LifeInsur-E311_2024-10ED
CISRO/OCRA Life Insurance Notes
LLQP Exam Preparation Manual
E-311 - 10th Edition, 2024
Revised by Susan Yates, project management by Sandra Ciccocioppo
Authored by Roxanne Eszes, CFP®
Consultation committee: Victor Lough B.A.CFP, Rocco Vetere, Eric Yeung, CFP®, CIM
Project management: Marie Achard, Emily Harrison, Lucie Regimbald
French adaptation: Normand Morasse
French adaptation committee: Me Jacqueline Bissonnette, Michelle Philibert-Charette, Serge Coudry, Hélène Doré, Martin Dupras
© Autorité des marchés financiers, 2024
ISBN 978-2-551-27158-0 (PDF)
Foreword
This manual is for the Life License Qualification Program (LLQP) exam.
Aims to help candidates recommend life insurance products adapted to client needs.
Chapter overviews highlight curriculum module competency components and sub-components.
Candidates should regularly review the competency components and subcomponents.
Understanding knowledge, strategies, and skills in each chapter is essential for passing the LLQP licensing exam.
Masculine form is used for both men and women.
Table of Contents
Chapter 1: Introduction to Life Insurance
1.1 Risk of death
1.2 Potential financial impact of death
1.2.1 Loss of income
1.2.2 Loss of caregiver
1.2.3 Debt repayment
1.2.4 Income taxes
1.2.5 Estate creation
1.2.5.1 Income tax owing
1.2.5.2 Education funds
1.2.5.3 Legacies
1.2.5.4 Charitable giving
1.2.6 Business impacts
1.3 Risk management strategies
1.3.1 Risk avoidance
1.3.2 Risk reduction
1.3.3 Risk retention
1.3.4 Risk transfer
Chapter 2: Term Life Insurance
2.1 What “term” means
2.1.1 Typical terms
2.1.2 Age limits
2.2 Policyholder vs. life/lives insured
2.2.1 Single life
2.2.2 Joint first-to-die
2.2.3 Joint last-to-die
2.3 Death benefit
2.3.1 Level term
2.3.2 Decreasing term
2.3.3 Increasing term
2.4 Term insurance premiums
2.4.1 How premiums are set
2.4.1.1 Cost of insurance (COI)
2.4.1.2 Expenses
2.4.2 Sample premiums
2.5 Renewable vs. non-renewable term insurance
2.5.1 Renewal provisions
2.5.1.1 Renewable with guaranteed rates
2.5.1.2 Re-entry term with adjustable rates
2.6 Convertible term insurance
2.6.1 Incontestability and suicide provisions
2.6.2 Attained-age vs. original-age conversions
2.7 Advantages and disadvantages of term life insurance
2.8 Using term insurance
2.8.1 Short-term risks
2.8.2 Decreasing risks
2.8.3 Limited cash flow
Chapter 3: Whole Life and Term-100 Insurance
3.1 Concept of permanent insurance
3.1.1 How permanent insurance differs from term insurance
3.1.2 Types of permanent insurance
3.1.2.1 Whole life
3.1.2.2 Term-100 (T-100)
3.1.2.3 Universal life (UL)
3.2 Overview of whole life insurance
3.2.1 Coverage term
3.2.2 Policy reserve
3.2.3 How premiums are set
3.2.3.1 Mortality costs
3.2.3.2 Expenses
3.2.3.3 Investment returns
3.2.3.4 Impact of modal factor
3.2.4 Premium options
3.2.4.1 Ongoing premiums
3.2.4.2 Single premium
3.2.4.3 Limited payment
3.2.5 Death benefit options
3.2.5.1 Guaranteed whole life
3.2.5.2 Adjustable whole life
3.3 Non-participating vs. participating whole life policies
3.3.1 How shortfalls or surpluses occur
3.3.2 Non-participating policies
3.3.3 Participating policies
3.3.3.1 Identifying the difference
3.4 Dividend payment options for participating policies
3.4.1 Cash
3.4.2 Premium reduction
3.4.3 Accumulation
3.4.3.1 Investment options
3.4.3.2 Upon death
3.4.4 Paid-up additions (PUA)
3.4.5 Term insurance
3.4.6 Impact on death benefits and cash values
3.4.6.1 Dividend illustrations
3.5 Non-forfeiture benefits
3.5.1 Cash surrender value (CSV)
3.5.1.1 Surrender charges
