Life Insurance¶

Risk avoidance
Risk reduction
Risk retention
Risk transfer

insurable interest (only need exist when the policy is issued)
- own life
- spouse life
- child/grandchild
- key employee
- anyone would financially impact the policyholder

variables would impact one's "risk of death" in a given year
- age and gender
    - premium goes up with age; male is more expensive than female
- personal and family health history
- smoking status
- employment and income level

two ways to quantify the "risk of death"
- life expectancy
- probability of death

risk of disability = morbidity

FPO rider is for disability insurance, not life

Insurance purpose:
- loss of income
- loss of a caregiver; eg. a spouse didn't earn income
- debt repayment
- income taxes; eg. deem disposed of an asset
- estate creation; for parents with little money to leave for kids
- education funds
- legacies; eg. a financial gift to students of a university
- charitable giving
- business continuation

charitable donation
- when alive, up to 75% of the current year's income
- when diseased, 100% of the current and prior year
- non-refundable tax credit is higher for the portion > $200
    - so one should claim the entire donation for a family

- temporary insurance needs
    - eg. mortgage, education
- permanent needs
- join first-to-die
    - eg. pay off mortgage
- join last-to-die
    - eg. leave benefit to disabled kid
- decreasing
    - eg. mortgage
- increasing
    - eg. tax on capital gain on a cottage which increasing in value
- small WL for kids as life insured with GIB
    - to lock the insurability
    - assign the policy (transfer ownership) to the kid when adult
    - GIB allow him to add additional amounts on certain dates and within certain limits with evidence of insurability
        - small amount → due to insurable interes

annuity
- to address "risk of living too long"

- a beneficiary other than the policyholder/estate is named
- the relationship of the beneficiary to the insured
    - part of the protected family class (spouse, child, grandchild)
    - irrevocable beneficiary

- the premium, the riders and the supplementary benefits be waived
- after the applicable waiting period
- the supplementary benefit is appropriate if the policyholder also the life insured
    - if others paying the premium, different rider "parent/payer waiver benefit"

- no policy gain → no tax consequence
- term policy; no cash value, no dividends, no policy loans

- the premium will incease each period at predefined rates

- renew is automatically upon expiry unless advised not to
- the premium can be higher than a brand new policy as no evidience of insurability is required
- if the insured is healthy, should compare premium of a brand new and the renewable rate
- the old should not be cancelled before new is approved

- CSV (cash surrender value)
    - when surrender, receive the cash value - cancellation fees
- APL (automatic premium loan)
    - premium is loaned using cash value as collateral
    - the loan and interests will be deducted from benefit
- reduced paid-up insurance
    - premium is eliminated
    - face value is reduced
- extended term insurance
    - premium is eliminated
    - now a term insurance (shorter time), not permanent

- can provide double indemnity
- the death is caused by an accident
- the deatch must occur with a certain time frame (usually 1 year)

- exclusion for AD&D (but basic death benefit will pay)
    - self-inflicted injury (drug overdose or suicide)
    - criminal act (drunk driving)
    - act of war, murder
    - piloting non-commercial plane (fly a plane for pleasure)

- allow add coverage without evidence of insurability and regardless of health
- if added after policy issued, evidence of insurability required
- the amount of additions, the maximum age can be exercised is decided by insurer

- similar to stand alone critical illness policy
- but the benefit paid out is from the whole coverage, just received faster

- can only be added to a permanent insurance, eg. WL and UL (not sure if UL has it)
- for WL, only apply to participating policy
- dividend option (not non-forfeiture)

- policy dividends is not guaranteed
    - it is good to show multiple dividend illustrations when discussing dividend options

- waiver of premium dividend option
    - reduce premium only when and if a policy dividends is paid
    - is standard on disability policy, but an added feature for life

- coverage goes from 15 days to 21 or 25 years
- not from birth

- LTC (long term care)
- Term rider

more expensive UL > WL > T-100

- calculate NAAR (net amount at risk)
    - face value = death benefit (when level death benefit option)
    - LCOI/YRT mortality costing option
    - premiums paid
    - accumulated investment component

    - NAAR (net amount at risk) = death benefit - investment amount

- funding
    - minimally funded 
            premium only cover insurance cost and expenses, no more for investment 
            → cash value = 0

    - maximum funded
            cash value is as high without failing the exemption test

- to increase investment (opposite to decrease)
    - larger deposit
    - better investment return
    - smaller mortality deduction
    - lower policy expense

- mortality charge (deduction)
    - a fee to compensates the insurer for any losses due to unexpected events
        eg. a death benefit paid sooner than expected
    - the average fee about 1.25% per year

