Risk Management and Insurance Flashcards
Critical Illness policy types
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
Anti Selection
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.
Survival period
must live this long after diagnosis to receive benefits (can pay sooner based on doctor assessment)
Return of premium
cancellation, at death, maturity or expiry
When CI doesnt pay
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
Riders
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
LTCI coverage
daily living - eating dressing, bathing, toileting, bodily mobility
cognitive impairment
premiums guaranteed for up to 5 years
covers facility, homecare, respite, hospice, palliative
How LTCI benefits are paid
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
LTCI benefit period and elimination period
1-7 years or lifetime
elimination period of 90-180 days
Features of policies ci
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
ACB
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 (essentially a one year non renewable term policy) adjusted for any rating on policy (your rating)(cost of term policy minus fees). taxed as income, not cap gains
if rating is 150%. increase ncpi, term rider, and base premium amount.
if you’re a corp, you want a low acb for cda and for an individual you want a high acb in case of policy disposition.
Policy loan
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)
Partial surrender
25k acbv and 60k csv. surrendering 40% of the policy death benefit = 24,000 csv -10,000 = 14k taxable income. (income on full surrender * 40%)
Assignment/annuitization/lapse
1)taxable as surrender, unless assigned to spouse, child, parent 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
Events that arent dispositions
collateral assignment, using csv as collateral,
Charitable giving and taxation (insurance)
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
Tax Avoidance
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)
Charity in will vs beneficiary designation
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.
When using life insurance to invest makes sense
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
Insurance Policy Valuation
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
Tax implications dependent on beneficiary
-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
Transfers with tax implications
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.
Paid up additions affect on csv and death benefit
will raise them each year. increase of csv increase share value of corp
Employee benefit
deductible as expense as long as its available to all employees. otherwise shareholder will receive a shareholder benefit and no tax deduction available