3.5.1.2 Policy loans
3.5.2 Automatic premium loans (APL)
3.5.3 Reduced paid-up insurance
3.5.4 Extended term insurance
3.6 Limited payment whole life
3.7 Premium offset policies
3.7.1 Illustrations and disclosure
3.8 Advantages and disadvantages of whole life insurance
3.9 Comparing term and whole life insurance
3.10 Using whole life insurance
3.10.1 Taxes upon death
3.10.2 Future insurability
3.10.3 Increasing coverage
3.11 Term-100 (T-100) life insurance
3.11.1 Duration of coverage
3.11.2 Premiums
3.11.2.1 Level cost of insurance (LCOI)
3.11.2.2 Limited payment T-100
3.11.3 Death benefit
3.11.4 Upon age 100
3.11.5 Using Term-100
Chapter 4: Universal Life Insurance
4.1 Transparency through unbundling
4.1.1 Cost of Insurance (COI)
4.1.2 Expenses
4.1.3 Investment
4.1.4 Premium tax
4.2 Flexibility for the policyholder
4.2.1 Timing and amount of premiums
4.2.1.1 Insufficient account value
4.2.1.2 Modal factors for UL policies
4.2.2 Face amount
4.2.3 Life/lives insured
4.3 Pricing the insurance component
4.3.1 Net amount at risk (NAAR)
4.3.2 Yearly renewable term (YRT)
4.3.3 Level cost of insurance (LCOI)
4.3.4 Choosing between yearly renewable term (YRT) and level cost of insurance (LCOI) costing
4.3.5 Guaranteed vs. adjustable COI
4.3.5.1 Open-ended or restricted increases
4.4 Death benefit options
4.4.1 Level death benefit
4.4.2 Level death benefit plus account value
4.4.3 Level death benefit plus cumulative premiums
4.4.4 Indexed death benefit
4.5 Investment components
4.5.1 Net premiums
4.5.1.1 Exemption test
4.5.2 Tax deferral
4.5.3 Investment choices
4.5.3.1 Daily interest accounts (DIAs)
4.5.3.2 Guaranteed investment accounts (GIAs)
4.5.3.3 Index fund investments
4.5.3.4 Mutual fund investments
4.5.4 Impact of investment returns on policy viability
4.5.4.1 Policy illustrations
4.6 Investment account
4.6.1 Surrendering the policy
4.6.2 Policy withdrawals (partial surrender)
4.6.3 Premium offsets
4.6.4 Policy loans
4.6.5 Collateral for third-party loans
4.6.6 Leveraging
4.6.7 Distribution upon death
4.7 Advantages and disadvantages of universal life (UL) insurance
4.8 Comparing universal life (UL) and whole life
4.9 Using universal life (UL) insurance
4.9.1 Maxed out registered retirement savings plan (RRSP) and tax-free savings account (TFSA)
4.9.2 Tax-free retirement income
Chapter 5: Riders and Supplementary Benefits
5.1 Riders that provide additional benefits upon death
5.1.1 Paid-up additions (PUA) rider
5.1.2 Term insurance riders
5.1.2.1 On a term policy
5.1.2.2 On a permanent policy
5.1.2.3 Family coverage rider
5.1.2.4 Child coverage rider
5.1.2.5 Converting child or family coverage riders
5.1.3 Accidental death (AD) rider
5.1.4 Guaranteed insurability benefit (GIB) rider
5.2 Supplementary benefits (benefits payable during life)
5.2.1 Accelerated death benefits
5.2.1.1 Terminal illness (TI) benefit
5.2.1.2 Dread disease (DD) benefit (a.k.a. critical illness or CI benefit)
5.2.2 Accidental dismemberment benefit
5.2.3 Waiver of premium for total disability benefit
5.2.3.1 Waiting period
5.2.3.2 Renewable or convertible term policies
5.2.4 Parent/payor waiver benefit
5.3 Using riders and supplementary benefits to customize coverage
5.3.1 Cost of coverage
5.3.2 Value of coverage
5.3.2.1 Limitations
5.3.2.2 Exclusions
5.3.3 Differences between companies
5.4 Advantages and disadvantages of riders and supplementary benefits
Chapter 6: Group Life Insurance
6.1 How group life insurance works
6.1.1 What constitutes a group
6.1.2 Policyholder
6.1.3 Master contract
6.1.4 Group membership
