Life Insurance Flashcards
Non forfeiture benefits
are those benefits that the policy owner does not forfeit, even if she chooses to discontinue payment of premiums.
These non-forfeiture benefits include:
- relinquishing the policy for its cash surrender value
- taking a paid up policy with some reduced amount of death benefit
- using the CSV to purchase and extended term life insurance policy; and
- borrowing from the insurance company against the CSV
Paid up policy
Is a life insurance policy that has not yet matured, but requires further payment of premiums.
A matured policy is one where the life insured has died.
Reduced paid up insurance option
Is an option that permits a policyowner to use the CSV of the policy as a net single premium to purchase paid up life insurance of the same plan as the original policy.
The policy owner must repay or settle any policy loans before exercising the paid-up option. The policyowner could settle any policy loans by accepting a lesser amount of paid up insurance than provided in the policy.
A policy owner does not need to repay the policy loan, but if she did, the death benefit would be greater by at least the amount of the policy loan. The death benefit would reflect the CSV of the policy. If the CSV of the policy is paid up before the date of maturity, the death benefit will be reduced.
What does an insurance premium consist of
provincial premium tax
broker commissions
administration fees
Every premium includes an administration fee, usually an annual fee of $75 or more
A premium tax on life insurance is a tax levied by the province. While rates may vary by province, they are typically about 2%.
Automatice premium loan provision
allows the policy owner to miss payments without having the insurance contract cancelled. The insurer issues a policy loan for the amount of the outstanding premiums, using the cash surrender value as collateral.
Premium holiday
is a feature that allows you to skip a premium, or series of premiums, provided there is sufficient cash in the cash surrender value in your policy. If the skipped premiums are not subsequently made up, the premium holiday will result in reduced cash values and/or death benefits in the future. You should be able to resume premium payments without penalty or cost.
Vanishing premium option
is an option available on certain kinds of life insurance policies to shorten the time span over which premiums need to be paid. The option was designed so dividends from the policy would be sufficient to pay the premiums after a number of years. However, due to the inherent nature of speculation, values on investment returns have a tendency to fluctuate reducing dividends, and consequently increasing the number of premium payments, often quite dramatically that must be made before the annual premium can vanish
Quick pay option
divides the amount of the payment over a small number of larger payments
Term 100 Insurance
is a permanent insurance that matures when the insured dies. The premiums stop if the life insured reached 100 years of age. Term 100 can also be issued a joint-life or last-to-die policy. The premiums are set at a fixed monthly or annual amount. Most term 100 insurance contracts do not build up cash surrender value, have no loan value, and do not pay dividends. Therefore, they are less expensive than whole life insurance contracts.
Whole life insurance or straight life insurance
Is permanent insurance that provides protection for the whole of the insured’s life, not just for a specified term. Whole life insurance is a form of permanent life insurance with a fixed annual or monthly premium that is payable for the entire lifetime of the insured. Premiums can be paid on a continuous payment basis over the insured’s life or on any limited basis, such as single payment or annually for 10 years. With whole life policies, the premium rate is established at the time the policy is purchased and is guaranteed not to increase for the life of the contract. Whole life insurance contracts are also referred to as straight life insurance interchangeably.
Universal Life
Provides level of flexibility not available in other life insurance vehicles. Universal lIfe plans offer the policy owner complete freedom in regard to amount, frequency, timing, and duration of deposits, subject only to the restrictions of the ITA and the need to maintain sufficient value within the contact to pay for all insurance costs and expenses.
The flexibility permits the policyowner to maximize the insurance and investment benefits of the policy, to tailor premiums to a personal variable income pattern and to generally customize the contract’s cash flow to suit the policy owner’s circumstances and preferences.
However, there are constraints upon this flexibility.
- the premium deposits, plus accumulated investment income, must be sufficient to pay for all expenses and deductions.
- the premium deposits plus accumulated investment income less expenses and deductions may not exceed the maximum amount allowable in an exempt life insurance contract, under the exempt policy test in the ITA regulations.
