Lesson #8 (Chapter #8 and #9) - Auto, Homeowner’s, Health and Life Insurance, With Solutions, Fall 2024 PDF

LESSON #8 AGENDA Schedule for the Rest of this Term Chapter #8-Home & Auto Insurance Chapter #9-Health & Life Insurance Copyright © 2022 Pearson Canada Inc. 8-1 Personal Finance Fifth Canadian Edition Chapter 8...

LESSON #8 AGENDA Schedule for the Rest of this Term Chapter #8-Home & Auto Insurance Chapter #9-Health & Life Insurance Copyright © 2022 Pearson Canada Inc. 8-1 Personal Finance Fifth Canadian Edition Chapter 8 Auto and Homeowner’s Insurance Copyright © 2022 Pearson Canada Inc. 8-2 Background on Insurance Primary function of insurance - to maintain your existing level of wealth by protecting you against financial losses or liability due to unexpected events. Transferring the risk of loss (potential liability) to a company in exchange for premium payments. Insurance is beneficial even when you do not receive any payments for losses. It provides the peace of mind of knowing that your assets are protected should you suffer a loss. Copyright © 2022 Pearson Canada Inc. 8-3 TYPES OF INSURANCE Property Ensures that any damages to your auto and home are covered, and that your personal assets are protected from any liability, when you are required to pay someone for damages you caused. Health Censures that health care needs, such as physician, dental, and vision care are covered. Disability Ensures that your monthly income will continue in the event that you are unable to work as a result of any injury or illness. Critical Ensures that you have access to lump sum benefits in the event Illness that you suffer a critical illness, such as a heart attack, stroke, life-threatening cancer. Long-Term Ensures that you have access to benefits that will help to cover Care added living costs, such as in-home nursing care, when you are unable to care for yourself due to injury or illness. Life Ensures financial support for dependents, other individuals, or charities when you die. Copyright © 2022 Pearson Canada Inc. 8-4  Purpose of Insurance To manage your financial risks. Techniques used: Avoid, Reduce, Accept. Risk Management Steps: 1. Recognize the risks to which you are exposed. 2. Decide whether to protect against those risks. 3. Decide on the amount of coverage that you need and the policy provisions you require. Copyright © 2022 Pearson Canada Inc. 8-5 Role of Insurance Companies-Examples Event Financial loss Protection Your neighbour is injured while Medical bills and liability Homeowner’s insurance in your home (liability) You become ill and need Prescription drugs Health insurance medical attention You develop an illness that Nursing care Long-term care insurance requires long-term care You become disabled Loss of income Disability insurance You die while family members Loss of income Life insurance rely on your income Copyright © 2022 Pearson Canada Inc. 8-6 How Insurance Companies Operate Insurance Company Operations – Insurance companies pool together a number of insurance policies based on the type of insurance purchased and the characteristics of a group of policy owners. – The insurance company will sell a number of policies to generate sufficient revenue to pay claims. – The number of policies that need to be sold can be determined using historical claims information. Copyright © 2022 Pearson Canada Inc. 8-7 How Insurance Companies Operate (Make Money!) - Continued Revenues – Premiums and investments earnings. Costs – Claims and business expenses. Profit = (Premiums + – (Claims + Business Investment Earnings) Expenses) Copyright © 2022 Pearson Canada Inc. 8-8 Practice Question When the likelihood of a negative event is very low and the potential financial loss due to the event is small, it would be reasonable to A) avoid risk. B) share risk. C) reduce risk. D) accept risk. Answer: ???? Copyright © 2022 Pearson Canada Inc. 8-9 Practice Question When the likelihood of a negative event is very low and the potential financial loss due to the event is small, it would be reasonable to A) avoid risk. B) share risk. C) reduce risk. D) accept risk. Answer: D Copyright © 2022 Pearson Canada Inc. 8 - 10 Practice Question When the likelihood of a negative event is very high and the potential financial loss due to the event is high, it would be reasonable to: A) avoid risk. B) share risk. C) reduce risk. D) accept risk. Answer: ???? Copyright © 2022 Pearson Canada Inc. 8 - 11 Practice Question When the likelihood of a negative event is very high and the potential financial loss due to the event is high, it would be reasonable to: A) avoid risk. B) share risk. C) reduce risk. D) accept risk. Answer: A Copyright © 2022 Pearson Canada Inc. 8 - 12 Practice Question In general, insurance companies generate their profit from: A) overestimating the value of client claims and keeping the difference as profit. B) investing the proceeds of premiums until the funds are needed to cover claims. C) selling a lot of certain kinds of highly profitable insurance products. D) only insuring people who are low risk to claim. Answer: ???? Copyright © 2022 Pearson Canada Inc. 8 - 13 Practice Question In general, insurance companies generate their profit from: A) overestimating the value of client claims and keeping the difference as profit. B) investing the proceeds of premiums until the funds are needed to cover claims. C) selling a lot of certain kinds of highly profitable insurance products. D) only insuring people who are low risk to claim. Answer: B Copyright © 2022 Pearson Canada Inc. 8 - 14 Practice Question Underwriters for an insurance company A) calculate the risks of specific insurance requests from the