6.1.4.1 Actively-at-work requirement
6.1.4.2 Membership classes
6.1.5 Premiums
6.1.5.1 Tax treatment for employer
6.1.5.2 Tax treatment for employee
6.1.5.3 Sales tax on premiums
6.2 Group term insurance coverage
6.2.1 Schedule of benefits
6.2.1.1 Earnings multiple
6.2.1.2 Flat rate
6.2.1.3 Length of service
6.2.1.4 Combination
6.2.2 Coverage maximums
6.2.3 Reductions for older or retired group members
6.2.4 Optional additional coverage
6.2.4.1 Term coverage
6.2.4.2 Permanent coverage
6.3 Dependant life coverage
6.3.1 Definition of dependant
6.3.2 Death benefit amount
6.3.3 Premiums
6.4 Survivor income benefits
6.4.1 Beneficiaries
6.4.2 Benefit amount
6.5 Accidental death and dismemberment (AD&D)
6.5.1 Basic vs. voluntary AD&D
6.5.1.1 Coverage for dependants
6.5.2 Exclusions
6.5.3 Overall limits
6.6 Conversion privileges
6.6.1 In Québec
6.6.1.1 Leaving the plan
6.6.1.2 Master contract terminates
6.6.2 In the rest of Canada
6.6.3 Premiums upon conversion
6.7 Replacement contracts
6.7.1 Benefit amounts
6.8 Disabled members
6.9 Group creditor insurance
6.9.1 Death benefit
6.9.2 Beneficiary
6.9.3 Premiums
6.9.4 Additional coverage
6.9.4.1 Disability
6.9.4.2 Critical illness
6.9.4.3 Unemployment
6.10 Group life insurance vs. individual life insurance
6.11 Advantages and disadvantages of group life insurance
Chapter 7: Taxation of Life Insurance and Tax Strategies
7.1 Key concepts
7.1.1 Tax-free death benefit
7.1.2 Policy dispositions
7.1.3 Policy gains
7.1.4 Adjusted cost basis (ACB)
7.1.4.1 Last acquired date
7.1.4.2 G1 policies
7.1.4.3 G2 and G3 policies
7.2 Taxation of policy dividends
7.3 Taxation of a full surrender
7.3.1 Policy gain calculation
7.4 Taxation of a partial surrender
7.4.1 Reducing coverage
7.4.2 Policy withdrawals
7.5 Taxation of policy loans
7.5.1 Repaying a policy loan
7.5.2 Policy loan interest
7.6 Taxation of exempt vs. non-exempt policies
7.6.1 Purpose of exempt test - insurance or investment?
7.6.2 Maximum Tax Actuarial Reserve (MTAR) rule
7.6.2.1 8-Pay endowment at age 90 for G3 policies
7.6.2.2 20-Pay endowment at age 85 for G2 policies
7.6.3 Maximum Tax Actuarial Reserve (MTAR) remedies
7.6.3.1 Increasing the face amount
7.6.3.2 Withdrawing premiums
7.6.3.3 Side funds
7.6.4 Anti-dump-in rule
7.6.4.1 Applying the 250% rule
7.6.4.2 Implications for minimum-funded policies
7.6.5 If a policy becomes non-exempt
7.6.5.1 Deemed disposition
7.6.5.2 Annual accrual rules
7.7 Tax implications of replacing an existing policy
7.7.1 Policy disposition
7.7.2 Tax advantages of older policies
7.8 Absolute assignments
7.8.1 General rule
7.8.2 To a non-arm’s length party
7.8.3 Assigning a policy to a spouse
7.8.3.1 Opting out of the spousal rollover
7.8.3.2 Income attribution rules
7.8.4 Assigning a policy to a child
7.8.4.1 Defining “child”
7.8.4.2 Direct transfers only
7.8.4.3 Education funding or other intergenerational transfers
7.9 Death of the policyholder
7.9.1 Rollover to spouse
7.9.2 Contingent policyholder
7.9.2.1 Rollover to a child
7.10 Taxation of life insurance strategies
7.10.1 Using the policy as collateral
7.10.1.1 Borrowing for business use
7.10.1.2 Deducting premiums
7.10.2 Annuitizing the cash surrender value (CSV)
7.10.2.1 If the policyholder is disabled
7.10.2.2 Partial surrender
7.10.3 Leveraging a life insurance policy
7.10.3.1 Collateralizing the cash surrender value (CSV)
7.10.3.2 Interest paid or capitalized
7.10.4 Charitable giving
7.10.4.1 Charitable Donation Tax Credit
7.10.4.2 Assigning a new insurance policy to a charity
7.10.4.3 Assigning an existing insurance policy to a charity
