The Ganadian Life lnsurance Course (LLOP) TABLE OF CONTENTS
Glossary
........i
Module 1.' WELCOME TO THE LIFE INSURANCE INDUSTRY.........................1-1
PART
1
Module 2: TIJE LAW AND LIFE Summary of Key
INSURANCE.......
Points
................2-91
^lIodule 2b: TIJ.F" LAw AND LIFE TNSURANCE: Case
.lIodule 3.'UNDERWRITING AND
.....2-l
Studies
CLAIMS...a...........
zb-l ................3-1
Summary of Key Points
4.'PROFESSIONALISM.. Summary of Key Points
.r[odule
INSURANCE....... Summary of Key Points
.r[odule 5; THE NEED FOR
.....4-l ................4-27
..............5-l ................5-25
Studies ...... 5b-1 LESSON 1: The Mathematical Calculations of lnsurance............ .Sb-2 LESSON 2: Ratios, Compounding and the Rule of 72........ ..........5b-4 LESSON 3: The Time Value of Money .........5b-4 LESSON 4: Matching Needs to Products ............ .........5b-7 LESSON 5: lntegrating Financial Planning with Life and Health lnsurance 5b-13
rlodule 5D; THE NEED FOR INSURANCE: Case
PART 2
Module
8..
INDIVIDUAL DISABILITY AND ACCIDENT & SICKNESS
INSURANC8................;.....,....... Summary of Key Points
\lodule 8r.' HEALTH INSURANCE FOR INDIVIDUALS: Module 9.' GROUP INSURANCE Summary of Key
Points
.........
......8-1 ................g_4g
Case Studies.......... 8b-L
...........................9-1 ................9_3g
PART 4 Modale 10.' INVESTMENT BASICS Summary of Key
Points
rc47
Module 10r.'INSURANCE INVESTMENTS Summary of Key
Points
Module 10c.' INVESTMENTS: Case
..............................
10b-1 10b-50
Studies
........o...10c-1
Module 11.' RETIREMENT .,..........................o...........o.....o.....o....................................11-l Summary of Key Points
Studies Bonus Modulez EXAM PREPARATION Module 11r.. RETIREMENT: Case
Index.....
..............,....o..........
11b-1 ................12-1
....I-1
Glossary ubsolute ussignment' the transfer of all of the rights
-1
of the original policy owner to
another pafty,
including the right to appornt a benefictary. uccelerated death beneJit: a rider that pays all or some of the face amount of the policy to the life
l1
insured thereby reducing the amount
-l
of
death
benefit the beneficiary will ultimately receive (also known as a living benefit rider or a terminal illness benefit). accidentul deuth and dismemberment: an accidental
-1
l5
death benefit that also provides coverage for dismemberment, such as the loss of a limb.
uccidental deuth bene/it: a payment made, in addition to the face value of the policy, if the life insured dies in an accident (also known as double indemnify).
& sickness insurunce: provides all or partral coverage for medical and dental expenses that are not covered by provincial health plans. accrual taxution: tax that is imposed on the growth in afi investment. Accrual taxation is normally applied to investments producing returns such as interest, dividends, and capital gains. Registered investment products and exempt life insurance accident
1 B
1
I
policies are not subject to accrud taxation. occrued rate annuity: an annuity in which taxes are paid on an accrued basis resulting in tax declining annually.
B
accumuluted vulae: the net amount paid
for
a
deferred annuity plus interest.
t
accutnuluted
fund: the pool of
savings
built by
t
deposits to a universal life policy. (rccumulation period: the period between the date a deferred annuity is purchased and the beginning of annuity payments during which the value of the
)
actively-ut-worlr provision: specifies that
7
deposit grows.
if
an
employee is absent from work on the day the group
insurance contract is due to begin, (because of sickness, injury, or certain other specified reasons) coverage will not begin until the day the employee
t
refurns to work.
actual uuthorityt the authority given to an agent to perform certain tasks. adjustable premium: premiums that change over the life of a whole life policy. adjusted cost base (ACB).' a dollar representation, for tax pu{poses, of the policy owner's cost of capital property, e.g. the amount spent to buy a cottage.
arljusted cost basis (ACB): a dollar representation, for tax pu{poses, of the policy owner's cost of a policy, e.g. premiums paid.
adverse selection: the concept of providing insurance coverage for people because they ate a member of a group and not because they need coverage. ugency contruct: the arrangement between the principal and the agent.
ullowunce: a monthly benefit paid to residents of Canada who receive the OAS and have income.
uvnendment: a document that an applicant must sign to indicate that he or she accepts a rated policy before it is issued.
unnuitant: the person who receives the payments from arr annuity or the proceeds of a segregated fund on death or maturity of the fund contr act. annuitizution: when a pension fund is converted to an annuity.
unnuity certnin' also known as a term certain annuity. Pays annuitant a guaranteed amount for either a defined period, a period ending at a specified zga, or a period equal to the number of years from annuitants age at the time of purchase and age 90 or until his or her spouse turns 90. annuity option' offers the owner or beneficiary three payment options: monthly installments guaranteed for life, &S a joint and last survivor annuity for the contract holder and his or her spouse, ?S a variable
annuity, installment refund or cash refund.
unnuity units: the number of units (based on
l
dga,
gender, and the prevailing interest rate) paid each
month to the contract holder or benefic tary
of a
segregated fund.
unnuiQ: an investment that pays a sum of money annually or at other regular intervals.
any occupotion (uny occ): a definition of disabilify that means a person is considered disabled
if he or
she is unable to work at anyjob.
appurent uuthorityt the implied or suggested authortty granted to an agent, even if this was not the intention of the principal. assignment: assignments of insurance policies can be absolute or collateral, and can be made to a person, a chanty, or corporation. ussuming compuny: the reinsurer who accepts the transferred risk when the retention limit has been
reached.