public. B) market insurance policies. C) recommend insurance policies that fit customers' needs. D) invest the premiums of policies to make their company a profit. Answer: ???? Copyright © 2022 Pearson Canada Inc. 8 - 15 Practice Question Underwriters for an insurance company: A) calculate the risks of specific insurance requests from the public. B) market insurance policies. C) recommend insurance policies that fit customers' needs. D) invest the premiums of policies to make their company a profit. Answer: A Copyright © 2022 Pearson Canada Inc. 8 - 16 DETAILS ON AUTO INSURANCE Copyright © 2022 Pearson Canada Inc. 8 - 17  SECTIONS OF A CAR INSURANCE POLICY Section A: Third Third party liability Party Liability Bodily injury liability coverage Coverage Third Party Liability Coverage Property damage liability coverage Section B: Accident benefits coverage Accident Benefits Uninsured motorist coverage Section C: Loss of Collision insurance or Damage to Comprehensive coverage Insured Deductible Automobile Facility association (Coverage is optional in all provinces.) Copyright © 2022 Pearson Canada Inc. 8 - 18 Section A: Third Party Liability Coverage Third party liability a legal term that describes the person(s) who have experienced loss because of the insured. Two key components: Bodily injury liability, and Property damage liability Bodily injury protects you against liability associated with injuries you liability coverage (or family members listed on the policy) cause to others. Also covers you (or your family members) if you cause injuries to others while driving someone else’s car with their permission. Coverage includes medical bills, pain and suffering, and economic loss. Mandatory coverage in all provinces. Third Party In most provinces, the injured party has the right to Liability Coverage sue for pain and suffering and economic loss. You should always purchase more than the minimum required third party liability coverage. Property damage protects against losses that result when the policy owner liability coverage damages another person’s property with his or her car. Copyright © 2022 Pearson Canada Inc. 8 - 19 Section B: Accident Benefits Accident Insures against the cost of medical care for you benefits and other passengers in your car. coverage Provides coverage for medical payments, funeral benefits, loss of income as a result of death or total disability, and uninsured motorist coverage. Mandatory in all provinces except Newfoundland and Labrador. Medical coverage applies only to the passengers and the driver of the insured car. Uninsured Insures against the cost of bodily injury when an motorist accident is caused by another driver who is not coverage insured. Also applies if you are in an accident caused by: A hit-and-run driver. A driver who is at fault but whose insurance company goes bankrupt. Copyright © 2022 Pearson Canada Inc. 8 - 20 Section C: Loss of or Damage to Insured Automobile (This coverage is optional in all provinces.) Collision Insures against costs of damage to your car resulting from an accident in which the driver of your car is at fault. insurance Comprehen Insures you against damage to your car that results from something other than a collision, such as floods, theft, fire, hail, sive explosions, riots, vandalism, and various other perils. coverage Coverage may be required by a lender since the car may be collateral on the loan. Limited Waiver of Depreciation (S.E.F. 43) If your car is damaged beyond repair, you will be reimbursed based on the actual purchase price or MSRP. Deductible A set dollar amount that you are responsible for paying before any coverage is provided by your insurer. The higher the deductible, the lower the insurance premium. Facility Ensures that drivers unable to obtain insurance with an individual company are able to obtain the coverage they need association to operate their vehicles legally. Applies to higher-risk drivers. Copyright © 2022 Pearson Canada Inc. 8 - 21 No Fault Auto Insurance No-fault Allows policy owners in all provinces to auto receive immediate medical payments insurance through their own insurance policy, regardless of who is at fault for causing the accident. Under a pure no-fault system, you are unable to sue the at-fault driver for pain and suffering and economic loss. The dollar value of accident benefits under the no-fault option are much higher in these provinces. Copyright © 2022 Pearson Canada Inc. 8 - 22 Factors That Affect Your Auto Insurance Premiums 1. Likelihood that you will submit claims 2. Estimated cost to cover those claims 3. Amount of liability coverage 4. Amount of deductible 5. Other Factors How you use your vehicle (to and from work?) Value of your car Repair record of your car Your location (urban versus rural areas) Your driver training/Your driving record Provinces that offer auto insurance through private P&C insurers may also consider the following: age, gender, driving distance. Copyright © 2022 Pearson Canada Inc. 8 - 23 Comparing Premiums among Insurance Companies An insurance company can cancel your policy after it has been in effect for 60 days if: – You provided fraudulent information on your application. – Your driver’s license is suspended. – You do not pay your premiums. An insurance company may decide not to renew your policy when it expires if you had a poor driving record over the recent policy period. Copyright © 2022 Pearson Canada Inc. 8 - 24 Homeowner’s Insurance Copyright © 2022 Pearson Canada Inc. 8 - 25 Homeowner’s Insurance Homeowner’s insurance: provides insurance in the event of property damage, theft, or personal and third- party liability relating to home ownership. Options for Home