7.10.4.4 Naming a charity as the beneficiary
Chapter 8: Business Life Insurance
8.1 Potential impacts of death on a business
8.1.1 Loss of skills
8.1.2 Creditor demands
8.1.3 Family member interference
8.1.4 Equality for family members
8.1.5 Capital gains tax for the shareholder
8.2 Business types
8.2.1 Sole proprietorship
8.2.2 Partnerships
8.2.3 Corporations
8.2.3.1 Public vs. private corporations
8.2.3.2 Capital gains exemption
8.3 “Key person” life insurance
8.3.1 Split-dollar arrangements
8.3.1.1 Taxation of key person split-dollar arrangements
8.3.2 As a requirement for borrowing
8.4 Buy-sell agreements
8.4.1 Cross-purchase agreements
8.4.2 Why buy-sell agreements are important
8.4.2.1 Guaranteed buyer
8.4.2.2 Guaranteed value
8.4.2.3 Mandatory sale
8.4.2.4 Guaranteed funding through life insurance
8.4.3 Criss-cross insurance
8.4.4 Business-owned insurance
8.4.4.1 Role of the capital dividend account (CDA)
8.4.4.2 Funding cross-purchase buy-sell agreements
8.4.4.3 Funding share-redemption buy-sell agreements
Chapter 9: Application and Underwriting
9.1 Process overview
9.1.1 Agent’s role
9.1.2 Completing the application
9.1.3 Underwriting
9.1.4 Issuing and delivering the policy
9.2 Application
9.2.1 Policy details
9.2.1.1 Applicant/policyholder
9.2.1.2 Life insured
9.2.1.3 Beneficiary
9.2.1.4 Type of policy
9.2.1.5 Riders and supplementary benefits
9.2.1.6 Premium options
9.2.1.7 Dividend options
9.2.2 About the applicant
9.2.2.1 Financial ability
9.2.2.2 Insurable interest
9.2.2.3 Justification of amount of coverage
9.2.2.4 Insurance application history
9.2.3 About the life insured
9.2.3.1 Personal information
9.2.3.2 Medical information
9.2.4 Incomplete or erroneous information
9.2.4.1 Mistake
9.2.4.2 Fraudulent misrepresentation
9.2.4.3 Incomplete information
9.2.5 Agent’s comments
9.3 Temporary insurance agreement (TIA)
9.3.1 Requirements for coverage
9.3.2 Coverage limits
9.3.3 Coverage duration
9.3.4 Agent’s responsibilities
9.4 Underwriting by the insurance company
9.4.1 Underwriting guidelines
9.4.2 Attending physician’s statement (APS)
9.4.3 Medical exam
9.4.4 Medical Information Bureau (MIB)
9.4.5 Motor vehicle record (MVR)
9.4.6 Inspection report
9.4.7 Requests for clarification or more information
9.4.8 Financial underwriting
9.4.9 People who are not Canadian citizens
9.4.9.1 Permanent residents
9.4.9.2 Awaiting permanent residency
9.4.9.3 International students
9.4.10 Frequent travellers
9.4.11 Avocations
9.4.12 Accelerated Underwriting
9.5 Risk classes and their impact on premiums
9.5.1 Standard risk
9.5.2 Preferred risk
9.5.3 Rated risk
9.5.4 Exclusions
9.5.5 Upgrading risk class
9.5.6 Declined
9.6 Client factors that may affect premiums
9.6.1 Age
9.6.1.1 Attained age
9.6.2 Gender
9.6.3 Health status or risk class
9.6.4 Hazardous occupation
9.6.5 Hazardous lifestyle
9.7 Company factors that may affect premiums
9.7.1 Mortality costs
9.7.2 Administration costs and expenses
9.7.3 Investment returns
9.8 Reinsurance
9.9 Issuing the policy
9.9.1 Delivery
9.10 Acceptance
9.11 Group life insurance
9.11.1 Basic group life insurance
9.11.2 Additional coverage
9.11.3 Creditor life insurance
9.11.3.1 Post-claim underwriting
Chapter 10: Assessing the Client’s Needs and Situation
10.1 Assess the family dynamics
10.1.1 Current spouse
10.1.1.1 Dependent vs. self-sufficient
10.1.2 Support obligations to ex-spouse(s)
10.1.2.1 Court-ordered insurance
10.1.3 Minor children
10.1.3.1 Current care arrangements
10.1.3.2 Child support to ex-spouse
10.1.3.3 Court-ordered insurance
10.1.4 Other dependents