(
a non-forfeiture benefit which automatically charges unpaid premiums as a loan against the cash surrender
uutomutic premium loun (APL):
value of a policy. uverage monthly pensionoble eurnings (AMPE):
to determine the amount of monthly retirement pension. overage tux rate: one of two tax rates, also known as effective tax rate. bsck-end load: a sales charge that is applied at the used
end of a contract.
i
little other
The Canadian Life Insurance Course
back-end surrender charge: a charge that may be applied tf a policy is surrendered. busic group AD&D.' can insure different classes of employees at rates that can' be a multiple of salary. Premiums are paid by the employer.
basic promise: the promise in the policy that identified the life insured, the amount of the
capitul retention approach: the capital required to provide the annual cash needs of the survivors. Also known as the capital needs approach. capitulizution of income: based on the calculation of
the present value of the survivor's share of the income stream that the deceased person would have received had he or she lived. Also known as
insurance payable, when and where that amount is payable, and to whom it is payable. beurer form: the bearer of the bond can sell the bond and collect the interest from the coupon. beneJiciary: the person who receives all amounts payable when the conffact holder dies.
the human tife value approach. capituliT,ed value: dete.rmines how much would have to be in-vested at a certain rate of refurn to equal the amount of money a person would earn in a year. coreer average earnings plun: a employer-sponsored
bene/it' income or payment received by the policy
pension credit in every year of employment based on employment income for that year.
owner. beneJit period: the length of time an income received.
will
be
beneJit schedule: identifies the amount of life insurance coverage or the method by which the insurer will determine the amount of coverage. best earnings pluns: a employer-sponsored pension
average of the best years of pensionable earnings. Usually 3 to 5 consecutive based
on the
years.
bond: represents a debt of a government
or corporation to the bondholder. business overhead policy.' covers business overhead expenses when the prime revenue earner is unable to produce because of an accident or sickness that causes disability.
bay-sell ugreement:
a legal contract
between the
seller (the sole proprietor, partner, or shareholder) and the buyer. These agreements, funded with life insurance, provide the benefictary with sufficient funds to acquire the deceased's interest in the proprietorship, partnership, or corporation. culluble bond: can be redeemed by the issuer before the maturity date under certain conditions.
Canadu Educution Suvings Grant (CESG).' the contribution to an RESP made by the federal government.
Cunudu Pension Plan (CPP): a federal government retirement and disability pension.
Cunadu Suvings Bonds.' issued by the federal government with regular or compound interest. A minimum interest rate is guaranteed for one or more years, depending on the issue.
capitul guins tux: a tax on financial gains made on capttal prop erty inve stments
.
capitul losses: when caprtal property is worth less than its purchase price and can be used to offset capttal gains.
capitul property.' investments such as stocks, bonds,
mortgages,
real property, mutual funds,
segregated funds.
and
pension plan where the employee receives
a
carry 'forwurd: a feafure of RRSPs that allows a person to carry forward any unused contribution indefinitely and apply it to subsequent years. cuse low: another truttta for common law. cush refund unnuity.' guarantees the annuitant an
income
for life. If the
annuitant dies before
receiving payments equal to the purchase price of the annuity, the difference befween the purchase price and the total amount received is paid to either a beneficiury or the annuitant's estate in a lump sum.
cush surrender vulue (CSV): the money in the policy reserve which can be accessed by the policy owner
and received in cash. The value premiums plus interest, less costs.
of the CSV is
of insurunce.' the document or booklet which a group plan member receives that outlines
certfficote
the benefits and other relevant details regarding the master contract held by the employer. children's bene/it: the beneflt a child receives when a palent who was a CPP contributor dies. churning.' occurs when an agent seeks to replace an in-force policy with an eiisting insurance company with a new policy from the same company for the purpose of generating a new commission. cluim: the application made on behalf of an insured
to
recover benefits due as
a result of
death,
disability, or accident.
cluimunt: the person or legal entily that is claiming the benefit from a life insurance policy. cluwbuck: a special tax which "claws back" all or part of the OAS pension from high income earners. of ethics: ethical conduct guidelines that have been established by the Canadian Life and health Insurance Association (CLHIA) and Advocis. coercion: intimid attng, threatening, or using undue influence to obtain insurance business. co-insurunce factor.' is expressed as percentage of an insurance claim that is paid by the insurer. colluteral assignment: when a policy is assigned to a financial institution as security for a loan.
-codes
Glossary
colluteral
lW insurance: a life insurance policy
assigned as collateral for a loan.
developed
common law: the law which comprises the bulk of law in Canada with the exception of the Province
of Quebec. Common law is based on custom and usage dating from ancient unwritten laws in England and which were collected together and established as the Common Law of the Realm. Also known as case law. common mistake: a mistake made in a contract that affects both parties. Also known as a mutual mistake.
common shares: shares which represent ownership in a company and which give the holder voting rights. Dividends are paid on common shares if declared by the board of directors of the company.
compounding.' occurs when an person reinvests distributions from an investment (e.g. interest), so that he or she is earning growth on growth (e.g.
health cate and dental benefits paid under group plans to ensure that benefits do not exceed total eligible expenses. co-pay.' when the group insured must pay a fixed percentage of costs. Also called co-insurance. corporute bond: evtdence of a corporate debt.
corporution: an incorporated company. An incorporated company issues shares and
shareholders are entitled to certain rights (e.g. such as the right to receive financial information about the comp zny, and to attend shareholder's meetings). cost illustrutions: point-of-sale tools used to illustrate hypothetical policy dividends and other benefits derived from life insurance products that are not guaranteed.
of living udjustment (COLA).' an adjustment made to help some incomes keep up with inflation. As an insurance rider benefits will increase according to the amount of increase
cost
interest on interest).
conflicting interest: an interest that would likely have an adverse effect on an agent's judgment, advice, or loyalty to a client or prospective client. considerution: a part of a contract which indicates the exchange of value.
constructive notice: information given
by
an
applicant to an agent is deemed to have been given to the insurer. contestable: the policy can be made void within two years of its date of issue by the insurer.
of benefits guidelines: guidelines by the Canadian Life and Health Insurance Association to coordinate extended
coordination
if
mistakes are discovered
specified in the rider. coupon bond: interest coupons are attached and can be presented for payment.
creditor: a person or an institution that is owed money by another.
criss-cross flgreement: a buy-sell agreement which has all partners or shareholders insuring the lives
of each other.
