funds are available when needed. A CRISS-CROSS ownership approach is frequently used.**

Question 8

**NOTES / INSURING AGREEMENT

Insuring agreement - describes the covered perils, or risks assumed, or nature of coverage, or makes some reference to the contractual agreement between insurer and insured. It summarizes the major promises of the insurance company, as well as stating what is covered.**

Answer 8

**NOTES / INSURING AGREEMENT

Insuring agreement - describes the covered perils, or risks assumed, or nature of coverage, or makes some reference to the contractual agreement between insurer and insured. It summarizes the major promises of the insurance company, as well as stating what is covered.**

Question 9

**USING LIFE INSURANCE

Key person insurance is a life insurance policy taken out by a business on the life of _ _ _ _**

Answer 9

USING LIFE INSURANCE

Key person insurance is a life insurance policy taken out by a business on the life of the KEY EMPLOYEE

Question 10

NOTES / How can life insurance be used to pay income taxes on RRSPs/RRIFs at death?

[1] Large amounts of tax may be payable on the funds within an RRSP/RRIF when a surviving spouse dies.

[2] When the first spouse dies, the deceased’s RRSPs/RRIFs can be transferred to the RRSP/ RRIF of the surviving spouse with no tax consequences (as long as the surviving spouse is the named beneficiary).

[3] However, when the surviving spouse dies, the total value of these plans is considered income in the year of death and can result in a large amount of tax payable.

[4] One option is to take out an estate-protector type of life insurance policy. It can be designed so that when the first spouse dies, further premiums are waived.

[5] The policy pays a death benefit equal to the approximate amount of taxes due at the death of the surviving spouse. The death benefit from the life insurance policy can be used to pay the final income taxes, and the full balance in RRSPs/RRIFs can pass on to the heirs.

Answer 10

NOTES / How can life insurance be used to pay income taxes on RRSPs/RRIFs at death?

[1] Large amounts of tax may be payable on the funds within an RRSP/RRIF when a surviving spouse dies.

[2] When the first spouse dies, the deceased’s RRSPs/RRIFs can be transferred to the RRSP/ RRIF of the surviving spouse with no tax consequences (as long as the surviving spouse is the named beneficiary).

[3] However, when the surviving spouse dies, the total value of these plans is considered income in the year of death and can result in a large amount of tax payable.

[4] One option is to take out an estate-protector type of life insurance policy. It can be designed so that when the first spouse dies, further premiums are waived.

[5] The policy pays a death benefit equal to the approximate amount of taxes due at the death of the surviving spouse. The death benefit from the life insurance policy can be used to pay the final income taxes, and the full balance in RRSPs/RRIFs can pass on to the heirs.

Question 11

**INSURANCE CONTRACTS

In the common-law provinces the contents of a life insurance policy are specified in the _ _ _ _ Act.**

Answer 11

INSURANCE CONTRACTS

In the common-law provinces the contents of a life insurance policy are specified in the Uniform Life Insurance Act.​

Question 12

**INSURANCE CONTRACTS

TRUE OR FALSE?

Insurance contracts, unlike other business contracts, are not subject to negotiation and redrafting.**

Answer 12

ANSWER: True

Question 13

**INSURANCE CONTRACTS

Insurance contracts are considered contracts of _ _ _ and any ambiguities or uncertainties are normally interpreted by the courts in favour of the purchaser.**

Answer 13

**INSURANCE CONTRACTS

Insurance contracts are considered contracts of adhesion and any ambiguities or uncertainties are normally interpreted by the courts in favour of the purchaser.**

Question 14

**INSURANCE CONTRACTS

What are the five elements of a valid life insurance contract?**

Answer 14

**INSURANCE CONTRACTS

[1] Valid offer and acceptance
[2] Legally competent parties
[3] Consideration
[4] Genuine intention
[5] Lawful object**

Question 15

**INSURANCE CONTRACTS

What types of life insurance contracts are there?**

Answer 15

[1] Two Party
[2] Third Party
[3] Group Insurance

Question 16

**INSURANCE CONTRACTS

Who are the parties involved in a third party life insurance contract?**

Answer 16

**The three parties are the:

[1] Owner (purchaser)
[2] Person whose life is insured
[3] Insurer**

Question 17

**INSURANCE CONTRACTS

Who are the parties involved in a group insurance contract?**

Answer 17

**In a group insurance contract the parties are the:

[1] Company/Organization
[2] Individuals who are insured
[3] Insurer**

Question 18

**INSURANCE CONTRACTS

What documents are included in every life insurance policy contract?**

Answer 18

**The insurance contract is made up of the following documents:

[1] A copy of the signed application
[2] The declarations page
[3] The insuring agreement
[4] Documents attached at policy issue for any riders and benefits
[5] Revisions to the contract agreed upon in writing after the policy is issued**

Question 19

**INSURANCE CONTRACTS

What items constitute a contract?