- Most UL plans have a specified minimum premium for the first year, or the first 5 years, that the policy is in force.
- It must be realized that changes to the planned premium pattern will impact the performance of the UL Plan.
UL polices - exempt and non-exempt investments
The investments included in the accumulating fund of an EXEMPT policy are exempt investments. These investments often include daily interest or T-bill savings, GICs, and a variety of interest bearing linked accounts. Linked accounts have performance tied to an outside indicator and their net account value can fluctuate up or down with the indicator. The return on linked account is almost never guaranteed, although there may be a minimum return guarantee.
The investments included in the accumulating fund of a non-exempt policy or a non-exempt side fund are non-exempt investments. The non-exempt portion of the UL investment can offer all of the same investments that are in the exempt portion - with the added element of seg funds. Often, the investment options are limited to a series of segregated funds. The non-exempt investments produce taxable income.
Side fund
is an accumulated fund external to the policy and does not get incorporated into the death benefit. Investments held within the fund are non-exempt for tax purposes, and any income or capital gains must be reported annually. The side fund does not affect the net amount at risk to the insurance company, and deposits are not subject to provincial premium tax.
How is the cash surrender value calculated?
(Current account value - outstanding policy loans - surrender charges)
Can obtain the CSV of the policy by a policy loan in this UL policy or as a recovery upon cancellation of the policy.
Assuris
Assuris insures, within limits, Canadian policy owners against loss of benefits should a member of Assuris become insolvent and be forced to wind up its affairs. Life insurance companies licensed to write life insurance in Canada are required to be members of Assuris.
The death and maturity guarantee is calculated as:
(Cost basis for the guarantee x gurantee rate)
Deposits made by policyowners in Individual Seg fund policies are invested in pools of assets. The assts of these funds and their value to investors are not impacted by insolvency. Policies often provide guaranteed amounts (usually 75% or more of the amounts invested) at specified maturity dates and at death. These guarantees might be impaired by insolvency. Assuris only provides coverage for seg fund policies that contain such death and maturity guarantees.
If a life insurance company fails, Assuris guarantees that on transfer, policyholders will retain 85% of the promised insurance benefits. These insurance benefits include death, health expenses, monthly income and cash value.
Policyholders may have benefits in each of individual and individual registered categories of coverage. For each category of coverage, total guaranteed seg fund benefits are fully covered up to $60,000. If total benefits exceed this amount, Assuris covers 85% of the promised benefits, but not less than $60,000.
Minimum amount an insurance company must pay in seg fund? (Weird question - #25/67 of life insurance)
Under the Insurance Acts, the insurance company must provide a guarantee of the net capital contributed to the seg fund. The guarantee applies to each deposit or contribution.
Once 10 years has passed since the deposit has been made, an amount of net capital has been contributed for, the insurance company must pay an amount to the seg fund such that the amount in the seg fund for that deposit is worth at least 75% of the net capital contributed in that deposit to the seg fund. Many insurance companies guarantee 100% of the net capital contributed to the seg fund.
Death benefit from a seg fund
Is any excess of guarantee amounts over the FMV paid upon the death of the annuitant. However, a death benefit from a seg fund is a return of capital, not a death benefit from a lfe insurance company.
Upon notification of death of the annuitant, a death benefit will be payable to the beneficiaries. All deposit maturity guarantees under the seg fund contract come due on the death benefit date.
The death benefit for each policy year is calculated as:
-The greater of A and B
A=the deposit value or existing guarantee less proportional reductions for withdrawals for each policy year; and
B = the market value of the units of the contract representing the above deposit value on the death benefit date.
Policy year
For the first year, the policy year starts on the contract day and ends on the anniversary date. The first policy year is for one year plus one day. For subsequent years, the policy year starts on the day following the anniversary date and ends on the next anniversary date. Any deposits made during a policy year are grouped together and share the same deposit maturity date. If the fund owner resets the guarantee, the policy year will start from the reset date.