contingent beneficiury: a beneficrary who would receive all or part of the insurance proceeds if the primary beneficnry is not living when the policy
critical illness insurunce (CII): designed to manage the risk associated with contracting certain
matures. contract holder'.' the owner of a contract.
critical loss: where financial ruin is a possible result. cross-purchuse ugreement: afi agreement that names the buyer of the business as the policy benefictdry,
of adhesion: the term used for a life insurance contract because the applicant either accepts or declines all of the terms and conditions of covercge that are set out in the contract. There is
contruct
no opportunity for negotiation. contruct: a promise or a set of promises that the law
will enforce. contructs under seal: do not require the elements of offer, acceptance, and consideration to be enforceable, but do require a seal.
dreaded diseases.
when the business is a sole proprietorship. When the owner dies, the buyer receives the face amount of
the policy. That money is then used to buy the business from the heirs of the deceased.
crystallizution: when a taxpayer dies and all accrued income, and capttal gains and losses must be reported in the year of death. current yield: reflects the annual rate of return on an investment.
is paid to
contributory plun: the group member contributes
deuth benelit' the money which
towards the premium for group insurance. conversion privilege: a clause that allows convertible term policies and policies with term riders to be
benefictary upon death of the insured. debenture: a bond which is supported by the general credit worthiness of the issuing corporation. debt securities: investments involving a loan given by an investor in return for regular payments of
converted to permanent evidence of insurability.
life insurance
without
interest plus
the
a repayment of the loan on a
specified date.
iii
The Canadian Life Insurance Course
disubility.' as defined in a policy (for example, it may
debtor.' a person who owes money.
decreasing term insurunce: (infrequently used) term insurance which provides a level premium over a long term, a decrease in the face amount each year, and a death benefit paid to the beneficuary for the face amount in force at the time of death of the life insured during the term specified in the policy. deductible: an amount the insured pays before payment is received from the insurer. deferred unnuity: an annuity that begins at a future date. The annuity ean be purchased with either a single premium or a series of premiums. deferred profit-shuring plan (DPSP).' a trust created for all employees of a company, or one or more
classes
of
employees
of that company,
and
registered with CCRA.
deferred sales charge.' the investor pays
a
sales
charge when all or part of the original investment is
redeemed.
The sales charge declines over
an
agreed-upon number of years until, at the end, the charge is eliminated. de/ined beneJit plan: a employer-sponsored pension plan where the employee knows exactly how much he or she is going to pay for the pension and how much he or she will receive when retired. deJined contribution plun: pools contributions of the employer and the employer to provide the pension. Also called a money purchase plan. dependency period: the time following death during
which the surviving spouse must have sufficient income to provide care for the children until the youngest reaches the age of eighteen.
ltfe: provides a specified amount in a lump-sum payment to the group member in the
dependent
event that his or her spouse dies. deposit-based guuruntee: when deposits are made on a periodic basis to a segregated fund, and when companies make the maturity date calculation on the basis of each deposit.
a physical impairment but not a mental disability); however, the disability must result from an accident or sickness that occurred while the policy was in force, and the disability must require cover
medical attention. dispositiorr.' when a life insurance policy is disposed of. Disposition has tax consequences. distributions: the periodic payments of interest or
dividends made
by mutual funds or
segregated
funds.
dividends (corporute): a share of profits that have been earned by the corporation and distributed to shareholders on a pro-rata basis. Dividend payments are not guaranteed.
dividends AW insurunce): an overpayment of premiums by the participating policy owner returned to the policy owner in annual dividend form. They are not guaranteed and there are a number of ways the dividends can be received. See special term additions andpremium ffiet.
dollur-cost averaging: achieved when the same amount of money is invested regularly over a period of time. dread disease beneJit: payable when death is caused by one of a number of specified diseases, such as cancer.
due diligence: betng able to show that a reasonable basis exists for the recommendations given.
earned income (fo, RR^SP und tux purposes): income from all sources. Earned income for tax purposes includes investment income (interest, dividends and capttal gains) whereas earned income for RRSP purposes does not include investment income.
eurned income
(fo, disubility insurunce):
includes
salary, wages and commissions, royalties, alimony payments, net research grants, and net business income.
derivutive: a financial product that is derived from
effictive dute.' the date upon which the policy
and based upon another financial product, such as a stock market index, a commodity, etc. direct writer: the insurer that issues a policy.
effect and the coverage starts. eliminution period: the time between the occuffence
disability buy-out insurunce: can only be used for businesses that have buy-sell agreements in place. It allows partners, owners, or shareholders of a business to purchase the share in the business held by another partner, owner, or shareholder who becomes disabled.
disubility income beneJit: a rider that provides
a
monthly income, after a waiting period, when the life insured is totally disabled. This rider can only be added to a two-p
afi
contract.
disabili$ income insurunce: provides a monthly income to those unable to work because of arr accident, sickness, or disability.
iv
takes
of the disability and when benefits begin. The waiting period during which benefits are not paid. embezzlement' stealing and using another's money. Embezzlement is a criminal offence. employee assistance programs: provide professional consultation to employees and their families to provide immedtate support, education, and access to resources for a wide range of employee needs, such as counseling for stress and dependency problems.
employer-sponsored
pension plun: a
fund
established by an employer to provide a retirement income for its employees. Often, both employers and employees can contribute to the plan.
Glossary
endowment policy: a variation of a whole life policy which pays the face amount if the life insured dies within a specified period of time (the endowment
period).
equiQ: common or preferred shares. errors und omissions insurance (E&O): professional
liability coverage carried by insurance agents and insurers against lawsuits claiming mistakes in professional judgment, andlor failure to properly execute the steps of putting a policy into effect. estute: a term commonly used on a person's death to refer to all of his or her assets. ethicul conduct: the measure of a life insurance agent' s business character and his or her adherence to the codes of ethics established by CLHIA and Advocis. evidence of the contruct: the insured's application and the insurer's policy. exclusion rider: a rider that excludes some coverage. exclusions: benefits denied under certain circumstances.
execution portion of policy: the part of the policy that confirms the date of issue of the policy and
when signed by the officers
of the insurance
company, finaltzes the contractof insurance. exempt policy.' provides tax benefits to the policy owner because the growth in the policy is not taxed until its disposition. exemption test: policies last acquired since December 2, 1982 must pass an annual test on the renewal date to determine whether the policy is classified as exempt or non-exempt. expense louding.' the allocation of part of a premium toward the payment of the insurer's operating expenses.
