Continuing Education for Financial Service Professionals
Basic Concepts of Canadian Life Insurance
Basic Concepts of Canadian Life Insurance Copyright © 2014 CLIFE Inc. All rights reserved. Any reproduction of parts or all of this book and its contents by any means electronic or mechanical is prohibited.
Basic Concepts of Canadian Life Insurance is a collection of terms common to the Canadian life insurance industry. The definitions of the terms are “pure,” that is, they do not reflect the practices or policies of any insurance company. Thus, there may be some minor discrepancies between these definitions and how an insurer uses this terminology or interprets and applies these terms.
The information in this book is provided for educational purposes only; it should not be construed or interpreted as providing advice. Agents and advisors should always seek guidance from their principals and compliance experts in regards to informing themselves and others about details of the products they sell and other considerations of their business.
We welcome all feedback and suggestions for additions to the book. Please send your comments to info@clifece.ca. CLIFE INC. 1595 Sixteenth Avenue Suite 301 Richmond Hill, ON L4B 3N9 www.clifece.ca
Basic Concepts of Canadian Life Insurance provides continuing education credits upon satisfactory completion of an online test. Please see the website for details or email info@clifece.ca.
2
TABLE OF CONTENTS
INTRODUCTION Joint and Last Survivor Annuity 27 PART ONE: Knowing the Product Accident and Sickness Insurance (A&S) 5 Adjusted Cost Basis (ACB) 5 Annuities 6 Application 7 Assignment 8 Assuris 9 Beneficiary 10 Cash Surrender Value 11 Continuing Expenses 12 Contract 13 Cost Illustrations 13 Critical Illness Insurance (CII) 14 Death Benefit 15 Death Benefit Guarantee 16 Disability Income Insurance 17 Disposition 18 Effective Date 18 Errors and Omissions Insurance (E&O) 19 Face Page 19 Fair Market Value (FMV) 20 Grace Period 21 Grandfathered Policies 22 Guaranteed Minimum Withdrawal Benefit Plans (GMWBs) 23 Incontestability 24 Individual Variable Insurance Contract (IVIC) 24 Information Folder 24 Insurable Interest 25 Insured Annuity 26 Irrevocable Beneficiary 26
Last Expenses 28 Life Annuity 28 Long-term Care Insurance (LTC) 29 Maturity Guarantee 30 Maximum Tax Actuarial Reserve (MTAR) 31 Needs-Based Sales Approach 32 Net Cost of Pure Insurance 32 Non-forfeiture Options 33 Notional Units 34 Participating Whole Life Insurance 34 Payout Annuity 35 Permanent Life Insurance 36 Policy Dividends 37 Policy Loan 37 Prescribed Annuity 38 Reinstatement 39 Renewable Term Life Insurance 39 Replacement 40 Rescission 41 Reset 42 Segregated Funds 43 Settlement Options 44 Suicide Exclusion Clause 44 Taxation of Life Insurance 45 Temporary Insurance Agreement (TIA) 46 Term Annuity 44 Term Life Insurance 47 Term-to-100 Life Insurance (T-100) 48 Universal Life Insurance 49 Whole Life Insurance 50 PART TWO: SALES REQUIREMENTS 51
3
Introduction -
Every life agent knows there are two parts to the customer sales story: 1. Knowing the product; 2. Knowing the requirements for selling the product.
-
To correspond with both of these parts of life insurance sales knowledge, this Course is divided into two parts: 1. The basic concepts of knowledge needed of the products and product design; 2. The “back story� of your duties for compliance and needs assessment.
-
When you have finished reading the entire Course, your life insurance sales ability will be ramped up in both practical matters and matters of practice.
PART ONE: KNOW THE PRODUCT
Accident and Sickness Insurance (A&S) Accident and sickness insurance is a broad category of insurance also known as health insurance.
A&S is available for both personal use and for groups.
All Canadians enjoy basic health insurance from their provincial health plans. A&S policies step in to provide:
-
Extended health care. Pays for semi-private or private hospital rooms, prescription drugs, medical appliances (such as a knee brace), and other services.
-
Travel insurance. Pays the cost of health care needed outside Canada above the amount provincial plans cover. Will also cover costs such as those incurred by a traveling companion, and the return of a body to Canada.
-
Prescription drugs.
-
Dental services.
-
Accidental Death and Dismemberment.
-
Critical Illness Insurance. Pays a lump sum when the insured is diagnosed with a critical illness covered by the policy and remains alive 30 days after diagnosis.
-
Long-term Care Insurance. Pays for care of those who are no longer able to care for themselves.
Advisor Resource: CLHIA guideline on travel insurance: http://www.clhia.ca/domino/html/clhia/CLHIA_LP4W_LND_Webstation.nsf/resources/Guidelines/ $file/Guideline_G5.pdf
Adjusted Cost Basis (ACB) Adjusted cost basis (ACB) is the insurance industry term used to describe a dollar amount that represents the net cost of the life insurance policy to the policy owner. It is made up of the gross cost of the policy (in other words, how much has been paid --- mostly, premiums) plus or minus other contributions that add to, or are subtracted from, that value.
ACB increases by costs incurred by policy owner and decreases by benefits received by the policy owner. ACB is used to determine the taxable gain on a policy loan and the taxable portion of a withdrawal.
Costs that increase the ACB include:
-
Premiums.
-
A policy loan repayment.
The ACB is decreased by: -
Life insurance coverage, called the net cost of pure insurance (NCPI).
-
Dividends.
-
A policy loan.
-
A withdrawal.