Insurance: – All perils coverage: protects the home and any other structures on the property against all events except those that are specifically excluded by the policy. – Named perils coverage: protects the home and any other structures on the property against only those events named in the policy. Copyright © 2022 Pearson Canada Inc. 8 - 26 Homeowner’s Insurance Policy Provisions Options on Insuring the Home/Structure (Property Damage) – Actual cash value policy: pays you the value of the damaged property after considering its depreciation. – Replacement cost policy: pays you the cost of replacing the damaged property with an item of a similar brand and quality. A replacement cost policy is preferable, but is more expensive than a cash value policy. – Full coverage=80% of the current replacement cost. Copyright © 2022 Pearson Canada Inc. 8 - 27 Homeowner’s Insurance Policy Provisions EXAMPLE – Haim owns a house with a current replacement cost of $375 000. – 10 years ago, it was valued at $210 000. – He has not updated his coverage amount and is not fully covered. ▪ Full coverage = $375 000 x 80% = $300 0000 ▪ Current coverage % = $210 000 ÷ $300 000 = 70% – A house fire that resulted in $150 000 of damage will only be 70% covered ($150 000 x 70% = $105 000). Copyright © 2022 Pearson Canada Inc. 8 - 28 Homeowner’s Insurance for Personal Property-Policy Limits and Exclusions Contents (Personal Property) – Policy normally covers personal assets such as furniture, computers, or clothing up to a specified maximum amount. ▪ Coverage amount is a percentage of the dwelling value. – Home inventory: contains detailed information about your personal property that can be used when filing a claim. Copyright © 2022 Pearson Canada Inc. 8 - 29  Homeowner’s Insurance for Personal Property-Policy Limits and Exclusions Contents (Personal Property) – Personal Property Replacement Cost Coverage ▪ Personal assets coverage at replacement cost rather than actual cash value. Copyright © 2022 Pearson Canada Inc. 8 - 30 Homeowner’s Liability Coverage Liability Coverage with Home Owner’s Insurance: – Specifies coverage in the event that you are sued as the result of something that occurs in your home or on your property. (Minimum $1 million) – Extends to events that occur away from your home. – Medical payments and voluntary property damage are also covered. Copyright © 2022 Pearson Canada Inc. 8 - 31  Homeowner’s Insurance Premiums Factors that Value of Insured Home Affect Deductible premiums: Location Degree of protection Discounts (alarm system, fire extinguisher, lump sum premium payment, multiple types of insurance from the same insurer). How To Increase your deductible (Standard Reduce deductible is set at $500) premiums: Improve protection (e.g. security system, fire extinguisher) Use one insurer for all types of insurance (car, medical, etc.) Stay with the same insurance company Copyright © 2022 Pearson Canada Inc. 8 - 32 Tenant’s Insurance Copyright © 2022 Pearson Canada Inc. 8 - 33 Tenant’s Insurance Tenant’s insurance: an insurance policy that protects your possessions within a house, condominium, or apartment that you are renting. – Does not insure the structure itself. – Covers personal assets. – Can cover living expenses. – Covers liability. Specifies the maximum amount of coverage for your personal assets. – Maximum coverage for specific items like jewellery. – Also covers liability resulting from injury to a person while on your premises. Copyright © 2022 Pearson Canada Inc. 8 - 34 Umbrella Personal Liability Policy Umbrella personal liability policy: a supplement to auto and homeowner’s insurance that provides additional personal liability coverage. – Intended to provide additional insurance. – Must show proof of existing coverage. – Useful when you have personal assets beyond a car and home that you wish to protect from liability. Copyright © 2022 Pearson Canada Inc. 8 - 35 Practice Question In general, insurance companies generate their profit from: A) overestimating the value of client claims and keeping the difference as profit. B) investing the proceeds of premiums until the funds are needed to cover claims. C) selling a lot of certain kinds of highly profitable insurance products. D) only insuring people who are low risk to claim. Answer: ? Copyright © 2022 Pearson Canada Inc. 8 - 36 Practice Question In general, insurance companies generate their profit from: A) overestimating the value of client claims and keeping the difference as profit. B) investing the proceeds of premiums until the funds are needed to cover claims. C) selling a lot of certain kinds of highly profitable insurance products. D) only insuring people who are low risk to claim. Answer: B Copyright © 2022 Pearson Canada Inc. 8 - 37 Insurance : DEFINITION MATCH-UP Peril _______ A. Represents one or more insurance companies and recommends insurance policies that fit customers’ needs. Underwriters B. Employee who works for only one particular insurance ________ company. Insurance C. A hazard or risk you face. agent______ Covered peril would include an unexpected or accidental event. Captive (or D. Represents many different insurance companies. exclusive) insurance agent______ Independent E. Employees of an insurance company who calculate the insurance agent risk of specific insurance policies and decide what policies ________ to offer and what premiums to charge. Insurance policy F. Specifies the coverage provided by an insurance ________ company for a particular individual and vehicle. Auto insurance G. Contract between an insurance company and the policy policy ______ owner. Copyright © 2022 Pearson Canada Inc. 8 - 38 Insurance : DEFINITIONS