The following items should be included in every policy contract:

[1] The identity of the parties to the contract
[2] The policy period
[3] Face or benefit amount
[4] Conditions under which the face or benefit amount becomes payable
[5] Amount and frequency of premiums payable
[6] Period of grace for payment of premium
[7] Whether the policy participates in a distribution of surplus
[8] How the contract is reinstated if the policy holder lets it lapse

Options, if applicable, of:

[1] surrendering the policy
[2] obtaining a policy loan
[3] obtaining paid-up or extended insurance**

Answer 19

**INSURANCE CONTRACTS

What items constitute a contract?

The following items should be included in every policy contract:

[1] The identity of the parties to the contract
[2] The policy period
[3] Face or benefit amount
[4] Conditions under which the face or benefit amount becomes payable
[5] Amount and frequency of premiums payable
[6] Period of grace for payment of premium
[7] Whether the policy participates in a distribution of surplus
[8] How the contract is reinstated if the policy holder lets it lapse

Options, if applicable, of:

[1] surrendering the policy
[2] obtaining a policy loan
[3] obtaining paid-up or extended insurance**

Question 20

**INSURANCE CONTRACTS

Why is a life insurance policy a valued contract?**

Answer 20

A life insurance policy is a valued contract because the amount of the benefit is
specified in advance when the contract is signed.

Question 21

**INSURANCE CONTRACTS

The _ _ _ summarizes the major promises entered into by the insurer under the contract. It states what the insurer promises to do and under what conditions it will fulfil those promises.**

Answer 21

The insuring agreement summarizes the major promises entered into by the insurer under the contract. It states what the insurer promises to do and under what conditions it will fulfil those promises.

Question 22

**INSURANCE CONTRACTS

The insured gives two forms of consideration:**

Answer 22

• *1. Money, in the form of a premium
  2. A promise to abide by the provisions and stipulations in the contract**

Question 23

**INSURANCE CONTRACTS

In exchange, the insurer’s consideration is a contingent promise to pay the insured if a specified event occurs. This is known as an _ __ _ contract in that the values exchanged are not equal.**

Answer 23

In exchange, the insurer’s consideration is a contingent promise to pay the insured if a specified event occurs. This is known as an aleatory contract in that the values exchanged are not equal.

Question 24

**INSURANCE CONTRACTS

Why are life insurance contracts unilateral contracts?**

Answer 24

Most life insurance contracts are unilateral contracts. This means that only the insurer makes an enforceable promise. The insured can walk away from the contract at any time.

For example, once a life insurer has accepted the risk and issued a policy, it is compelled to honour its terms, regardless of any changes in health of the insured. However, the insured can cancel the contract and stop premium payments at any time.

Question 25

**INSURANCE CONTRACTS

What is meant by the principle of indemnity?**

Answer 25

**One of the basic principles of insurance law is the principle of indemnity.

The principle of indemnity states that the insured should be restored to approximately the same
financial position as existed before the loss and should not profit from the loss.**

Question 26

**INSURANCE CONTRACTS

This reduces people’s temptation to intentionally cause a loss in order to collect money that exceeds the amount of the loss.**

Answer 26

The Principal of Indemnity

Question 27

How do you define an insurable interest?

Answer 27

**An insurable interest means that the applicant would suffer a loss if the person whose life is insured died.

A person is said to have an insurable interest in:

[1] Their own life
[2] The life of their spouse, child, grandchild
[3] The life of any person upon whom the insured depends for support
[4] Any person in whose life the insured has a pecuniary (relating to money) interest, such as an employee or business partner**

Question 28

**NOTES / INSURABLE INTERESTS

The insurer must be satisfied that a non-family relationship constitutes an insurable interest before it will issue a policy.

The concept of insurable interest is only of concern at the time of application/issue of the policy. An insurable interest does not have to exist throughout the duration of the policy. For example, if Rita and Sheila are business partners and buy life insurance policies on one another’s lives, these policies will remain valid even if Rita and Sheila’s business relationship ends and they go their separate ways.**

Answer 28

**NOTES / INSURABLE INTERESTS

The insurer must be satisfied that a non-family relationship constitutes an insurable interest before it will issue a policy.

The concept of insurable interest is only of concern at the time of application/issue of the policy. An insurable interest does not have to exist throughout the duration of the policy. For example, if Rita and Sheila are business partners and buy life insurance policies on one another’s lives, these policies will remain valid even if Rita and Sheila’s business relationship ends and they go their separate ways.**

Question 29

Can a policy can still be issued if there is no insurable interest?

Answer 29

Yes, the individual to be insured must consent to this in writing and the insurer must be willing to issue the policy.

Question 30

An agent is a person _ _ _.

Answer 30

An agent is a person authorized to act for another person.

Question 31

An agency contract stipulates_ _ _.

Answer 31

An agency contract stipulates the rights and duties between an agent or Advisor and the insurer.

Question 32

_ _ _ _ provide the client with a 10-day “free-look” period, commencing on the date of policy delivery, to review and consider the contract.