The ACB calculation for a “plain vanilla” policy is: ACB = premiums – NCPI The ACB calculation for a par whole life policy with a policy loan is: ACB = premiums – NCPI – dividends – policy loan
When a life insured dies, the policy beneficiary receives the death benefit of the policy. The death benefit is not affected by the ACB. Advisor Remarks: 1. As of Dec. 2, 1982, the method for calculating the ACB changed. Policies issued prior to this date are called grandfathered. These policies have preferential tax treatment compared to those issued after that date. 2. ACB is a difficult concept. It is best thought of as how much the person is “out of pocket” in terms of expense for the product. 3. For non-insurance purposes, the ACB is the adjusted cost base. Only in insurance is “basis” used.
Annuities An annuity is an investment contract, usually made with a life insurance company. A single lump-sum deposit or a series of deposits funds the annuity. The deposits are called the premium.
An annuity rate applies to the premium and determines the amount of payment the annuitant will receive. It is largely based on the interest rate in effect at the time the annuity is purchased.
Annuities make a level payment that is a combination of return of premium plus interest. The exception to this is if the contract owner has chosen to deposit his capital into a variable annuity. Instead of receiving a guaranteed interest rate, he will receive annuity payments based on performance of the stock market. The amount of benefit from a variable annuity is not guaranteed.
If an annuity is funded with a single deposit, the annuitant can begin to receive a benefit on the first annuity period he has selected. This is called an immediate annuity.
Alternatively, if a series of deposits are made to the contract, the benefit will begin at a date in the future. An annuitant may also choose to make a single deposit but begin to receive benefits at a future date. This is called a deferred annuity.
Annuities are available for a specified term, such as 10 years or to age 80, or for life. A life annuity is available with a guarantee period in which a beneficiary is named. If the annuitant dies before the end of the guarantee period, the beneficiary receives the balance of guaranteed payments.
One option for RRSP maturity is a term-to-age 90 annuity or a life annuity. A life annuity is also a transfer option available to those with locked-in pension savings. Advisor Remarks: 1. The annuity benefit paid to the annuitant is determined by a number of factors. They include the rates offered by the insurer (there are differences between companies), the total amount of capital, how often the benefit is paid, and the age, gender and health of the annuitant. 2. All provinces define annuities as a form of life insurance. This gives them creditor protection. 3. Annuity benefits are paid monthly, every three months (quarterly), twice a year (semi-annually) or annually. The contract owner makes this decision on the application. 4. Withdrawals or surrender of the annuity contract is to be avoided since the annuitant will be financially penalized or prohibited.
Application After the life insurance agent has presented insurance options to the client, and calculated the correct amount of insurance required in a fact-finding interview, the client may then proceed to apply for the insurance policy.
Completing the application form correctly is a key job for the agent because its details, together with other information, form the basis for underwriting the policy.
-
The concept of constructive notice applies to the agent during the application process. This means the insurance agent must disclose all information about the proposed policy owner and proposed life insured to the insurance company.
-
A person appointed as power of attorney (POA) may complete an application for a physically or mentally disabled person. (A power of attorney is appointed in a legal document as a person who assumes decisions for another.) However, the POA may be restricted from naming a beneficiary.
-
After the application is completed, it must be reviewed with the proposed insureds, and signed by the proposed policy owner and agent. The agent must not sign on behalf of the client; this is forgery.
-
If the agent believes that the standard premium rate will apply, he or she will ask for a cheque in the amount of the first premium to accompany the application.
-
The agent must promptly deliver the application to the insurance company, and be prepared to acquire more information if requested by the underwriters.
-
All details of an application are highly confidential and must never be shared with another person without the consent of the proposed insureds.
-
When the application is approved, the policy is issued.
-
The application together with the policy forms the entire contract between the policy owner and the life insurance company.
Advisor Remarks: 1. The policy owner provides information about his or her income and finances on the application to prove that premiums can be paid. 2. The underwriting of the policy determines premiums. This will include medical information from the Medical Insurance Bureau (MIB). 3. If the agent thinks that the life insured presents a higher risk than is covered by the standard premium, the agent should not ask for payment to accompany the application. 4. The agent may be required to complete an Inspection Report, Drug and Alcohol Questionnaire, or Hazardous Sports and Occupations Questionnaire to go along with the application.
Assignment When a life insurance policy is assigned, it is turned over to another person, company, or organization. In effect, ownership changes hands and the original policy owner loses his or her rights to the benefits of the policy.
-
An absolute assignment sees a policy switched from its owner to another owner. It could be used if a business held a key person life insurance policy on a senior executive in which the business was named as the beneficiary, and that executive leaves the company. Part of a compensation package could include transfer of the policy so that the executive assumes the obligation for premium payments but is able to name a beneficiary for the life insurance coverage. This is a permanent change.
-
A collateral assignment sees a policy switched from its owner to a financial institution. This would occur if a person was taking a loan for business purposes. Collateral (or security) for taking the loan is provided to the lender by the policy. If the borrower dies with the loan unpaid, the death benefit of the policy goes first to the lender and the balance to the beneficiary of the policy owner. The collateral assignment could be terminated when the loan is repaid.
-
A charitable assignment sees a policy switched from its owner to a charitable organization. When the charity becomes the beneficiary, the policy owner receives the tax benefit that applies to a charitable gift. If a policy owner assigns the policy and continues to pay premiums, each premium is a charitable gift for the year and receives a non-refundable tax credit.
Advisor Remarks: 1. Some or all of the premiums paid for a life insurance policy used as collateral may be an allowable tax deduction. 2. Tax specialists should be consulted when assignment is contemplated.
CLICK HERE TO ORDER