Risk Management and Insurance

Question 1

Critical Illness policy types

Answer 1

Term (cheapest) can be switched to long term care insurance and is convertible to permanent. usually guaranteed renewable, non cancellable. return of premium may apply.
Permanent - more expensive, no csv or investment component. usually include return of premium rider. only offered on fully underwritten basis.
group - many convertible to individual without underwriting (30 day conversion)

many include medical consultation

Question 2

Anti Selection

Answer 2

Due to anti-selection risks (people who may have a strong reason to suspect they will have a claim in the near future) cancer coverage typically includes a 90-day period after the policy is purchased where no claims are possible.

Question 3

Survival period

Answer 3

must live this long after diagnosis to receive benefits (can pay sooner based on doctor assessment)

Question 4

Return of premium

Answer 4

cancellation, at death, maturity or expiry

Question 5

When CI doesnt pay

Answer 5

non life threatening injury (10-15%), exclusions, cancer claim within 90 days, claim within survival period, committing a criminal offence, failed suicide, self inflicted injury, non-prescription drugs, poisonous gas inhalation, civil disorder, dui

Question 6

Riders

Answer 6

LTCI conversion, medical consultations, total disability (loss of independent existence), waiver of premium (any occupation), second event benefit (can’t be related to first), child rider (but condition on children), inflation protection

Question 7

LTCI coverage

Answer 7

daily living - eating dressing, bathing, toileting, bodily mobility

covers facility, homecare, respite, hospice, palliative

Question 8

How LTCI benefits are paid

Answer 8

reimbursement - pay for expenses as they arise
indemnity - will max out at a certain amount, if costs are less than maximum, extend the benefit period
income - set amount for a set period, like disability

Question 9

LTCI benefit period and elimination period

Answer 9

100-250 weeks or lifetime
elimination period of 90-180 days

Question 10

Features of policies

Answer 10

generally price goes up every 5 years.
first payment bonus -(to cover expenses during elimination period)
medical equipment, waiver of premium, non forfeiture (term or reduced paid up), 3rd party notification of missed premium, return of premium, inflation, future purchase option

Question 11

ACB

Answer 11

premiums paid (excluding riders and benefits but including term riders) - dividends received (par whole life from cash or savings components) - net cost of pure insurance adjusted for any rating on policy (cost of term policy minus fees). taxed as income, not cap gains

Question 12

Policy loan

Answer 12

can borrow certain percentage of cash value. any amount borrowed above acb is taxed as income. tax deduction if loan repaid. outstanding loan deducted from death benefit. interest repayments increase acb of loan for personal use (not for business use)

Question 13

Partial surrender

Answer 13

25k acbv and 60k csv. surrendering 20k of policy results in 40k csv remaining, 16,668 acb and 35k * .333 = 11,665 taxable income.

Question 14

Assignment/annuitization/lapse

Answer 14

1)taxable as surrender, unless asigned to spouse, child or grandchild (if they are the life insured)
2)treated as a total surrender. payments received over period of time
3)lapse, rare because of non forfeiture

Question 15

Events that arent dispositions

Answer 15

collateral assignment, using csv as collateral,

Question 16

Charitable giving and taxation (insurance)

Answer 16

deductible from income as long as no third party contract in place. can assign policy during lifetime and claim deduction to offset disposition. if owner pays premiums, those are deductible as well. no advantage on death

Question 17

Tax Avoidance

Answer 17

considered non exempt and taxed as a disposition, ANY FUTURE growth taxed as income. insurer can either increase death benefit or move funds out of the account within 60 days of failing exemption test. policies tested against 3.5% rate of growth up to age 90 (Maximum tax actuarial reserve)

Question 18

Charity in will vs beneficiary designation

Answer 18

beneficiary designation avoids probate but if charity no longer exists, other charities can apply to receive the funds. leaving it in a will may give executor pwoer to make decision in this scenario.

Question 19

When using life insurance to invest makes sense

Answer 19

registered plans are maxed, there is an insurance need, there are advantages for a corporation, the cost of insurance is low enough to remain affordable. works when in high tax bracket (compared to non reg). may not make sense in corps with more than one shareholder (unless there is a business need). taxed as pasive income and included as passive asset in asset test for lcge

Question 20

Insurance Policy Valuation

Answer 20

pv of death benefit -pv of premiums to be paid (assumes a projected mortality, based on health). easier to determine value on a healthy person

Question 21

Tax implications dependent on beneficiary

Answer 21

-corp, no tax implications
shareholder or spouse - assessed a taxable benefit, no deduction for corp
employee - taxable benefit but corp can deduct
parent corp - same as naming shareholder
subsidiary - same as naming corp

Question 22

Transfers with tax implications

Answer 22

corp to shareholder/employee - taxed as passive income based on fmv (pays tax on dividend - anything paid for the policy). better to apply for new policy if healthy
cda based on death benefit - acb.
liability insurance (not taxable) and business interruption (taxable)- tax deductible
corp cii not eligible for cda if paid to corp.

Question 23

Paid up additions affect on csv and death benefit

Answer 23

will raise them each year. increase of csv increase share value of corp

Question 24

Employee benefit

Answer 24

deductible as expense as long as its available to all employees. otherwise shareholder will receive a shareholder benefit and no tax deduction available

Question 25

Policy loan

Answer 25

40-75% for UL policy and 50-90% for WL. debt need not be serviced. interest still deductible whether paid or payable.

Question 26

IFA Accumulating Fund/WL

Answer 26

can borrow every dollar put in policy in the year its contributed (not like normal policy where csv has to build 8-10 years. borrowing personally can either pay for insurance share (or transfer share) or pay a guarantors fee to create arms length relationship (and avoid shareholder benefit)
WL -accumulating funds value cannot decrease, effective because returns are almost guaranteed.
UL-less effective because of variable returns. Usually use yearly renewable term structure to invest more in early years

Question 27

PUA

Answer 27

Paid-up additional life insurance can be thought of as small chunks of whole life insurance purchased with dividends from a whole life policy. Each paid-up addition (PUA) has its own death benefit and cash value, and also earns dividends. This makes them an effective way to increase the cash value and death benefit over time without medical underwriting or increasing the premium payment.

Question 28

Cash Value retirement income strategies

Answer 28

IRP - borrow using accumulating fund as collateral in retirement. csv will appreciate at around 4% per year and interest can be capitalized. CSV adds to death benefit. is income worth leaving less money to heirs
Corp IRP - corp borrows funds then pays to shareholder as a dividend (lower tax risk)

Question 29

RCA

Answer 29

Insurance held within RCA and 50% is invested to cover cost of insurance, remainder is invested,. Returns can eventually be used to pay policy and don;t attract withholding taxes

insurance held in corp and rca holds investment portion. corp uses after tax dollars to pay for insurance. corp will have to pay insurance premiums until employee dies.

Question 30

BOE/CGL (liability)

Answer 30

overhead expense coverage, deductible.
liability not deductible. neither has any value when transferred from personal to corp