expiry dute: the day term insurance coverage ends.
extended eliminution period umendment: a limitation in a disability policy that extends the elimination period when a claim arises from a preexisting condition.
extended term insurance (ETI): an option which allows a policy owner who stops paying premiums to keep coverage in force by using the cash surrender value as a single premium to buy term insurance.
fuce umount: the amount of the insurance payable.
face pnge: describes the basic components
in
the
policy. Also known as the schedule.
failure of others: when others do not fulfill
obligations they have made to you and you face risk resulting from their inaction. fuir market value.' the value of an item based on the price if neither the buyer or seller are under duress and both are fully informed about the value of the item.
fo*ily
deductible: an amount the insured pays for all
family members covered under the group plan before payment is received from the insurer; the
amount is reduced if the single deductible is paid before the family deductible.
Jidaciary duty: the responsibility of confidentiality and trust.
fidaciury relationship: the relationship between a fiduciary (someone having a responsibility of confidentiality and trust) and his or her client.
Jinol uveroge enrnings plans: a employer-sponsored pension based on the final income-earning years.
/inanciul services.' the insurance industry is one element of Canadian financial services which also includes banking and securities.
Jiscal policies.' determine how the government will
raise income through taxation and how government will spend that income.
the
Jixed-term unnuity.'
a term certain annuity. plans: beneJit a employer-sponsored pension IIat plan that specifies the age and the number of years of service that are required before the employee is eligible for the benefiL forgery.' something written or prepared in writing to deceive, such as a false signature. Forgery is a
criminal offence. fruud: a fraudulent misrepresentation intended to cheat or deceive.
fraudulent misrepresentation: a false representation which a party makes deliberately, knowing it to be false, and with the intent of deceiving the other party to enter into the contract.
front-end loud: a sales charge that is applied at the beginning of a fund contract.
fully-insured plan: a group plan where the policy owner pays a premium and the insurer pays all claims. Under this plan, it is possible for claims to exceed premiums.
fature contructs: contracts that involve a commitment to buy or sell a specific quantity of an asset, at a specific price, for delivery during a specific period of time. groce period: the 30 or 31-day period during which the policy remains in full force before a policy is lapsed for non-payment of a premium. grundparented policy.' a policy last acquired before December 2, 1982. The policy owners do not have to report income accruing for tax pu{poses. gross premium: the net premium of a policy plus the expense load.
group creditor life: provided to creditors to insure the
life of their debtors.
group insurunce: pools the risk of individual members of the group to provide insurance without requiring evidence of insurability.
The Canadian Life Insurance Course
group retirement suvings plun (GRSP).' provides benefits similar to those offered by individual RRSPs except the employer administers them on a group basis. Employees contribute by wage deduction, matched in whole or part by employer. growth allocation: the process of distributing growth in a segregated fund to each contract holder.
Guurunteed Income Supplement (GIS): monthly benefits paid to residents of Canada who receive the OAS and have little other income.
guuranteed insurubility: a benefit that protects the life insured from becoming uninsurable by giving
the policy owner the right to buy more life insurance at certain times.
Guuranteed Investment Certfficutes (GIC{: afi interest-paying investment in which principal and interes t are guaranteed.
income payments: cash provided under the cash
surrender value that
is
received
as
periodic
payments over a period of time.
income splitting: a term used to describe strategies used to save taxes by diverting income from a high tax-bracket family member to a family member in a lower tax bracket.
incontestable clauses.' clauses that state that a life insurance contract is incontestable by the insurer when it has been in effect continually for two years after the issue or reinstatement date.
increosing term insurunce: term insurance which covers a life that is increasing in economic value,
such as an essential employee whose salary increases annually.
individual vuriable insurance contruct QVIC).' the contract that buys into a segregated fund.
guoranteed policies.' whole life policies which have premiums and face amounts that are set (do not change over time). gaoronteed return' ellsures an rnvestor will receive a predetermined amount of growth on the
inflution protection: the level of protection against
investment. hazards.' contribute to perils and can be both physical
innocent misrepresentation: a false representation made without the intent to deceive the other party.
or moral.
health insurunce: sold through accident and sickness policies, it reimburses the insured for out-of-pocket expenses.
high severity/low frequency risks: risks that have a low likelihood of occuffence, but that would cause severe losses should they occur.
holding out: how an agent presents himself or herself
to the general public. A
licence
to sell life
insurance must be obtained before a person can be identified or held out as a licenced life insurance agent.
home buyer's plan' allows an RRSP plan holder to withdraw up to $20,000 from his or her RRSP for the purchase of a home under certain conditions. haman life value upprouch: based on the calculation of the present value of the suryivor's share of the income stream that the deceased person would have received had he or she lived. Also known as the capitalization of income.
immediute annuity beneJit' purchased with a single premium. Income begins at the end of the first
annuity period after it is purchased (e.g. if the annuity period is one year, the first payment is received one year after the annuity has been
purchased.
importunt /os,s.' where financial adjustments are required that will reduce the standard of living. in kind: arry assets not in the form of cash but which have a cash value.
vi
losses caused by inflation that an investor requires.
informution folder.' the disclosure document of segregated funds which provides the investor with information regarding the fund.
Also known as negligent misrepresentation. inspection report: detail any hazardous recreational
or occupational activity of the policy applicant, as well as financial data on both policy holder and life insured.
installment refund annuity.' guarantees the annurtant a set number of payments equal to the purchase
price.
If the
annuitant dies before receiving
payments equal
to the purchase price of
the
annuity, the difference between the purchase price and the total amount received is paid to either a beneficLary or the annuitant's estate in installments.
insuruble interest: when the death of the insured would be detrimental or cause harm to the person taking out the insurance.
insured: the person who is the owner (policy owner) of the policy and pays its premium. insurance regulutors: regulators of the insurance industry and segregated funds.
interest rute-sensitive policies.' policies that are linked to interest rates and react to changes in interest rates. (Also known as new money plans). intestate: when a persol dies without leaving a will. investment returns: the refurns (growth in value) investors receive on their investments.
irrevocable beneficiary: the policy holder cannot change the beneficnry unless the beneficuary agrees in writing to the change.