SOLUTION Peril ___C____ A. Represents one or more insurance companies and recommends insurance policies that fit customers’ needs. Underwriters B. Employee who works for only one particular insurance ____E____ company. Insurance C. A hazard or risk you face. agent___A___ Covered peril would include an unexpected or accidental event. Captive (or D. Represents many different insurance companies. exclusive) insurance agent___B___ Independent E. Employees of an insurance company who calculate the insurance agent risk of specific insurance policies and decide what policies ____D____ to offer and what premiums to charge. Insurance policy F. Specifies the coverage provided by an insurance ____G____ company for a particular individual and vehicle. Auto insurance G. Contract between an insurance company and the policy policy ___F___ owner. Copyright © 2022 Pearson Canada Inc. 8 - 39 Insurance Business-DEFINITIONS Peril A hazard or risk you face. Covered peril would include an unexpected or accidental event. Underwriters Employees of an insurance company who calculate the risk of specific insurance policies and decide what policies to offer and what premiums to charge. Insurance agent Represents one or more insurance companies and recommends insurance policies that fit customers’ needs. Captive (or Employee who works for only one particular insurance exclusive) insurance company. agent Independent Represents many different insurance companies. insurance agent Insurance policy Contract between an insurance company and the policy owner. Auto insurance Specifies the coverage provided by an insurance policy company for a particular individual and vehicle. Copyright © 2022 Pearson Canada Inc. 8 - 40 Personal Finance Fifth Canadian Edition Chapter 9 Health and Life Insurance Copyright © 2022 Pearson Canada Inc. 8 - 41 TYPES OF HEALTH & LIFE INSURANCE Health Care Plans provide coverage for drug, dental, and paramedical costs. Provided by Federal & Provincial Governments and Private Companies. Disability Provides a monthly income benefit to replace a portion of your earnings if you become ill or injured and cannot work. Critical Illness Provides a lump-sum benefit if you are diagnosed with a covered illness. Long-Term Care Provides an income if you lose the ability to care for yourself as a result of illness or injury. Life Insurance Insurance that provides a payment to a specified beneficiary when the insured dies. a. Types of life insurance that are available. b. Decision of how much life insurance to purchase. c. Contents of a life insurance policy. Copyright © 2022 Pearson Canada Inc. 8 - 42 HEALTH CARE INSURANCE Copyright © 2022 Pearson Canada Inc. 8 - 43 Canada’s Health Care-The System and the Players Definition: Medicare-an interlocking system of 10 provincial and 3 territorial health and federal government insurance plans: Copyright © 2022 Pearson Canada Inc. 8 - 44 Legislation for Canada’s Health Care System Canada Health Act Establishes the criteria and conditions related to insured health care services that provinces and territories must meet in order to receive money from the federal government for health care. Copyright © 2022 Pearson Canada Inc. 8 - 45 Canada’s Health Care Legislation-Continued Canada Health Transfer (CHT): the largest federal transfer of money to the provinces and territories, providing them with cash payments and tax transfers in support of health care. Five principles of the Canada Health Act: 1. Public administration 2. Comprehensiveness 3. Universality 4. Portability 5. Accessibility Copyright © 2022 Pearson Canada Inc. 8 - 46  Canada’s Health Care System Role of the federal government – To ensure that universal coverage is provided on the basis of need rather than the ability to pay. – Insured health care services: medically necessary hospital, physician, and surgical-dental services provided to insured persons. – Insured person: an eligible resident of a province. Copyright © 2022 Pearson Canada Inc. 8 - 47 Canada’s Health Care System-Continued Role of the Responsible for the administration and delivery of provincial and insured health care services. territorial Most provincial and territorial governments offer governments and fund supplementary benefits for certain groups (e.g. seniors, children, and social assistance recipients). Role of private Provides additional medical coverage through health either group or individual supplemental health insurance insurance plans. Group health insurance plans may include, among other things: Dental care, vision care, medical care, life and disability insurance, and travel insurance for employees and/or their families. Copyright © 2022 Pearson Canada Inc. 8 - 48 More Details About Private Health Care Plans Copyright © 2022 Pearson Canada Inc. 8 - 49  Employer Group (Non-Government) Health Insurance Benefits offered by group health insurance: – Employee perspective: ▪ Provides added protection beyond what is available from government plans. ▪ Saves money on provincial premiums or the cost of having to purchase individual insurance. – Employer perspective: ▪ Write off premiums as business expenses. ▪ Encourages loyalty and trust among employees. ▪ Enables better staff retention. ▪ Keeps workforce healthy and productive. Copyright © 2022 Pearson Canada Inc. 8 - 50 Practice Question This type of insurance provides financial support to your dependents, or other individuals. A) Health insurance B) Disability insurance C) Life insurance D) Critical illness insurance Answer: ???? Copyright © 2022 Pearson Canada Inc. 8 - 51 Practice Question This type of insurance provides financial support to your dependents. or other individuals. A) Health