FP2 Chapter 10

What is the first step to select an insurance rep?

Risk Management Review

Information required for a Risk Management Review

Assets	Expenses
Age	Income
Existing Life Insurance	Personal health history

Criteria for Choosing an Insurance Rep.

Awareness of tax consequences	License to sell insurance in the same jurisdiction
Product knowledge	Financial planning designation
Capability on the technical side of insurance

Capital Needs Analysis

used to estimate the amount of insurance a client is required to meet the needs of surviving dependants

Capital Needs analysis steps

1. Prepare an Asset Inventory → determine the total cash available

2. Determine the estate’s obligations at death → determine the total cash needed

3. Calculate the needs of the survivors → determine the net monthly income required

Total Capital Needed to Produce Income Formula

(Net monthly income required * 12)/discount rate

Total Additional Capital Needed Formula

(Total cash needed + Total capital needed to product income - Total cash available)

Financial Needs to Consider in Determining the Amount of Life Insurance Required

Mortgage	Final Expenses	Education Funds
Emergency Fund	Income for Survivors	Donations

Buy-Sell Agreements

provides the transfer of shares from one shareholder to another in the event of death, disability, retirement or disagreement among shareholders

• Used for partnerships and corporations in which the surviving shareholder(s) purchase the shares are a reduced price

Criss-Cross Ownership

a policyholder owns the policy on the other shareholder’s life and vice-versa

Key Person Insurance

an insurance policy taken out by a business on the life of the key employee

Who is the beneficiary of key person insurance?

the business

When a spouse dies, can RRSPs/RRIFs be transferred to the surviving spouse?

Yes with no tax consequences

Estate-Protector Life Insurance

when the first spouse dies, the policy pays a death benefit

When happens to a second property upon the death of the surviving spouse?

a capital gain is triggered (FMV - ACB) and taxed at 50%

When is life insurance taxed at death?

• The death benefit paid out to a beneficiary is not subject to tax; only when it is surrendered for its cash value or transferred to a third party 

Annual Exempt Test

a test to determine if the investment portion of a life insurance policy can grow tax-sheltered

Deferred Annuity

a plan in which payments do not start until some point in the future

Segregated Funds

provide a guarantee below which the value of the accumulation at maturity to death may not fall

What percentage of premiums paid will the value of segregated funds not fall below?

75%

Segregated Fund Risk Ratings

Segregated Fund Risk Rating	Standard Deviation range
Low	0-6
Low-Medium	6-11
Medium	11-16
Medium-High	16-20
High	20+

Capital Gain Amount

 the amount by which net proceeds exceed ACB

Adjusted Cost Base

the sum of money originally invested plus any income or capital gains minus any capital losses

Taxes on Life Insurance Policies Issued Before 12/02/1982

treated as an exempt policy (no income tax)

• The policy may be transferred to the child or spouse at the ACB without any tax implications

Taxable Policy Gain = Proceeds of disposition - ACB

Taxable Policy Gain = Cash Surrender Value - Total Premiums Paid - Total Dividends Declared

Policies Issued After 12/02/1982

not treated as an exempt policy (subject to income tax)

Taxable Policy Gain = Proceeds of Disposition - ACB + NCPI

NCPI = net cost of pure insurance

Net Cost of Pure Insurance (NCPI) formula

= Pure risk * Prescribed mortality factor

Pure Risk formula

Death benefit - Cash Surrender Value

Exempt Policies

the investment build-up is not subject to income tax

Purpose of exempt policies

to provide benefits at death rather than provide lifetime investment benefits

How can exempt policies stay exempt?

must meet an annual exemption test

What happens if a policy fails to pass the annual exemption test?

the policyholder is given a grace period to bring the policy back to an exempt status

Non-Exempt Policies

the investment build-up exceeds a certain limit in relation to the amount of insurance protection and is subject to income tax

Life Insurance Tax Frequency

Date of Insurance Issue	Tax Frequency
Pre-1990	At least every three years
After 1989	Every year

If insurance premiums are tax-deductible, are the benefits taxable?

yes

Taxation of Transferring Life Insurance Policies

• If the policy is transferred to a child at no cost, it is deemed to be transferred at the ACB of the policyholder before the transfer

  • Allows the policy to rollover to the child with no tax impact (cost = ACB)

• If the policy is transferred to a spouse, it is transferred at ACB

Who can life insurance policies be transferred to?

An inter-vivos spousal trust

Spouse

Former spouse as part of a divorce settlement

Maximum Tax Actuarial Reserve

the maximum amount that can be accumulated within an exempt policy while retaining its exempt status

Differences Between Policies Issued Before and After 12/02/1982

	Before	After
ACB	Includes entire premium paid	NCPI is deducted from ACB and results in more of the policy’s cash value being taxed
Accumulating Value on Endowment Plans	Accumulates tax-deferred	Accrual taxation
At Insured’s Death	Accrual taxation	Tax paid on any amount accrued and not previously taxed
Exempt Status	Exempt	Non-exempt
Withdrawal of Cash Value	Tax free up to ACB amount	Amount that can be withdrawn tax-free is reduced due to NCPI
Using Cash Value to Purchase an Annuity	Used to purchase an annuity without tax implications	Considered a taxable sale

Endowment Life Insurance

pays the face value of the policy either at the insured’s death, at a certain age or after a number of years