Glossary
issue and participution limits: designed to protect against overinsurance. They consider how much income a disabled person is earning from all sources, and provide the difference between the insured's limit and what is already being received. joint Jirstflast to die: a contract in which more than one life is insured and settlement is made to either the survivor (first to die) or the beneficrary (last to die).
joint and last survivor annuiQ.' provides a guatanteed income during the course of two people's lives.
key employee: an important employee whose death would cause the business a devastating blow. key person disubility insurance: insurance used to cover a person who is a key employee. There are three parties to this contract: the policy owner (business), the insured (employee), and the insurer. know your client rule: part of the Code of Ethics for life insurance agents which states that an insurance agent must make every effort to understand his or her client's needs and financial sifuation.
law of agency.' allows a client to purchase life insurance without direct contact with the insurance agency.
legal cupacity: a person's legal ability
rights, duties,
to alter their
or obligations (for example,
by
entering into a contract or writing a will). Ievel death benefit plus cumulutive gross premium: the level death benefit of a universal life policy plus the amount of each gross deposit before premiuffis, taxes, deductions, and expenses. level term insurance: term insurance which specifies in the policy exactly how much the insurance will cost, how much it will pay out, who will receive the death benefit, and when the insurance expires.
leveraged deferred compensation plon (LDCP): combines the benefits of a universal life insurance policy with a loan in retirement. Ieveraging: when borrowed money is invested.
Iiability risk: when a person intentionally
LIRA, another LIF, locked-in pension funds, or a pension fund may be transferred and then paid out to the fund owner as retirement income. life insurunce: insurance which provides financial protection against financial loss resulting from death.
life insured: the person whose life is insured by the life insurance contract. life retirement income funds (LRIF): a vatiation on the life income fund (LIF) in which there is no requirement to purchase afi annuity by age 80. pays a gvaranteed income for
lW struight annuity: life.
Itfelong learning plan: allows an RRSP plan to withdraw up to $20,000 for educational expenses.
limited payment umendment: a restriction in an individual disability income policy that limits the benefit period when a claim is made resulting from a pre-existing condition.
limited puyment ltfnt another form of whole life insurance. Premiums on these policies are limited and only payable for a certain period or to a certain age.
linear reduction method: the adjustment made to
a
segregated fund contract when there is a withdrawal that reduces the value of the contract by the dollar amount withdrawn.
Iiquidity.' the ease with which investments can
be
converted to cash or near cash. loads: sales charges for a mutual or segregated fund. Iocked-in plans: a restriction under the Pension Benefits Standards Act that prevents a person from cashing-out pension benefits to ensure that the person has an income for lift. Pension monies must
be placed in locked-in plans
if the pension
plan
member wishes to transfer his or her plan out of the employer- sponsored plan.
Iocked-in income retirement account (LIRA).' a form or
unintentionally inflicts personal injury on someone else, or causes damage to another's property.
IW annuity with u guorunteed number of puyments: provides afi income that is guarafiteed for a specified period of time or until the death of the annuitant after that period of time. If the annuitant dies before the end of the period, the balance of the to the beneficrary until the guarantee period ends. If the annuitant outlives the guatanteed period, payments continue until the last installment before his or her death. Iife annui$.' makes income payments for the lifetime of the annuitant.
benefits afe paid
lW income funds (LIF): retirement fund into which the accumulated savings in a Locked-in RRSP,
of Locked-in RRSP into which pension benefits may be transferred from an employer's plan when the employee leaves the company prior to the age of retirement. Ioching in: when vested money is locked in to arr RRSP, a LIRA, or LIF account until the employee retires or to a date specified in the plan.
long-term cure benefit' payable when the health condition of the life insured requires long-term eare, such as in a nursing home. long-term disubility policy.' has a benefit period of five years or longer. Benefits begin after short-term disability or government benefits end.
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The Canadian Life Insurance Course
look-see period: the ten days that a policy owner has
to decide whether or not to keep the policy after acknowledgement of receipt of the policy. (Also called the rescission period).
loss prevention: controlling risk by reducing the frequency of loss.
loss reduction: controlling risk by reducing the severity of loss. management expense: fees that cover the cost of running a segregated fund.
marginal tax rute: the rate at which an individual
is
murket risk: investments thf move with the market. If the stock market moves down, the value of the investment moves down.
murket value udjustment; when an annuity contract is surrendered, or an early withdrawal made, afl adjustment is made to the interest rate on which the fixed benefit annuity is based. muster contruct: the group insurance policy which is given to the policy owner, usually an employer. are
required.
material misrepresentution: a misrepresentation of a fact such that, if the truth had been known, a reasonable insurer would have refused to issue the insurance or would have charge a higher premium for it.
muturity guorantee: provides for the guaranteed return of at least 7 5% of the initial deposit to a segregated fund 10 years after the date the contract is signed by the investor. muximum tux sctuarial reserve MTAD.' the name given to the specified amount used in the annual exemption test to determine whether or not a policy is tax exempt. meeting of the minds: when the parties have agreed to all the details of a contract. minors.' individuals who have not reached the age of majority as defined in the province where they reside.
misrepresentation: when one of the parties to a contract has been induced or persuaded to enter into the contract through the misrepresentation (or false representation) of the other party.
mistake: when a mistake has been made about the details of a contract and there has been no meeting of the minds. modul factor.' arr additional charge factored into the premium cost to reflect additional costs associated with the processing of insurance premiums that are paid monthly or quarterly, rather than in a single payment.
monetary policy.' how the government manages the money supply.