insurance B) Disability insurance C) Life insurance D) Critical illness insurance Answer: C Copyright © 2022 Pearson Canada Inc. 8 - 52 Practice Question This type of insurance provides coverage that will cover added living costs, such as in-home nursing care. A) Long-term care insurance B) Disability insurance C) Life insurance D) Critical illness insurance Answer: ???? Copyright © 2022 Pearson Canada Inc. 8 - 53 Practice Question This type of insurance provides coverage that will cover added living costs, such as in-home nursing care. A) Long-term care insurance B) Disability insurance C) Life insurance D) Critical illness insurance Answer: A Copyright © 2022 Pearson Canada Inc. 8 - 54 Employer Group Health Insurance Benefit Description Dental Care ▪ Coverage: 90% of basic services and 50% of major services. ▪ Basic services: examinations, scaling and polishing, X-rays, cleanings, major services: inlays, crowns, bridges. ▪ Maximum: $2000 per year (all coverage types). Vision Care ▪ Optometrist fees: maximum $50 per visit per year. ▪ Prescription lenses and frames: maximum $250 per year. Prescription ▪ 80% coverage for any and all prescribed medications. Drugs ▪ Maximum: $5000 per year. Life Insurance ▪ Minimum employer-paid coverage: 1 times salary. ▪ Optional coverages: 2 to 5 times salary; spousal life insurance. Disability ▪ General illness: coverage for 100% of income for the first 10 Insurance consecutive days of missed employment due to illness or injury. ▪ Short-term and long-term disability insurance: up to 70% ▪ Definition of disability: general illness and short-term – regular occupation; long-term – any occupation. Employee ▪ A counselling and referral service for personal and/or job stress, Assistance relationship issues, eldercare and childcare, addictions and related issues. Program (EAP) Copyright © 2022 Pearson Canada Inc. 8 - 55 Disability Insurance Copyright © 2022 Pearson Canada Inc. 8 - 56 Disability Insurance - Sources of Disability Income Benefit Source What to Watch For Workers’ You may not be covered since workers’ compensation may not be Compensation provided at your place of work. This benefit is available only for work-related injuries or illnesses. What if you are injured or become ill while away from work? In general, the benefit amount, within a prescribed maximum, is up to 90% of your net income, which is your gross income less your income tax payable and less your CPP and EI contributions. Group In addition to health insurance, many group plans provide benefits for Insurance long-term disability. Although most plans will cover your full after-tax income, the most important issue you should consider is the definition of disability in your group plan. In general, the benefit amount is 60% to 70% of your gross salary. Copyright © 2022 Pearson Canada Inc. 8 - 57 Disability Insurance Benefit Source What to Watch For Canada Pension Plan – The definition of disability requires that you must be totally Disability disabled, and that your disability must be severe and prolonged in nature. Severe means that a person is incapable of regularly pursuing any substantially gainful occupation. Prolonged means that the disability will prevent the individual from going back to work in the next 12 months or is likely to result in death. For 2020, the maximum disability benefit amount is $1,387.66 per month. Employment Insurance The disability benefit under EI is payable for only 15 weeks. (EI) As of January 2020, the benefit amount is 55% of your average insurable weekly earnings up to a maximum weekly benefit of $573. Copyright © 2022 Pearson Canada Inc. 8 - 58 Disability Insurance-Definitions Regular occupation The policy will provide benefits if you are unable to perform the duties required by your regular occupation. Any occupation Means that the policy will provide benefits only if you cannot perform the duties of any job that fits your education and experience. Indemnification The concept of putting an insured individual back into the same position he or she was in prior to the event that resulted in insurance benefits being paid. Waiting period The period from when you become disabled until you begin to receive disability income benefits. Benefit period Most common length of time is to age 65. Non-cancellable Gives you the right to renew the policy each year at the provision same premium, with no change in the benefits. Guaranteed Gives you the right to renew the policy with the same renewable benefits; however, the insurance company can increase provision your premium if it is increasing the premium for all of its insured customers with the same profile. Copyright © 2022 Pearson Canada Inc. 8 - 59 Critical Illness Insurance Copyright © 2022 Pearson Canada Inc. 8 - 60  Critical Illness Insurance Critical illness insurance: a lump sum benefit paid to you in the event that you suffer a life-altering illness, such as stroke, life-threatening cancer, or heart disease, and are able to survive that illness for at least 30 days. Three major critical illnesses: 1. stroke 2. life-threatening cancer, and 3. heart disease. Copyright © 2022 Pearson Canada Inc. 8 - 61  Critical Illness Insurance vs. Disability Insurance Main differences between critical illness (CI) insurance and disability insurance (DI): – CI benefits are paid in one lump sum whereas DI is a monthly benefit. – CI provides coverage for insured conditions whereas DI covers any injury or illness that prevents you from working. Benefit can be used in whatever manner you choose. Copyright © 2022 Pearson Canada Inc. 8 - 62 Long-term Care Insurance Copyright © 2022 Pearson Canada Inc. 8 - 63 Long-term Care Insurance (1 of 3) Long-term