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
cognitive impairment
premiums guaranteed for up to 5 years

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

1-7 years or lifetime
elimination period of 90-180 days

Question 10

Features of policies ci

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 (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.

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 40% of the policy death benefit = 24,000 csv -10,000 = 14k taxable income. (income on full surrender * 40%)

Question 14

Assignment/annuitization/lapse

Answer 14

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

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. (benefit taxable)
liability not deductible. neither has any value when transferred from personal to corp

Question 31

critical illness general info

Answer 31

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)

Question 32

ci needs analysis

Answer 32

travel for care, partner taking time off, portions of health not covered,

Question 33

Ci Riders

Answer 33

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.

Question 34

corp ci with rop (questionable)

Answer 34

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.

Question 35

policy failing exempt test

Answer 35

rare. loses tax advantages and disposition results. all future gains on policy are taxable.

Question 36

MTAR limit

Answer 36

limit before policy becomes non exempt.

Question 37

UL acb

Answer 37

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)

Question 38

charitable donation using life insurance (estate vs chairty)

Answer 38

-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

Question 39

donate policy to charity

Answer 39

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

Question 40

exempt policy test if failed

Answer 40

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

Question 41

Insured retirement concept

Answer 41

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

Question 42

Insurance uses in business

Answer 42

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