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by occupation based on the probability of sickness and irUuty occurring. mortoliQ churge.' the cost for insurance protection in a universal life policy. mortulity rutes: the number of people expected to die at a given dga, based on 1,000 people of the same age.
mortality tobles: the tables used by underwriters in the calculation of life insurance premium rates. municipal bonds: issued by municipalities. Usually term or serial bonds. Most are non-callable.
taxed.
muteriul /oss.' where financial adjustments
morbidity experience: the classification
mutual compunies: companies owned
by
policyholders.
of money managed by professional fund managers, funded by investors with similar investment objectives. The fund's portfolio may consist of a variety of investments. mutual mistuke: a mistake made in a contract that affects both parties. Also known as a common
mutuul funds: pools
mistake.
negligent misrepresentation: a false representation made without the intent to deceive the other party. Also known as innocent misrepresentation.
net usset vulue (LYAV): the net assets in a mufual fund minus liabilities, divided by the number of units outstanding. net cost of pure insurance (IVCPD.' the life insurance cost within the poli.y. net deuth benejit' the face value of the policy plus any extras the policy owner may be entitled to receive.
net premium outluy.' the difference
between
premiums paid and premiums received. no-load fund: a fund that charges no sales fee but usually compensates by charging a higher management expense fee.
nominul rute of return: the "named" rate of refurn for an investment (i.e. a GIC that pays 4% interest; 4% is the nominal rate of return).
non-contributory plan' the group policy owner, often the employer, pays the full premium for the group insurance.
non-discriminatory beneJits schedule: all employees in a group plan receive the same coverage. non-exempt policy.' the policy owner must report the income that is accruing in the policy yearly. non-forfeiture options also called non-forfeiture benejits.' a benefit or value that allows coverage to continue even if premiums are not paid. There are three non-forfeifure values: automatic premium loan, extended term insurance, reduced paid-up insurance.
non-purticiputing policy.' a whole life policy which does not pay dividends.
Glossary
non-refundable tox credit: the amount of the credit is
refunded
only when tax is owed (charitable
contribution).
notional units; theoretical units assigned to investors in segregated funds so that they can monitor the growth of their investment.
occuputionsl classiJicution: the five categories into which occupations have been classified based on
the likelihood of a claim being made. The
classification is based on the hazard inherent in the
job and the likely duration of the disabilrty that will result from work in that occupation.
offer und ucceptunce: afi essential element of
a
contract, also know as mutual assent or bargain. old age security (OAS): a monthly pension payable to all Canadians or legal residents age 65 and over
who apply for the benefit and meet
residence
requirements. open-ended investment
fund: a pooled investment in which new units ate continuously sold to new investors and existing units are redeemed upon demand by the fund.
option' a contractual right or obligation to buy or sell a specific quantity of a security at a specific price, within a stipulated time period over-contribution: a lifetime and cumulative limit of $2,000 over the RRSP contribution allowed before
of lo/o per month is charged on the over contribution. overhead expenses: expenses incurred in running a a penalty
partners, if desired. partnership property.' property owned
by
a
partnership which a partner may sell at a fair price to the other partners, if desired. purtnership: a business entity owned by a group of two or more individuals. pust service pension odjustment' the adjustment an employer makes to an employee's pension plan for the years the employee worked for the employer before the pension plan was implemented. past service benefits.' pensions for employees who
have worked for their employer prior to the implementation of the pension plan by the employer.
puy-direct plun: the insured is provided with a drug insurance plan card to pay for the drugs and the pharmaey bills the insurer directly. pecuniury interest.' opportunity to profit financially from an investment or circumstance. pension udjustment' the value of benefits accruing in a company-sponsored RPP or a DPSP. Pension adjustment for any current year must be deducted when calculating the allowable RRSP contribution for the subsequent year. pensionuble earnings.' the amount of income on which the pension contribution is based.
perils: exposure to pure risk that leads to loss. permonent insurance: insurance which insures for life.
business.
overinsuronce: paying more
purtnership interest: a share in the partnership which a partner is able to sell at a fatr price to the other
to a disabled person
than the person received as earned income.
own occupntion (own occ): a definition of disability that applies to a person who is unable to perform the essential duties of his or her own regular or previous occupation.
puid-up addition: where dividends are used to buy additional paid-,rp insurance.
paid-up insurance @UI): an option when a policy owner stops paying premiums to convert the cash surrender value to a reduced face amount of the same policy type. por policy: a whole life participating policy (pays dividends).
purent waiver.' allows all fufure premiums to be waived if the parent dies or becomes totally disabled, until the child is a certain age, or until the end of the contract. purtiul dispositions.' dividends and policy loans made after March 31, l9l8 are considered to be partial dispositions. purticipating policy: a whole life policy which pays
dividends.
purtnership debt: the responsibility of a partner for the debts incurred by the partnership.
personul contruct: a contract in which the insured and the life insured are the same. personul income needs approach: identifies the needs of dependents and family members that must be met in the event of the loss of a major income stream.
personul risk: risks that directly affect individuals and their dependents.
policy loun: loans made against the cash surrender value of a policy. Most insurers limit loans to 90oA of the CSV.
policy owner.' the owner of a policy, the policyholder. policy reserve: a portion of whole life policy premiums which accumulate to form a policy reserve.
policy-bused guaruntee: when deposits to a segregated fund are made on afi on-going basis (such as monthly) and the maturity date is calculated annually, thereby starting anew the tenyear guarantee period.
portfolio: an investor's holdings of stocks, bonds, etc. power of attorneJl: the appointment of a person to
look after financial affairs of
someone who
becomes incap acrtated due to sickness, accident, or other mishaps.
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The Canadian Life Insurance Course
precedent: a past or present decision of a judge of a court that serves as the guiding principle in similar cases in other courts. pre-existing condition: a disability or illness which exists at the time of application. preferred shares: a fype of share that entitles the owner to a dividend ahead of any dividends paid to common shareholders. Preferred shareholders fypically do not have voting rights. premium: legally, the consideration for the contract: in other words, the payment required to bring the policy into force and to keep it in force. premium offiet: when dividends from a whole life policy are used to reduce the cost of premiums. premium portion of policy: part of the face page of the policy that sets out the amount and method of payment, as well as the frequency and duration of premium payments.
premium rebuting.' prohibited by provincial legislation and association by-laws. Premium rebating usually occurs when an agent offers to pay all or part of the premium required by the policy, it may also involve a grft, promotion, or inducement. prescribed annuity.' annuity payments are a blend of capttal and interest. The caprtal is spread evenly over the expected payment period and the balance of each payment is the interest. The interest portion is subject to tax, while the capital portion is tax-
according to the number of units surrendered compared to the number of units prior to
withdrawal.
