Life Insurance

In order to help save time:

begin @ the last 3 sentences/final question

Chapter 1 - Questions

  1. Lucas owns a property that he uses as his principal residence. He resides in the property with his 20 yr old son Jake. The property has a $250K mortgage registered against it. Upon his death, Lucas would like to gift the property to his son provided his son takes over the mortgage.

Lucas is retired and collect OAS and CPP but not enough to cover his monthly expenses. Jake earns $100K a year but has a bad credit history. However, Jake is able to pay the mortgage.

Which of the following financial impacts of death should be of the most concern?

a. Loss of Lucas’ income

  • able to pay income bc of high salary

b. Debt repayment

WHY:

c. Capital gains tax on residence

d. none of the above

LIFE INSURANCE REVIEWS

  1. a person has a lot of $, and he wants to leave his mortgage free rental properties to all his kids. why does he need life insurance?

    1. to cover the trigger capital gains taxes triggered by propeties on death

    2. a married couple has young kids ALL under 14 yrs old. also have 15 yrs left on the mortgage of their home. what

    3. asd

    4. asd

    4 RISK MANAGEMENT TECHNIQUES

    R - retention

    ex. if you wanna go swimming you don’t care. don’t come prepared bringing swimsuit, towel, sandals, sunscreen, etc. retaining the risk

    accept the risk and consequences

    drive. in case of car accident deal with it

    R - reduction

    ex. reducing the risk, bringing proper protection sunscreen or having insurance

    accept risk, take action to lower risk

    have winter tires on → maintain the car

    A - avoidance

    ex. don’t go outside your house, avoid the risk

    don’t drive in winter → don’t do the risky activity

    T - transfer

    ex. transferring the risk to the insurance company, pet/car/travel/life insurance

    get someone to assume risk, insure

    PREMIUMS & RATINGS

    1. mortality - risk of death

factors affecting mortality:

  • age

    • older the riskier

    • infants are high risk

  • gender

    • males > females when it comes to risk

  • health

    • family medical history

  • lifestyle

    • smoking habits

    • hobbies

    • travel

  • occupation

  • income

    • may impact risk

    • usually doesn’t impact premiums

  1. Expenses

    • admin fees

    • taxes

  2. Investment

    • cash value LI

    • lower rate of return/interest rate % would result in increased premiums

      • insurance companies need to make somehowwheninterestratesarelow</p></li><li><p>increasedpremiums=moresomehow when interest rates are low</p></li><li><p>increased premiums = more$ to make

premium - monthly payment

the principle is you pay now, enjoy later

5 things tax FREE in Canada:

  1. TSFA (tax free savings account)

  2. WCB (workers compensation board)

  3. IDI (individual disability insurance)

  4. GIS (guaranteed income supplement)

  5. death benefit (Life Insurance)

TAXATION OF LI

  • death benefits are tax free, whether individual or group insurance

  • investment is tax-exempt, BUT there are limits (UL)

  • premiums paid by employer is tax deductible for employer but included in taxable income of employee

On death, potential impacts that could arise:

  • Final Expenses

    • funeral, probate, taxes

    • probate - provincial taxes

  • Estate Protection

    • debt repayment, income taxes → federal & provincial

  • Estate Creation

    • education, legacy, charitable giving

  • Loss of Income

    • supporting the family expenses

  • Loss of Caregiver

    • taking care of the dependents

  • Business Protection

    • key person insurance (UL), buy-sell agreements

      • key person - the $ will go directly to the beneficiary, the cash value/ LI will go to the family of the person (split dollar arrangement)

Preferred Beneficiaries:

  1. Parents

  2. Spouse

  3. Kids/Grandkids

  4. Estate

When LI is NOT important:

  • sufficient funds/coverage to cover needs upon death

  • no obligations/responsibilities (debt, taxes, family)

  • modal factor: added cost to pay monthly instalments instead of annually

  • modal monthly (M&M)

LI POLICY PREMIUM

  • may be classified as:

    • smoker vs non-smoker

    • determined by smoker status

  • rated: high cost risk (250%)

    • age: 20 but health status is age 50

    • better to be rated than declined

  • standard: normal (100%)

  • preferred: low cost low risk (>100%)