care insurance: covers expenses associated with long-term health conditions that cause individuals to need help with everyday tasks, such as bathing, eating, dressing, toileting, maintaining continence, or transferring. Typically covers nursing care, rehabilitation and therapy, personal care, homemaking services, and supervision by another person. Copyright © 2022 Pearson Canada Inc. 8 - 64 Long-term Care Insurance (3 of 3) Other Factors That Affect Long-term Care Insurance Premiums: – Provisions of policy – Age and gender (Premiums are higher for women) – Health Condition Copyright © 2022 Pearson Canada Inc. 8 - 65 Life Insurance Copyright © 2022 Pearson Canada Inc. 8 - 66 Life Insurance Two main categories: 1. Temporary or short term (e.g. term insurance) 2. Permanent (e.g. whole life and universal life insurance) Copyright © 2022 Pearson Canada Inc. 8 - 67 Life Insurance Psychology behind the life insurance decision: – People do not want to think about life insurance decisions and would rather spend their money on products or services that provide an immediate benefit. – About one-third of all households in Canada do not have any life insurance. – Immediate benefit of life insurance. ▪ If you die, your family will receive sufficient support. Copyright © 2022 Pearson Canada Inc. 8 - 68 LIFE INSURANCE-DEFINITIONS Face amount Beneficiary Life insured Policy owner Term insurance Permanent Whole life insurance Universal life insurance Mortality rate Underwriting Grace period Term-to-100 Copyright © 2022 Pearson Canada Inc. 8 - 69 Contents of a Life Insurance Policy Beneficiary Name multiple beneficiaries and/or a contingent beneficiary. Change the beneficiary any time you wish. Grace Period Policy is said to be in lapse status after the grace period. Premium Applies to a term life policy. Schedule Loans You can borrow cash from a policy that accumulates cash value. Suicide Benefits are not payable if the policy owner commits suicide Clause within two years of the policy’s effective date. Renewability allows you to renew your policy for another term once the option existing term expires. Conversion allows you to convert your term insurance policy into a whole option life policy that will be in effect for the rest of your life. Copyright © 2022 Pearson Canada Inc. 8 - 70 LIFE INSURANCE: (Limited) TERM INSURANCE Copyright © 2022 Pearson Canada Inc. 8 - 71 Term Insurance premiums will be higher under the following circumstances: – The longer the term of the policy. – The older the policy owner. – The greater the insurance coverage. – Life insured is a male. – Life insured is a smoker. – Life insured’s family members have a history of medical problems. premiums on term insurance can be found at: – e.g. www.kanetix.ca and www.term4sale.ca Copyright © 2022 Pearson Canada Inc. 8 - 72 Term Insurance EXAMPLE Kenyon and James Burris, identical twins, have each applied for identical $100 000 life insurance policies. Three different premium levels for male non-smokers: gold, silver, and bronze. Based on the criteria of age, gender, smoking status, and family medical history alone, both men expect to qualify for the silver premium level. But they do not fall into the silver level due to their lifestyle considerations. Copyright © 2022 Pearson Canada Inc. 8 - 73 Term Insurance EXAMPLE (continued) Kenyon’s lifestyle considerations: – Two speeding tickets in the last year and he is a licensed scuba diver. Based on these lifestyle considerations, Kenyon would pay a higher-than-average premium at the bronze level. James’s lifestyle considerations: – Blood pressure, cholesterol levels, and weight-to-height ratio are better than average for a 32-year-old male non-smoker. – Clean driving record, no history of alcohol or drug abuse, no participation in any hazardous sports. Based on these lifestyle considerations, James would pay a lower-than-average premium at the gold level. Copyright © 2022 Pearson Canada Inc. 8 - 74 Focus on Ethics: Applying for Life Insurance You may be tempted to omit some information in the hopes that you can pay a lower premium. Medical Information Bureau: a clearinghouse of medical information that insurers have. Insurance company will most likely uncover any inaccuracies in your application. Insurance benefits could also be eliminated at a later date if the company discovers inaccuracies. Be truthful. Copyright © 2022 Pearson Canada Inc. 8 - 75 CREDITOR INSURANCE-A Specific Type of Term Insurance Copyright © 2022 Pearson Canada Inc. 8 - 76 Term Insurance Creditor insurance: term life insurance where the beneficiary of the policy is a creditor. Creditor: an individual or company to whom you owe money. – e.g. mortgage lender Decreasing term insurance: a type of creditor insurance where the life insurance face amount decreases each time a regular payment is made on debt that is amortized over a period of time. – e.g. mortgage life insurance Copyright © 2022 Pearson Canada Inc. 8 - 77 Term Insurance Exhibit 9.5 Comparison of Creditor Insurance and Personally Owned Term Insurance Creditor Insurance Personally Owned Term Insurance The policy is owned and controlled by a creditor, for example, a bank, trust The policy owner owns the policy. company, or credit union. In the event of the death of the life In the event of the death of the life insured, benefits are payable directly to insured, the policy owner determines the creditor. who will be the beneficiary. Beneficiaries determine if they wish Benefits are used to pay off the to pay off the mortgage balance or if remaining credit balance, for example, they would like to use the benefits for the mortgage balance. another purpose. Copyright © 2022 Pearson