prospectus: publication prepared by mutual fund companies which provides specific information regarding the fund.
provincial bonds: issued as a means to fund public works and guaranteed by the province. pure risk: offers no chance of gain.
qualtJication period: a period of time after the accident or illness during which the insured must be totally disabled, as specified in a policy with a residual income benefit. qualitative information: information collected by a
life agent that reveals the client's lifestyle choices. quantitative informstion.' information collected by a life agent regarding a client's assets, income, and expenditures. Quebec Pension Plsn (QPP).' the Quebec equivalent of the Canada Pension Plan.
quick puy: when dividends from a whole life policy are used to reduce the cost of premiums.
rated contract: a contract with higher premiums offered to applicants identified as special risk or substandard risk. ruted premiums; higher-priced premiums.
free.
reudjustment period: financial support needed by dependents while adjusting to a new standard of
of a single sum: a formula used to illustrate how much money must be invested
living after the death of the income earner. real rate of return: the nominal, or "named" rate of
present value
presently, in order to grow to a desired amount, at a specified time in the future.
present value
of money.' the value of money in
today's terms for money paid in the future. presumptive disubility cluuse.' covers loss of limbs, sight, hearing, or speech. Full benefits are payable
until the end of the benefit period or for life regardless of whether or not the person can return
and dental plans that determines the benefits first and then calculates the benefits as though duplicate coverage does not exist.
principal guoruntee: the
refurn on an investment minus the current rate of inflation. recurring disability.' if a disability recurs or a new disability begins within a period of time set out in the policy's reculrence clause, it is treated as a continuation of the original claim and not subject to a new elimination period, but the benefit period is deemed to begin at the start of the original claim, not the date of the reculrence.
to work.
primary cowier: the insurer of group extended health
maturity guarantee of
segregated funds and the death benefit.
probutionnry period: the length of time (usually one to six months) that a new group mernber must wait before being eligible to join the group plan.
professional stundurds: rules and regulations imposed by a wide range of players in the insurance industry.
proper| risk: risk faced by property owners of having their properfy lost or damaged.
proportional reduction method: the adjustment made to a segregated fund contract when there is a
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withdrawal that reduces the value of the contract
re-entry term insurance: a form of term insurance
which provides guatanteed renewability. Those who can prove good health will have a lower renewal rate than those who are unable to provide evidence of insurability. registered bond: the owner is identified on the bond certific ate.
registered educution savings pluns (RESPs): a savings program developed by the federal government to encour age parents to save for the post-secondary education of their children. registered pension plans (RPP) : employer-sponsored pensions, registered with CCRA, established by employers for the benefit of their employees.
Glossary
plun: a plan that has been registered with the Minister of Customs and Revenue as required
registered
by the Income Tax Act. registered retirement income funds (RRIF).' a fund registered with CCRA to receive retirement
income.
It is an account to which accumulated
RRSPs can be transferred without incurred tax at the time of transfer.
registered retirement plun: one that has been registered with the CCRA so that tax advantages can be received by the plan owner.
registered retirement suvings plans (RRSP): a registered savings plan which is a tax shelter to assist individuals in saving for their retirement years.
regulur occupation: a definition of disabled that applies to a person who is unable to perform the essential duties of his or her regular occupation. reimbursement plan: the insured pays the cost of the medical service or drugs and is reimbursed by the insurer.
reinstutement clouse.' a clause in the policy designed to assist when a life insurance contract lapses due to premium non-payment. reinsurance: part of the risk that is passed along to a reinsurer if the retention limit is exceeded.
renewability: being able
to renew an
insurance
policy.
a term used to
the act of surrendering an insurance policy or part of the coverage of an insurance policy in order to buy
replacement:
describe
another policy.
rescission: the right to cancel the policy within ten days of acknowledgment of receipt of the policy. reset feuture: when investors decide to lock in the value of their segregated funds, thereby resetting the maturity guarantee and maturity date of the contract.
residual disubility beneJit' the benefit paid proportionate to pre-disability earnings. The loss must be between 20-80% of pre-disability earnings to qualify for a residual benefit. retention limit: the cap or upper limit that insurance companies place on an individual life. retiring ullowunce: severance pay, sick leave credits,
and court awards for wrongful dismissal that may be transferred tax-free to an RRSP without using up annual RRSP contribution limits. retrocession: the process of sharing the risk among several insurers or retrocessionaires.
revocuble beneJiciary.' the policy owner may change the beneficrary named in an insurance contract at any time, in writirg. riders: policy extras. Premiums are higher based on the riders that are attached to the policy.
right of redemption' the issues of the investment
withdraw their investment by submitting their units to the mutual fund.
rights: options granted to shareholders to purchase additional shares directly from the company that issues them.
risk:
the probability of suffering harm or loss in the future. Another definition is the price volatility of one type of security compared to the price volatility of another. risk uvoidance: the easiest way to reduce risk but avoiding all risk is not possible.
risk control: by loss prevention, which reduces the frequency of loss, or by loss reduction, which reduces the severity of loss.
risk Jinuncing: includes transferring risk
and
retaining risk. risk frequency.' the probability that a loss will occur. risk munogement: the process of planning for risk. risk retention.' when a person accepts or retains all or part of a given risk. risk severity.' the dollar cost of a loss.
risk tronsfer: shifting some or all of the cost of
a
potential loss to a third party.
rule of 72: illustrates how long it takes for investment portfolio to double in size when
an
its
income is reinvested.
schedule: describes the basic components in the policy. Also known astheface page. secondary currier.' the insurer of group extended health and dental plans that determines the benefits second and then limits its benefits coverage to the lesser of the amount that would be paid by the
primary carrier or I00% of all eligible expenses reduced by all other benefits payable for the same expenses by the primary carrier. segregated funds (seg fand): an investment fund held by an insurance comp dfry, in which the funds are separate from the other assets of the insurance
company.
self-directed plun: the RRSP plan holder's assets are administered by a bank, trust company, or investment dealer. A11 investment decisions are made'by the plan holder. self-insured plan: the group policy owner pays all claims.
settlement: the amount paid to the beneficrary when the life insured dies. settlement options: the options available to the beneficiaries to settle the contract when the life insured dies.
short-term disubility policy.' has a benefit period of two years or less.