- mortality charge based on YRT (yearly renewable term)
    - the mortality charge (cost of insurance) per $1,000 of NAAR
        - is lower in the early years
    - more left to invest, the accumulating fund can grow faster
    - for more sophisticated client (higher risk)
    - the mortality charge will increase as time goes on
    - the hope is the growth in investment can reduce NAAR 
        - so to keep the cost manageable
    - greater short-term policy value

- mortality charge based on LCOI (level cost of insurance)
    - more mortality cost in earlier year, but never increase
    - less to invest in the beginning
    - for more conservative investor
    - looking for longer-term policy value; less chance of lapsing

- participating is more expensive than non-participating
    - as it offers potential dividends

- limited payment WL
    - the entire premium being paid over a fewer years
        - so annual premium is higher
    - the total premium cost is lower
        - as the insurer applies the time of value of money principle
    - the premium can be paid off at known time; eliminates longevity risk

- adjustable WL
    - the premium and coverage only guaranteed a certain of years
    - after that, premium can be adjusted up or down 
        - depending on actual expense
            - mortality, expenses, investment return
    - interest increase will lower premium 
    - premium can't be changed based on things with life-insured    

- APL (automatic premium loan) is included in a WL policy
    - missed premiums were loaned with interest
    - cash value is used as collateral
    - death benefit is reduced by the loan plus interests

- only face value is paid out at death (no adding cash value)    

- Modal factor (also for WL)
    - annual premium * modal factor = monthly/quarterly/annual payment

- calculate money needed
    - keep percentage of salary / rate of return (net return = after tax)
      (capitalization of income method)
    or 
    - calculated by (monthly expense - monthly income) x 12 x years
    (capital drawdown method)

  - other money needed
    - mortgage paid off
    - funeral expenses
    - car loan
    - capital gains tax owned on dispose of property

- calculate money available
    - life insurance benefit (group/personal) 
    - sell house/car/business
    - liquidate investment

- calculate money shortfall

- replace net income in perpetuity
    - net return = gross return x (1 - weighted average tax rate)
    - insurance required = net annual income / net return 

- if to replace gross income
    - insurance = gross income / gross return

- premium is not tax deductible in most of cases 
    - the exception is used to secure a loan for business or investment purpose

- death benefit is paid out tax free to the beneficiary
    - CPP death benefit is taxable

- dispose property
    - tax owing = (capital gain x 50%) x MTR
      - capital gain = current value - ACB

tax upon death
- RRSP deemed to be withdrawn and full taxed
    - unless spouse rollover
- CPP/QPP (maximum = $2,500)

- UL (universal life) = buy term + invest the difference yourself

- fail exemption test → non-exempt forever (after 60 day grace period)
    - deemed disposition (policy gain = CSV - ACB → full taxable)
- 3 ways to remedy (fix) the failure
    - increase face amount (coverage)
    - withdraw money from the accumulating account/cash value
    - move to side account (=shuttle account); taxable
- MTAR (maximum tax actuarial reserve) room
    - measure the cash value is reasonable to the coverage and length of policy time
    - when there's room, side account can be transferred back

- anti-dump-in rule = the 250% rule
    - prevent a policyholder from making large lump-sum deposits
        - after the 7th anniversary on a policy that's minimum funded
    - beginning on the 10th year and every after
        - the accumulating fund comparing to 3 years ago
    - if the increase is > 250%, the rule will apply
        - ETP (except test policy) is reset to 3 years ago
        - result in a lower MTAR on the test policy, so harder to pass the exemption test

- surrender a policy (after Dec. 2, 1982)
    - ACB (adjusted cost basis) = Premium paid - NCPI (Net cost of insurance) - Dividends paid
    - policy gain = CSV (cash surrender value) - ACB
    - tax owing = policy gain x MTR
      - full gain is subject to tax; treated like bank interests
    - proceeds net of tax = CSV - tax owing

- surrender (before Dec. 2, 1982)
    - the ACB is not prorated
    - only withdraw exceed ACB will result in a policy gain

- reducing coverage → deemed disposition/partial surrender of a policy (after 1982/12/1)
    - prorate = 1- (new face value / original face value)
    - prorated policy gain = (CSV - ACB) x prorate
    - tax liability = prorated policy gain x MTR

- dividends paid out

- exempt vs non-exempt
    - tax status of income earned with the policy
    - not the death benefit itself

- policy loan
    - considered a partial disposition of the policy
        - results in a policy gain and reduce ACB
            - tax on the amount > ACB
            - if < ACB, no tax owed, ACB reduced

    - when repay the loan, can deduct the repayment upto above gain amount
    - if the repay exceed the gain amount, the remainder will add to ACB
        - higher ACB will reduce the tax when surrender

    - when used as a collateral for a loan, the premium can be tax deductable
        - only the premium associated with the loan amount
        - only the NCPI (net cost of pure insurance) can be deducted
            - no investment portion = term insurance