Canada Inc. 8 - 78 Term Insurance Exhibit 9.5 (continued) Creditor Insurance Personally Owned Term Insurance The policy owner determines if As the credit balance decreases, the insurance coverage should be insurance coverage decreases. decreased. If coverage is reduced, However, premiums do not decrease. premiums may decrease. If the credit balance is paid off, life The life insurance policy exists insurance coverage will terminate. If independent of any credit facility. credit is reapplied for with another Therefore, the policy is cancelled only creditor, life insurance will have to be if the policy owner (you) decides to reapplied for, possibly resulting in cancel it. increased premiums. Copyright © 2022 Pearson Canada Inc. 8 - 79 LIFE INSURANCE-Definitions: PERMANENT INSURANCE WHOLE LIFE UNIVERSAL LIFE DEATH BENEFIT Copyright © 2022 Pearson Canada Inc. 8 - 80 Permanent Insurance (1 of 2) Permanent insurance: life insurance that continues to provide insurance as long as premiums are paid. – Premium payments are divided into two portions: ▪ Cost of insurance: the insurance-related expenses incurred by a life insurance company to provide the actual death benefit (the pure cost of dying). ▪ Cash value: the portion of the premium in excess of insurance-related and company expenses that is invested by the insurance company on behalf of the policy owner. Copyright © 2022 Pearson Canada Inc. 8 - 81 Permanent Insurance (2 of 2) – Death benefit: the total amount paid tax-free to the beneficiary on the death of the policy owner. ▪ May include the cash value. – Cash value is available to the policy owner prior to his or her death. – If you withdraw a cash amount, the amount by which the cash value exceeds the premiums that were paid is subject to tax. Copyright © 2022 Pearson Canada Inc. 8 - 82 Whole Life Insurance (1 of 2) Whole life insurance: a form of permanent life insurance that builds cash value based on a fixed premium that is payable for the life of the insured. – The premium on whole life insurance is constant for the duration of the policy. – In the earlier years, when the life insured is young, the portion of the premium needed to insure against the possibility of death is relatively low. – In the later years, the opposite is true. Copyright © 2022 Pearson Canada Inc. 8 - 83 Whole Life Insurance (2 of 2) Exhibit 9.6 Allocation of Whole Life Insurance Premiums Copyright © 2022 Pearson Canada Inc. 8 - 84 Universal Life Insurance Universal life insurance: a form of permanent life insurance for which you do not pay a fixed premium and in which you can decide to invest the cash value portion in a variety of investments. – Policy owner is able to choose their cost of insurance and investments. – Cost of insurance options: ▪ Level term ▪ Yearly renewable term (YRT) Copyright © 2022 Pearson Canada Inc. 8 - 85 Similarities and Differences between Whole Life and Universal Life Similarities Permanent insurance policies that provide an opportunity to build cash value. Accumulated growth of savings is tax-sheltered until it is withdrawn. Useful tools for tax, retirement, and estate planning. Differences Whole life insurance premium is fixed whereas universal life premium is flexible between a minimum and maximum range. In a whole life policy, insurance company selects the investments whereas the policy owner controls the investment choice in a universal life policy. Copyright © 2022 Pearson Canada Inc. 8 - 86 Comparison of Life Insurance Premiums With respect to term insurance policies, the length of the term determines the premium to be paid. Term insurance is less expensive for two reasons: – It will expire. – It does not build cash value. Difference in premiums among types of permanent insurance policies is mainly a result of the amount you choose to deposit to the savings or investment account. Copyright © 2022 Pearson Canada Inc. 8 - 87 Methods Available to Calculate Amount of Life Insurance Needed Income A general formula that determines how much life Method insurance is needed based on the policyholder’s annual income. Normally specifies the life insurance amount as a multiple of your annual income. Very easy to use. Does not consider age or household situation. Budget A method that determines how much life Method insurance is needed based on the household’s future expected expenses and current financial situation. Provides a better estimate of necessary coverage. Copyright © 2022 Pearson Canada Inc. 8 - 88 Determining the Amount of Life Insurance Needed EXAMPLE #1 Trent and Carlin household’s each earn $50 000 per year. They are both told they should have coverage of 10 times their annual income. However, the Trent household’s financial situation is completely different from that of the Carlin household. The Trents are in their early thirties and have two very young children. – Large credit card balances, two car loans, and a mortgage loan. – Want to send their children to college or university. – Would like to purchase a bigger home in the future. Copyright © 2022 Pearson Canada Inc. 8 - 89 Determining the Amount of Life Insurance Needed The Carlins are in their late fifties and do not have any children. – Have established a very large amount of savings and a substantial retirement account. – Completely paid off their mortgage and do not have any other debt. Trents should apply a higher multiple of their annual income, while the Carlins should apply a lower multiple. Factors to consider: – Annual living expenses – Special future expenses (e.g. tuition) – Debt – Job marketability of spouse – Value of existing savings Copyright © 2022 Pearson Canada Inc. 8 - 90  Determining the Amount of Life Insurance Needed