    • ex. age: 50 but health status is age 20

CAPITAL GAINS TAX

  • 50%

  • will depend on marginal tax rate

  • higher income higher tax rate

  • half of it is the basis for paying your taxes

TYPES OF LI

Term insurance - NO cash value

  • pure insurance

  • temporary

  • no cash value

  • inexpensive

  • premium is level for the term, can be guaranteed (less risk) or adjustable (more risk)

  • when you die you get the face amount (death benefit)

  • only if you die within the term - get $

    • don’t die within the term → no $ received

  • if person is still healthy, renewal premiums are higher to cover health risks

  • USE:

    • low/discretionary income family

    • people concerned about temporary/increasing liability (ex. mortgage)

Term to 100 (permanent)

  • permanent with NO cash value

  • coverage for life

  • level premiums paid to age 100

  • USED:

    • people w fixed needs

    • not interested in cashing out

    • old ppl who don’t have time to accumulate funds

insurance exist to make $ NOT charity

see letter R - renewable on provincial exam

renewed automatically by insurance company @ the end of term as long as you have $

but will still renew for 1 month even i you don’t have →graceperiod(30/31days)</em></p><p><em>lapse−nolongerbecoveredforlifeinsurance,itwilllapse</em></p><p><em>letterC−convertible</em></p><p><em>canconvertittopermanentinsurancelater</em></p><p>faceamount−deathbenefitorLIcoverage</p><p>permanent:wholelifeanduniversallife(UL)</p><p></p><p>RenewableTermInsurancew/Re−entryTermvs.ConvertibleTerm</p><ul><li><p>Uponrenewal,theinsuredwillhavetoprovideEOI,andiftheirhealthhasdeteriorated→higherrenewalrate</p></li><li><p>Re−entrytermresultsin→lowerpremiumduring1stterm</p></li><li><p>Convertibleallowsinsured/policyholdertoconverttheterm→permonew/oEOIhoweverhigherpremium→ grace period (30/31 days)</em></p><p><em>lapse - no longer be covered for life insurance, it will lapse</em></p><p><em>letter C - convertible</em></p><p><em>can convert it to permanent insurance later</em></p><p>face amount - death benefit or LI coverage</p><p>permanent: whole life and universal life (UL)</p><p></p><p>Renewable Term Insurance w/ Re-entry Term vs. Convertible Term</p><ul><li><p>Upon renewal, the insured will have to provide EOI, and if their health has deteriorated → higher renewal rate</p></li><li><p>Re-entry term results in → lower premium during 1st term</p></li><li><p>Convertible allows insured/policyholder to convert the term → perm one w/o EOI however higher premium$, won’t ask about the life-insured’s health or current employment

WHOLE LIFE INSURANCE

  • permanent

  • no options for investment

  • not flexible

  • guaranteed cash value = return is lower, they’re not a risk taker

  • higher the risk, higher the return

  • death benefit

    • guaranteed (less risk)

    • adjustable (more risk)

  • ADJUSTABLE whole life insurance

    • same premiums paid regardless of increased/decreased interest rates

  • USE: for people who want permanent protection but is a conservative investor

    • conservative person - more reserved and kept to themselves, not willing to take risks

CPPR

C - cash out, withdrawal ATM

P - premium reduction (payment reduction)

P - paid up addition PUA, coverage is increase, extra insurance /face amount/death benefit

R - reinvest w/ interest, still paying same amount

participating - add more premium/payment, ex. extracurricular acitivites = extra $ and hours after school

non-participating - less cost, no dividend

Universal Life (where IRP resides)

premium = deposit = monthly payment

Premium/Deposit → Investment “Fund Value” → Cost of Insurance

COI = NAAR

  • USE:

    • those who want permanent protection

    • control of investments and flexibility

    • no modal factor = no added cost to monthly payments instead of annually → flexible premium

    • premium remains the same regardless of interest rates being high or low

    • aggressive investors

      • more willing to take risks

      • higher risk, higher return

      • low starting cost, but increasing ↑

    • YRT - yearly renewable term

      • paying specifically for your age

TYPES OF DEATH BENEFIT

Death benefit Type

Description

Availability

Level

- face amount (death benefit)