- dispose of CCPC (Canadian-controlled private corporation)
    - $800,000 lifetime capital gains exemption (LCGE) per individual
    - capital gain = sale proceeds - ACB - unused LCGE
    - only 50% is taxable
    - tax owing = taxable capital gain x MTR

- benefit = 
    + (face value + interest)
    + (term addition + interest)
    - (outstanding loan + interest)
    - (terminal illness benefit + interest)
        as it is previously paid

advantage/disadvantages on different structures:
    - cross-purchase agreement vs. share redemption plan
    - criss-cross insurance vs. business-owned insurance

business owned life advantage:
    - business pay premium instead of each partner
    - premiums are not tax deductible and paid with after-tax dollars; corporate has lower tax rate in general
    - compared to criss-cross insurance approach, far simpler than each partner to buy insurance on every other partners

buy-sell agreement
    - the company owns the policy and pays the premiums
    - when one owner dies, his shares are transferred to his estate
    - the insurer pays the death benefit (tax free) to the company's CDA (capital dividend account)
    - other owners pay the deceased owner's estate for his shares with a promissory note
    - other owners instruct the company to pay them tax-free capital dividend
    - other owners use dividend to pay off the promissory note

- probationary period = waiting period
- enrolment period = eligibility period
- actively-at-work requirement

- convert to individual
    - amount for Quebec: $400,000
    - others: $200,000
    - without providing proof of insurability
    - need to convert within 31 days of termination of group coverage

- beneficiary designation

not controllable:
- premium split
- co-insurance factor
- single deductible amount
- membership class

- employee is required to contribute to the premium
    - the premium is deduct from employee's pay
    - benefit is tax free
    - employee can't deduct premium for tax
    - employer can deduct premium as business expense

- non-contributory
    - employer pay the entire premium

- rated
    - excessive alcohol user
    - risky avocations (hobbies)
    - frequent travel
    - major driving convictions

- smoker/non-smoker (not rated, just higher premium for smoker)

- risk of death
    - underwrite on the life insured
- waiver of premium
    - underwrite on a policyholder (pay the premium)
    - if he is disabled, the premium is waived

- MIB (medical information bureau) report
    - medical info
    - hazardous hobbies
    - adverse driving records
- APS (attending physician's statement)

- void a policy (no fraudulent error, eg. misstatement of age)
    - life-insured age older than max
    - still alive
    - error noticed in 3 years
    - void in 60 days of notice

- deny a claim
    - during the contestability period (first two years)
    - material misrepresentation even in the absent of fraud
    - can't deny when misstatement of ago or gender unless fraud
      - coverage (benefit) is adjusted by the percentage of paid / correct premium
    - lying about smoking status is frasudulent material misrepresentation
        - the claim can be denied even after 2 years contestability period

- in person
- sign acknowledgement that no change in insurability
- when change in insurability, no delivery
- collect the first premium
- 10 days free look provision (= right of rescission), start right after delivery

- policy illustration
    - help to understand the policy
      - for term
        - only show the premium payable and death benefit each year
    - for permanent
        - more complex; eg. including investment component, cash value etc

- valid until the earliest of
    - the main policy is approved and delivered
    - the applicant being advised in writing that policy is declined
    - maturity date in TIA, eg. 60, 90 days

- only given when an agent reasonably sure the underwriter will issue the policy
    - travel plans to certain destinations could make the application being rejected

- process
    - notice of death
    - complete claim form, including
        - insured's age
        - claimant's name, age, identity
        - proof of death

- CLHIA (the Canadian life and health insurance association) guideline

- to protect clients from churning or twisting
    - Quebec: Notice of replacement of insurance of persons contract
    - others: Life insurance replacement declaration (LIRD)
    - it provides
        - a warning not to cancel existing until new is in place
        - a list of questions so that the client should know or find the answer

- provide by bank
- if cancelled within 20 days, the premiums is refunded

- CLHIA guide
    - the borrower must be advised the creditor insurance is optional
    - the borrower has 20 days to change his mind with full refund
    - can cancel at any time
    - all terms and exclusion be fully disclosed
    - disclose the amount of premium and how it's determinded
    - once apply, coverage is subject to approval by the insurer
    - the insurer might inform the client if declined

- term
    - the coverage lapses

- permanent
    - cash out the policy; no life insurance, but get some cash value back
        - tax consequencies
    - non-forfeiture options
        - reduced paid-up option
            - allow stop paying premium for a reduced death benefit
        - convert to an extended term based on ACS (accumulated cash savings)
    - policy will lapse
        - some insurers allow to reinstate within 5 years
            - pass a physical examination
            - pay back the premiums + interest