Answer 32

Rescission rights provide the client with a 10-day “free-look” period, commencing on the date of policy delivery, to review and consider the contract.

Question 33

**NOTES / RESCISSION RIGHTS

If the applicant returns the contract to the insurer within the 10-day period (10 calendar days), the insurer will cancel the policy and refund any premium paid to date. Applicants do not have to provide a statement explaining why they are returning the contract.**

Answer 33

**NOTES / RESCISSION RIGHTS

If the applicant returns the contract to the insurer within the 10-day period (10 calendar days), the insurer will cancel the policy and refund any premium paid to date. Applicants do not have to provide a statement explaining why they are returning the contract.**

Question 34

Life and health insurance contracts provide a _____ of 30 or 31 days after the premium due date for the policyholder (or insured) to pay the premium.

Answer 34

Life and health insurance contracts provide a grace period of 30 or 31 days after the premium due date for the policyholder (or insured) to pay the premium.

Question 35

What happens if the life insured dies during the grace period?

Answer 35

If the life insured dies during the grace period, the insurer would pay the full face amount of the policy, less any outstanding premiums.

Question 36

**DEFINITION OF ‘NONFORFEITURE CLAUSE’

A clause in an insurance policy that allows for the insured to receive all or a portion of the benefits or a partial refund on the premiums paid if the insured misses premium payments, causing the policy to lapse. The nonforfeiture clause may only be in effect for a limited period of time, and may only kick in after the policy has been active for several years.**

Answer 36

**DEFINITION OF ‘NONFORFEITURE CLAUSE’

A clause in an insurance policy that allows for the insured to receive all or a portion of the benefits or a partial refund on the premiums paid if the insured misses premium payments, causing the policy to lapse. The nonforfeiture clause may only be in effect for a limited period of time, and may only kick in after the policy has been active for several years.**

Question 37

List the 4 non-forfeiture options?

Answer 37

[1] Automatic premium loan
[2] Cash surrender
[3] Reduced paid-up insurance
[4] Extended term insurance

Question 38

Describe an automatic premium loan?

Answer 38

If a premium is not paid within the grace period, the insurer will issue a loan against the policy’s cash value for the amount of the premium and keep the policy in force.

Question 39

The _ _ _ _ _ option allows the policyholder to exchange the policy’s cash value for a fully paid-up policy with a reduced coverage amount. Paid-up means that the policy is fully paid for and no further premium payments are required.​

Answer 39

The reduced paid-up option allows the policyholder to exchange the policy’s cash value for a fully paid-up policy with a reduced coverage amount.

Paid-up means that the policy is fully paid for and no further premium payments are required.​

Question 40

The _ _ _ _ option provides the opportunity to exchange the policy’s cash value for a term insurance policy with the same amount of coverage.

Answer 40

The extended term insurance option provides
the opportunity to exchange the policy’s cash value for a term insurance policy with the same amount of coverage.

Question 41

**TRUE OR FALSE?

With the extended term insurance no further premiums are payable.**

Answer 41

ANSWER: True

Question 42

NOTES / EXTENDED TERM INSURANCE

The extended term insurance option provides
the opportunity to exchange the policy’s cash value for a term insurance policy with the same amount of coverage. No further premiums are payable. The duration of the extended term insurance coverage is based on the cash value of the policy and the age and sex of the insured. It will be less than the original policy; for example, the duration could be two years and four months.

Answer 42

**NOTES / EXTENDED TERM INSURANCE

The extended term insurance option provides
the opportunity to exchange the policy’s cash value for a term insurance policy with the same amount of coverage. No further premiums are payable. The duration of the extended term insurance coverage is based on the cash value of the policy and the age and sex of the insured. It will be less than the original policy; for example, the duration could be two years and four months.**

Question 43

What is reinstatement?

Answer 43

If a policy lapses due to a non-payment of premiums, the policyholder has an opportunity to reinstate the policy if certain conditions stated in the policy are met.

Question 44

**If a policy lapses due to a non-payment of premiums, the policyholder has an opportunity to reinstate the policy if certain conditions stated in the policy are met. The conditions include:

[List 3]**

Answer 44

[1] Providing satisfactory evidence of insurability
[2] Paying all premiums in default, with interest
[3] Repaying any loans that are outstanding, including interest

Question 45

Typically, a policyholder has ___ years from the lapse date to reinstate the policy.

Answer 45

Typically, a policyholder has two years from the lapse date to reinstate the policy.

Question 46

What is a suicide clause?

Answer 46

**[1] If death by suicide occurs within two years of the policy issue date, the contract is considered void and the insurer is not required to pay the death benefit.

[2] Instead, the insurer returns the total amount of premiums paid to the beneficiary.

[3] Some insurers use a one-year rather than a two-year suicide period.

[4] If death by suicide occurs more than two years from the policy date, the full amount of the death benefi t is paid.**