10.1.4.1 Disabled family members
10.1.4.2 Aging parents
10.2 Assess the employment situation
10.2.1 Employee
10.2.1.1 Current income
10.2.1.2 Future income potential
10.2.1.3 Job stability
10.2.1.4 Group benefits
10.2.2 Business owner
10.2.2.1 Sole proprietorship
10.2.2.2 Corporation
10.2.2.3 Partnership
10.2.2.4 Existing buy-sell agreement
10.2.2.5 Business income stability and amounts
10.2.3 Retirement
10.2.3.1 Time to retirement
10.2.3.2 Retirement income sources
10.3 Assess current financial situation
10.3.1 Assets
10.3.1.1 Liquid assets
10.3.1.2 Fixed assets
10.3.1.3 Investment assets
10.3.1.4 Pension entitlements
10.3.1.5 Case study summary of assets
10.3.2 Debts
10.3.2.1 Mortgage
10.3.2.2 Credit cards and lines of credit
10.3.2.3 Other loans
10.3.2.4 Case study summary of liabilities
10.3.3 Tax liability upon death
10.3.4 Current expenses
10.3.5 Available cash flow
10.4 Assess existing insurance
10.4.1 Individual insurance
10.4.2 Business insurance
10.4.2.1 Relationship to buy-sell agreement
10.4.2.2 Type of policy
10.4.2.3 Ownership of policy and payment of premiums
10.4.3 Group insurance
10.4.3.1 Face amount
10.4.3.2 Policyholder and conditions of membership
10.4.3.3 End date and convertibility
10.4.3.4 Vulnerabilities
10.4.4 Government benefits
10.4.4.1 Canada Pension Plan (CPP) survivor benefits
10.4.4.2 Québec Pension Plan benefits (QPP)
10.4.4.3 Old Age Security (OAS) survivor benefits
10.4.4.4 Workers’ Compensation benefits
10.5 Identify client’s priorities in the event of death
10.5.1 Family lifestyle
10.5.2 Final expenses
10.5.3 Plans for future
10.6 Next steps
Chapter 11: Recommending an Insurance Policy
11.1 Evaluate the probability, severity and duration of risks
11.1.1 Probability of death
11.1.1.1 Current age and gender
11.1.1.2 Personal and family health history
11.1.1.3 Lifestyle risks
11.1.2 Financial impacts of death
11.1.3 Duration of risk
11.1.4 Other risks
11.1.4.1 Risk of illness or disability
11.1.4.2 Risk of unemployment
11.2 Insurance needs’ analysis – Income replacement approach
11.2.1 Capitalization of lost income
11.2.2 Impact of investment returns, inflation and income tax
11.2.2.1 Accounting for income taxes
11.2.2.2 Accounting for inflation
11.2.2.3 Accounting for income taxes and inflation simultaneously
11.2.3 Weaknesses of the income replacement approach
11.3 Insurance needs’ analysis – Capital needs’ approach
11.3.1 Income earned by survivors
11.3.2 Ongoing expenses
11.3.3 Income shortfall
11.3.3.1 Capitalization of income shortfall
11.3.4 Capital needs’ analysis
11.3.4.1 Final expenses
11.3.4.2 Tax liabilities
11.3.4.3 Debt elimination
11.3.4.4 Estate expenses
11.3.4.5 Emergency fund
11.3.4.6 Education fund
11.3.4.7 Estate equalization
11.3.4.8 Charitable bequests and legacies
11.3.4.9 Total capital needs
11.3.4.10 Assets available upon death
11.3.4.11 Existing insurance
11.3.4.12 Shortfall
11.4 Bringing it all together
11.4.1 Duration of risk
11.4.2 Investment needs
11.4.3 Cash flow vs. premiums
11.4.4 Coverage for spouse or dependents
11.5 Making the recommendation
11.5.1 Type of coverage
11.5.2 Death benefits
11.5.3 Premiums
11.5.4 Beneficiaries
11.5.4.1 Primary and contingent
11.5.4.2 Revocable or irrevocable
11.5.4.3 Probate implications
11.5.5 Highlighting important clauses
11.5.5.1 Exclusions
11.5.5.2 Incontestability
11.5.5.3 Grace period
11.5.5.4 Reinstatement
11.5.5.5 Right of rescission
11.5.5.6 Expiry
11.5.5.7 Surrender charges
11.6 Using illustrations
Chapter 12: Ongoing Service
12.1 Monitoring changing client needs
12.1.1 New dependants
12.1.2 Marriage
1