EXAMPLE #2 Based on the following additional information about your household, you then adjust the amount of insurance needed. Special future expense. – You want to allocate an extra $50 000 in life insurance to pay for your two children’s college or university expenses. Job training. – You want to have additional insurance of $20 000 to ensure that your spouse can pay for job training. Copyright © 2022 Pearson Canada Inc. 8 - 91 Determining the Amount of Life Insurance Needed-Continued EXAMPLE (continued) Debt. – You want to increase the life insurance amount so that your $250 000 mortgage can be paid off. By summing your preferences, you determine that you need a total of $779 730 in life insurance. You round off the number and obtain quotes for a policy with coverage of $800 000. Copyright © 2022 Pearson Canada Inc. 8 - 92 Practice Question Which of the following is true about the cost of health care in Canada? A) The supplementary health care benefits funded by the provinces vary across the country. B) The federal government administers all Canadian health care through the Canada Health Act. C) Health care costs as a portion of revenue are growing minimally over time. D) Approximately half the funding for health care comes from private health care plans. Answer: ???? Copyright © 2022 Pearson Canada Inc. 8 - 93 Practice Question Which of the following is true about the cost of health care in Canada? A) The supplementary health care benefits funded by the provinces vary across the country. B) The federal government administers all Canadian health care through the Canada Health Act. C) Health care costs as a portion of revenue are growing minimally over time. D) Approximately half the funding for health care comes from private health care plans. Answer: A Copyright © 2022 Pearson Canada Inc. 8 - 94 Practice Question Health insurance includes all of the following benefits except: A) disability insurance. B) critical illness insurance. C) medicare. D) life insurance. Answer: ???? Copyright © 2022 Pearson Canada Inc. 8 - 95 Practice Question Health insurance included all of the following benefits except A) disability insurance. B) critical illness insurance. C) medicare. D) life insurance. Answer: D Copyright © 2022 Pearson Canada Inc. 8 - 96 Practice Question – True or False While the Canada Health Act is federal legislation, it is the responsibility of the provinces and territories to Administer and deliver health care services. Answer: ???? Copyright © 2022 Pearson Canada Inc. 8 - 97 Practice Question – True or False While the Canada Health Act is federal legislation, it is the responsibility of the provinces and territories to Administer and deliver health care services. Answer: TRUE Copyright © 2022 Pearson Canada Inc. 8 - 98 LIFE INSURANCE-DEFINITIONS Face amount the amount stated on the face of the policy that will be paid on the death of the insured. Beneficiary the named individual who receives life insurance payments upon the death of the insured. Life insured the individual who is covered in the life insurance policy. Policy owner the individual who owns all rights and obligations to the policy. Term insurance life insurance that is provided over a specified time period and does not build a cash value. Intended strictly to provide insurance to a beneficiary in the event of death. Expires at the end of the term. May have a renewability option. Renewability is no longer an option after a certain age. Permanent life insurance that continues to provide insurance as long as premiums are paid. Includes Whole Life and Universal Life Copyright © 2022 Pearson Canada Inc. 8 - 99 LIFE INSURANCE-DEFINITIONS Whole life a form of permanent life insurance that builds cash insurance value based on a fixed premium that is payable for the life of the insured. Universal a form of permanent life insurance for which you do not life pay a fixed premium and in which you can decide to insurance invest the cash value portion in a variety of investments. Mortality the number of deaths in a population or in a subgroup rate of the population. Life insurance industry has developed preferred underwriting criteria (e.g. blood pressure, cholesterol level). Underwriting the process of evaluating an insurance application based on the applicant’s age, sex, smoking status, driving record, and other health and lifestyle considerations and then issue insurance policies based on the responses. Copyright © 2022 Pearson Canada Inc. 8 - 100 LIFE INSURANCE-DEFINITIONS Grace the period the insurance company period extends to the policy owner before the policy lapses due to nonpayment, usually 30 days. Term to 100 a form of permanent life insurance that insurance: does not build cash value. More expensive than term insurance but less expensive than whole life or universal life insurance. In most cases, the policy owner does not need to pay premiums if he or she lives beyond the age of 100. Copyright © 2022 Pearson Canada Inc. 8 - 101  HOMEWORK 1. Complete Insurance Definition Sheet on your own. 2. Watch the posted videos (in DC Connect, under Contents) for Chapter #8 and #9. Copyright © 2022 Pearson Canada Inc. 8 - 102  APPENDIX A: INSURANCE FIGURES Copyright © 2022 Pearson Canada Inc. 8 - 103 Disability Insurance Exhibit 9.2 Probability of Becoming Disabled for Three Months or Longer before Age 65 Copyright © 2022 Pearson Canada Inc. 8 - 104 Disability Insurance Exhibit 9.3 The Average Duration of a Disability Lasting More Than Three Months Copyright © 2022 Pearson Canada Inc. 8 - 105 Homeowner’s Insurance Policy Provisions Exhibit 8.7 Expense Allocation for Homeowner’s Insurance Companies Copyright © 2022 Pearson Canada Inc. 8 - 106