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can
repurchase or redeem them at a time and price that is set out in the security itself. right of withdruwul: the right of unit holders to
The Canadian Life Insurance Course
simple contruct: a contract that can be enforced as long as there is an offer and acceptance and also a consideration (an exchange of value) between the parties.
sole proprietorship: a business entity owned and operated by one person. speciul risk: a rating assigned to some life applicants who arc at high risk for some reason usually due to health, habit, or occupation.
special term additions: a one-year renewable term policy that is equal to the cash surrender value of the policy at the end of the policy year. Also known as the fifth dividend option.
specialty contruct: does not require the elements of offer, acceptance, and consideration but does require a seal. Also known as contracts under seal. speculative risk: a risk where someone can achieve a gain.
stundurd group: must have a minimum of 25 people for group insurance purposes. stock companies: companies owned by shareholders.
stock market indices.' statistical tools used
to
measure the state of the market or the economy.
lW: the most cornmon form of whole life policies. Premiums are paid over the entire lifetime of the life insured. stripped bond: interest coupons have been removed and sold separately.
struight
structured settlement annuity.' used to settle large accident and liability claims that result in serious peffinanent disability.
subrogution: a legal process that allows an insurance company to assume the policyholder's right to collect damages from a third party. substandurd risk: a rating assigned to some life applicants who are at high risk for some reason. suicide exclusion cluuse.' suicide is excluded as a cause of death for which the death benefit is paid if it occurs up to two years after the policy is issued. supplementury benefits.' policy extras. Premiums are higher based on the supplementary benefits that are attached to the policy. survivor income plan' provides ongoing income for the spouse and dependent children of a deceased group life plan member. survivor lW income needs: the period of time, which may be life long, during which the surviving spouse requires income.
tubles of non-forfeiture: the tables the policy owner can use to determine the value of the non-forfeiture options in the policy. tux brackets: the division of taxpayers into categories based on level of income. tax credits: a direct reduction in tax.
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tax dedactions: expenses, payments, and contributions that are allowed to be deducted from taxable income. tax defercal: tax is paid at a later date. tuxuble beneJit: an employer-provided benefit that is taxed in the hands of the employee. taxuble income.' income received during the year that is subject to Canadian income taxes. temporury insurunce ugreement (TIA): a temporary
but binding contract between the insurance company and a prpposed life insured to provide coverage during the underwriting process. term additiozrs.' uses the whole dividend of a whole life policy to buy a non-renewable one-year term addition that will be paid if the life insured dies during that year. term certsin annuity: an annuity that pays an income for a pre-determined period of time or to a specific age.
term insurunce: life insurance for a specific period of time.
terminul illness beneJit' payable when the death of the life insured will occur within six months as declared in a doctor's certificate.
terminul tax return' the final tax refurn filed in the year after the death of the taxpayer.
term-to-I0| insurance: a hybrid of term insurance and permanent insurance which provides a termtype policy to age 100. For most people this would provide coverage for life
third party contruct: a contract in which the insured insures the life of another person (the life insured). tied selling.' when a financial institution requires a client to transact other business with the institution as a condition of doing business. time horizon: the length of time avallable for money
to be invested before it is needed. time vulue of money: the sum of money received today is worth more than if the same amount of money is received in the future.
time-weighting.' income based on the length of time notional units in a segregated fund are held. tolerunce for risk: the level of risk a person is prepared to take in the purchase securities and insurance.
tort law: designed to compensate a person who has been harmed for any damage caused by wrongful civil behaviour. totul disobility.' is defined in the insurance policy by the work the insured may be able to resume. treusury bills: short-terrn investments issued by the
federal government and some provinces.
Glossary
trigger dute: a date established in a mandatory bnyout clause of a disability buy-out contract, which states when the disabled owner, partner, or shareholder must
sell his or her share in
the
yesr's maximum pensionuble earnings (YMPE).' the amount of income above which CPP contributions are not made.
yield to maturity: the refurn an investor can expect by holdin g an investment to maturity.
business.
truisting.' when an agent induces a policyholder to surrender or lapse a policy with one insurer and replace it with another insurer, to the detriment of the policyholder. unbundling: the listing separately of the cost of insurance, the guaranteed interest tate, and the expense charges of the insurer in a universal life policy. underwriters: insurance officials who assess risks.
yield: refurn on investment.
underwriting: the process of assessing and classifying the potential degree of risk that a proposed insured represents to an insurance company.
unfuir trude proctices.' the use of coercion, premium rebating, and gifting to clients. u
nilateral contruct: term used for
insurance
contracts because the insurance company is the trnh' par-ty bound by the contract and is obliged to tulfill the contract as long as premiums are paid. unilateral mistake: a mistake made by one party that ma\. only be remedied if it is an obvious mistake recoqntzed by the other parfy.
life insurunce: an interest rate-sensitive r.-rlicy that is a unique combination of insurance
universal
;;ld investment. ttnislting premiums: when dividends from a whole ":ie policy are used to reduce the cost of premiums. ['an also be done from the account value of a "nir.ersal life policy. ,,"sriable unnuity.' takes the notional units credited to :::e contract in a segregated fund and converts them ,,
: . annuiry units.
cstrrgr the right of an employee to keep the previous ;:riplover's pension contributions when switching . -'ns after, usually, two years of employment. ,,,:fuilteO' group AD&D.' arr option for employees : :,', ered by a basic plan that increases coverage. *,,ltitirrg period: the period from the time a claim is :,:ule until benefits begin (provided in the policy). q rr/l'er" of premium: a rider to a policy which ensures ,:,rI the premiums on the policy are pard if the life
',
:,sured becomes disabled. ,,1,
utrrfint: a certificate that grants the holder the -:r.-\trTunity to buy shares in a company at a stated
: :.; e over a specific period. h,tlâ‚Ź life insurance.' perrnanent insurance available ",
* ) straieht life or limited payment life. These :,..rcies are in force for the lifetime of the insured
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are guaranteed policies.
r 's 6as
ic exemption (YBE): the amount of income
:,: -,",\ uhich CPP contributions
are not made.
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t