- benefit remains the same

- basic type, least expensive $

Term

✓

WL

✓

UL

✓

Indexed

i for increasing ↑

- i for increasing

- usually used for increasing liability

✓

Participating

✓

Reducing

- usually used for mortgage

- decreasing ↓

✓

Level + Account Value

- face amount + investment

✓

Level + Cumulative Premiums

- face amount + total deposits

- essentially a return of deposits

✓

DEATH BENEFIT FOR UL (IRP)

  • NET AMOUNT @ RISK (NAAR) + FUND VALUE. NAAR = DEATH BENEFIT - FUND VALUE

  • NAAR = COI

NON-FORFEITURE OPTIONS

  • used when the insured is not able to pay the premium

  • only possible for policies w/ accumulated cash value (WL, UL)

  • surrender/withdrawal = TAXABLE

Option

Description

Use

Surrender/Withdrawal

  • surrender charges & taxes MAY apply

  • surrendering policy

no more need for LI

Policy Loan (P90)

  • loan up to 90% of CSV

avoid taxes to certain extent if there is a need to use funds

Collateral Loan

  • not taxable

best option to avoid tax IF there is a need to use funds

APL

Reduced Paid-up Insurance

Extended Term Insurance

POLICY LOAN

ACB - adjusted cost base

  • principal amount

CSV - cash surrender value

  • gain of your investment

  • growth of the $ inside the plan

You want to get a policy loan from the CSV, the gain because its more $10K > $1K

90% of $10K (CSV) or 90% of $1K (ACB)

ofc the CSV because you get more $9000 instead of $900

COLLATERAL LOAN

  • interest applies, NOT taxable

2 TAX RULES FOR UL (CHECKED YEARLY)

  • MTAR - maximum tax actuarial reserve

    • tax exemption limit

  • 250% (anti-dump-in) rule

    • staring year 10, if fund value is 250% of itself 3 years ago, MTAR is reset to the earlier amount → increasing tax risk

    • helps limit policy payments size to keep a LI policy from becoming an investment, in the CRA’s view that could improperly grow on a tax-sheltered basis

      • withdraw funds

      • transfer to side account

      • increase life insurance coverage

  • remedies

  • put into taxable account - no me likey, rich ppl dont wanna get taxed

JOINT COVERAGE

  • joint first-to-die

    • payout benefit on 1st death, or to pay off a shared debt like mortgage

    • use for family: IF surviving spouse needs benefit, pay off debt (ex. mortgage)

    • use for business: buy-sell agreement

  • joint last-to-die (or 2nd to die)

    • payout benefit on last death

    • USE: taxes, give benefit to kids

  • BUT, it is usually better to get separate coverages although joint is cheaper $ > $

RIDERS (ADD-ONS)

  • paid up addition rider

    • can buy additional permanent coverage @ certain times w/ lump sum payment

    • no medical required

  • GUARANTEED INSURABILITY BENEFIT (GIB) rider

    • can add coverage @ certain times and amount w/ added premium

    • no medical needed

  • TERM INSURANCE rider

    • add on term insurance

    • USE: temporary needs of for affordable coverage

  • SPOUSAL rider

    • coverage for spouse up to certain age, usually 65

  • child rider

    • coverage for kids up to age 21

  • *ACCIDENTAL DEATH rider*

    • additional benefit on accidental death

    • usually doubles (x2) the death benefit (face amount)

    • ex. trucker gets a heart attack while driving and THEN crashes and dies

      • he will not get the accidental death rider benefit ONLY the life insurance because the car accident came second

  • Terminal Illness benefit

    • CAN advance part of DB if insured will die within 1-2 years (max 2 years)

  • Critical Illness/Dread Disease

    • see notes on extended health insurance

  • WAIVER OF PREMIUM

    • on total disability, premiums are waived after waiting period (for A&S)

    • unemployment is NOT a valid reason

  • ACB OF

ACB OF LIFE INSURANCE ADJUSTED COST

ACB = PREMIUMS - NET COST OF PURE INSURANCE

premium = total deposit

CCHS

Cancer

Coronary bypass

Heart

Stroke

ON DEATH, potential impacts that could arise:

  • final expenses: funeral, probate (provincial taxes), taxes

  • estate protection: debt repayment, income taxes

  • estate creation: education, legacy or charitable giving

  • loss of income: supporting the family expenses

  • loss of caregiver: taking care of the dependents

    • the one who takes care of the family, when something happens to them who will take care of the house/family if the other is working to provide?

