LIFE INSURANCE 1 Flashcards
**USING LIFE INSURANCE
To calculate the amount of capital required to meet a client’s financial needs, you would:
[List 3]**
[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.
**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.**
**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.**
**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.**
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.
**USING LIFE INSURANCE
What financial needs should be considered when estimating replacement income?
[List 6]**
[1] Final Expenses
[2] Mortgage
[3] Education Funds
[4] Emergency Funds
[5] Income for Survivors
[6] Special Bequests
**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]**
**[1] Buy-sell agreements
[2] Key person insurance
[3] Income taxes on RRSPs/RRIFs at death
[4] Income taxes on the family cottage**
**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.**
**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.**
**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.**
**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.**
**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.**
**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.**
**USING LIFE INSURANCE
Key person insurance is a life insurance policy taken out by a business on the life of _ _ _ _**
USING LIFE INSURANCE
Key person insurance is a life insurance policy taken out by a business on the life of the KEY EMPLOYEE
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.
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.
**INSURANCE CONTRACTS
In the common-law provinces the contents of a life insurance policy are specified in the _ _ _ _ Act.**
INSURANCE CONTRACTS
In the common-law provinces the contents of a life insurance policy are specified in the Uniform Life Insurance Act.
**INSURANCE CONTRACTS
TRUE OR FALSE?
Insurance contracts, unlike other business contracts, are not subject to negotiation and redrafting.**
ANSWER: True
**INSURANCE CONTRACTS
Insurance contracts are considered contracts of _ _ _ and any ambiguities or uncertainties are normally interpreted by the courts in favour of the purchaser.**
**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.**
**INSURANCE CONTRACTS
What are the five elements of a valid life insurance contract?**
**INSURANCE CONTRACTS
[1] Valid offer and acceptance
[2] Legally competent parties
[3] Consideration
[4] Genuine intention
[5] Lawful object**
**INSURANCE CONTRACTS
What types of life insurance contracts are there?**
[1] Two Party
[2] Third Party
[3] Group Insurance
**INSURANCE CONTRACTS
Who are the parties involved in a third party life insurance contract?**
**The three parties are the:
[1] Owner (purchaser)
[2] Person whose life is insured
[3] Insurer**
**INSURANCE CONTRACTS
Who are the parties involved in a group insurance contract?**
**In a group insurance contract the parties are the:
[1] Company/Organization
[2] Individuals who are insured
[3] Insurer**
**INSURANCE CONTRACTS
What documents are included in every life insurance policy contract?**
**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**
**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**
**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**
**INSURANCE CONTRACTS
Why is a life insurance policy a valued contract?**
A life insurance policy is a valued contract because the amount of the benefit is
specified in advance when the contract is signed.
**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.**
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.
**INSURANCE CONTRACTS
The insured gives two forms of consideration:**
- *1. Money, in the form of a premium
2. A promise to abide by the provisions and stipulations in the contract**
**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.**
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.
**INSURANCE CONTRACTS
Why are life insurance contracts unilateral contracts?**
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.