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
Policy loan
40-75% for UL policy and 50-90% for WL. debt need not be serviced. interest still deductible whether paid or payable.
IFA Accumulating Fund/WL
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
PUA
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.
Cash Value retirement income strategies
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)
RCA
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.
BOE/CGL (liability)
overhead expense coverage, deductible. (benefit taxable)
liability not deductible. neither has any value when transferred from personal to corp
critical illness general info
paid based on about 25 perils, term or permanent, limited pay, guarantee and renewable policies.
some things may have small coverage (melanoma <3mm, 5-10k for example)
ci needs analysis
travel for care, partner taking time off, portions of health not covered,
Ci Riders
return of premium (can get someone hesitant to commit to actually commit to policy), loss of independent existence, disability waiver of premium, 2nd event.
The important question is to what extent does it affect your risk management outcome.
corp ci with rop (questionable)
buy 10m policy for 7.5 years and pay 5m one time payment using corp dollars. pay for the rop rider personally at 2m. if not used, receive back 7m. if you don’t have the 2m personally, the sponsor can lend you the money personally.
policy failing exempt test
rare. loses tax advantages and disposition results. all future gains on policy are taxable.
MTAR limit
limit before policy becomes non exempt.
UL acb
premium paid -ncpi =increase to acb, even if additional amount is paid towards investments up to mtar limit. may be better off in corp to just pay enough premiums so that acb is reduced to 0 (higher cda credit at death)
charitable donation using life insurance (estate vs chairty)
-Direct beneficiary. never irrevocable. no probate, tax receipt issued to estate, can be used against terminal return
estate with gift through will- more tax flexibility (terminal return, year before death, first 5 years of estate) probate, can be challenged, wills can be changed, funds available to creditors
donate policy to charity
get fmv of policy (charity issues receipt for that amount and becomes owner), donor continues to pay premiums and they are deductible. no tax benefit at death
exempt policy test if failed
is this an insurance contract? (non-taxable) or an investment (taxable). if mtar test is failed, insurer can notify insured and increase face amount of policy (increase by 8% increases other policy numbers by 8%) to keep it exempt
return premiums paid to policy owner (keeping policy in force)
move excess premiums into taxable account
csv = account value - surrender charges
Insured retirement concept
ul policy - use a term rider (sum of exempt test is based on total of face amount (UL amount and term rider, cheap way increase mtar limit), utilize all mtar room ideally borrow from a line of credit using csv as collateral, draw on loc every year, loans are non-taxable, interest can be capitalized). dump term rider in retirement.
issues: high investment fees and murky. provincial premium tax and insurance investment tax (15% on all returns). introduces tax drag.
par wl - same taxes apply. calculation of dividends is murky. dividend scale isn’t based on money put into policy, only on growth of policy reserve
surrender charges and other fees - hefty surrender charges in first 8-10 years
Insurance uses in business
key person/business continuity - not deductible premiums, anything other than life insurance doesn’t create cda. person whom business success is dependent on.
collateral loan - business borrows from authorized lender, for business or investment purposes, lender says you must have insurance. if this is all true, some of premium is deductible (ncpi, or premiums paid, whichever is less as a prorated portion of the loan).
business owner dies with loan of 1m, the corp will still get the cda credit even if death benefit goes to lender.
buy-sell - premiums not deductible