  • business protection: key person insurance, buy sell agreements situations when life insurance is NOT important

    • key person - you do everything for the company, right hand man, most valuable employee. when something happens to me the company is the beneficiary NOT my family. $ value goes to the family, insurance goes back to the company.

    • permanent insurance, UL

    • buy sell agreements - beneficiary is the company

      • if one of the share holders dies, we can pay the family for the deceased shares = they no longer are apart of the company

  • modal factor - m = monthly

    • added cost to pay monthly installments instead of annual

A LI POLICY’S PREMIUM

  • may be classified as:

    • smoker vs non-smoker, determined by smoker status

    • rated (high cost & risk) = 150%

    • standard (normal) baseline = 100%

    • preferred (low cost & risk) very healthy person = 75% > 100%

CNA - Capital Needs Approach

CDA - Capital Drawdown Approach

CIA - Capital Income Approach

BUY-SELL (BUY-OUT) AGREEMENT

  • for partnerships/corporation shareholders

  • an agreement supported by life or disability insurance

  • STEPS TO FORM:

    • 1. company valuation must be done first

2 TYPES OF BUY-SELL AGREEMENT

  1. cross-purchase agreement: used between 2 equal (=) partners

    • shareholders/partners buy off the shares from the dead partner/shareholder’s estate

    • 2. entity purchase

FOR DIABILITY BUYOUT

  • waiting period: 12 months, max is 24 months

  • benefit usually 1 time (lump sum)

KEY PERSON INSURANCE

  • for the MVP employee, business (policy holder) buys the insurance on the key employee (life insured)

  • beneficiary is the business

  • premiums NOT tax DEDUCTIBLE

    • business is paying the premium = no tax return

  • benefits are tax FREE

    • when employee passes away, pay now enjoy later

    • 5 fingers: TSFA, WCB, IDI, GIS, DEATH BENEFIT (LI)

  • for LI, benefit can have a split $ dollar arrangement

OVERHEAD EXPENSE INSURANCE

  • for the owner-operator or for the owner where the income of a business is dependent on

  • used to pay for running costs of business when disabled

  • does NOT cover:

    • loan (capital portion)

    • salaries of owner and independent working employees

    • capital expenditures

  • Disability premiums tax DEDUCTIBLE

    • benefits not TAXABLE (benefit used to pay for business expenses)

BUSINESS LOAN PROTECTION INSURANCE

  • insurance to cover the loan payments/balance

  • definition of disability: “OWN OCC”

    • own occupation

  • premiums not tax DEDUCTIBLE

    • benefits not TAXABLE, tax free

cross purchase - between 2 people

entity (entiTHREE) purchase - between more than 2 people

company-business

beneficiary = business/company

insured =

policy holder =

30 yr limited-pay term-to-100 policy : pay premiums for a specific limited period but the coverage continues for the entire term of the policy

low-maintenance policies:

  • participating WL insurance

    • whole life is guaranteed but if it performs better than ordinary they will not give you the market value of your policy

  • term-to-100 life insurance

  • non-participating WL insurance

high-maintenance policy:

  • UL

    • need to meet up every year to review policy

financial underwriting:

establishing whether the coverage is reasonable and that the applicant can afford the required premium

decreasing term insurance

  • coverage available in term but NOT UL

  • want to keep premiums to a minimum

twisting - TD (twisting different insurer)

encouraging a client to cancel a policy in order to buy a new one with a different insurer for the sole purpose of earning a commission

churning - CS (same insurer)

encouraging a client to cancel a policy in order to buy a new one with the same insurer or the sole purpose of earning a commission

adjustable WL

WL insurance

guaranteed WL

non-participating WL

APS - attending physician statement

MIB - medical information bureau

inspection report - financial and driving report or record

renewal = $
new = $

life insurance replacement declaration (LIRD)

TIA - temporary insurance agreement

While waiting for approval you can pay for 1 month and you will be covered half of coverage by dying

collateral loan = non taxable

withdrawal/loan = taxable

RISK
???

??

Reality

Global

Fund??

Indexed

Balance

Dividend

Bond Fund

Income Bond

Fixed Income

Money market (MFIB) Basement??