Accident and Sickness Insurance PDF - LLQP Exam Preparation Manual

Accident and sickness insurance Life Licence Qualification Program (LLQP) Exam Preparation Manual E-312 – 10th Edition, 2024 Accident and sickness insurance 10th Edition, 2024 Revised by Sylvie Couture Project management Jérôme Gagnon 1st Edition and 2nd Edition, 2015 Written by Robert N. Ransom Consultation committee Adrienne D. Benkson, Fred Bridel, Andrew Gordon, Sean Long, Nicholas Parnell and Roderick Smith Project management Sandra Ciccocioppo, Jérôme Gagnon and Geneviève Vigneault French adaptation Normand Larivière French adaptation committee Hélène Doré, Audrey Lacroix and François Nadeau © Autorité des marchés financiers, 2024 All translation and adaptation rights, in whole or in part, are reserved for all countries. No part of the material protected by this copyright may be reproduced or utilized in any form or by any means, electronic or mechanical, including microreproduction, photocopying, recording or any information storage or retrieval systems, without permission in writing from a duly authorized representative of the Autorité des marchés financiers. Despite the preceding paragraph, an authorized course provider may use copyright material as permitted under a licence agreement entered into with the Autorité des marchés financiers. Legal deposit – Bibliothèque et Archives nationales du Québec, 2024 ISBN 978-2-551-27156-6 (PDF) Accident and sickness insurance iii FOREWORD This Manual is an exam preparation tool for future life insurance agents registered in the Life Licence Qualification Program (LLQP). Its contents will help candidates develop the competency targeted in the accident and sickness insurance module of the LLQP Curriculum: Recommend individual and group accident and sickness insurance products adapted to the client’s needs and situation. Chapter overview page The first page of every chapter outlines the Curriculum module competency components and sub-components that will be covered. Highlighting which of the evaluation objectives are addressed in each of the manual’s chapters serves to identify the contents that are essential to attain these objectives. It is thus recommended that candidates regularly review the competency components and sub-components in order to contextualize and assimilate them as they read each chapter. This will help develop an understanding of the nature and scope of the evaluated competency. Candidates must have fully understood the knowledge, strategies and skills covered in each chapter in order to successfully pass the corresponding module of the LLQP licensing exam. In this text, the masculine form is used for both men and women. Accident and sickness insurance iv TABLE OF CONTENTS List of diagrams and tables.......................................................................................................... xviii List of abbreviations..................................................................................................................... xx CHAPTER 1 FINANCIAL PROTECTION PROVIDED BY ACCIDENT AND SICKNESS INSURANCE 1.1 For individuals and their families.......................................................................................... 2 1.1.1 Financial goals of individuals and their families......................................................... 2 1.1.1.1 Wealth accumulation................................................................................... 3 1.1.1.2 Retirement income....................................................................................... 3 1.1.1.3 Family needs............................................................................................... 3 1.1.2 Financial risks that threaten individuals and their families......................................... 4 1.1.2.1 Unexpected expenses................................................................................. 4 1.1.2.2 Loss of income............................................................................................. 5 1.1.2.3 Loss of savings............................................................................................ 5 1.1.2.4 Lower standard of living............................................................................... 5 1.1.2.5 Inflation........................................................................................................ 5 1.1.2.6 Longevity..................................................................................................... 6 1.1.2.7 Debt............................................................................................................. 6 1.1.3 Personal risks that threaten individuals and their families......................................... 7 1.1.3.1 Likelihood of disability.................................................................................. 7 1.1.3.2 Loss of independence and costs of long-term care..................................... 8 1.1.4 Needs met by accident and sickness insurance for individuals................................. 8 1.1.4.1 Protection for income................................................................................... 8 1.1.4.2 Protection for savings.................................................................................. 9 1.1.4.3 Protection for assets.................................................................................... 9 1.2 For business owners............................................................................................................ 10 1.2.1 Goals......................................................................................................................... 11 1.2.1.1 Business profitability.................................................................................... 11 1.2.1.2 Business succession................................................................................... 11 1.2.1.3 Sale at fair market value.............................................................................. 11 1.2.2 Business risk............................................................................................................ 12 1.2.3 Risk management...................................................................................................... 12 Accident and sickness insurance v 1.2.3.1 Self-funding.................................................................................................. 12 1.2.3.2 Insurance..................................................................................................... 13 1.2.4 Needs met by accident and sickness insurance for businesses............................... 13 CHAPTER 2 INSURANCE TO PROTECT INCOME 2.1 Sources of income protection............................................................................................... 16 2.1.1 Individual disability insurance.................................................................................... 16 2.1.2 Group disability insurance......................................................................................... 17 2.1.3 Creditor insurance..................................................................................................... 17 2.1.3.1 Mortgage disability insurance compared to individual disability insurance (traditional).................................................................................. 17 2.2 Individual (personally owned) disability insurance............................................................... 18 2.2.1 Types of individual policies........................................................................................ 18 2.2.1.1 Non-cancellable policy................................................................................. 19 2.2.1.2 Guaranteed renewable policy...................................................................... 19 2.2.1.3 Cancellable policy........................................................................................ 19 2.2.1.4 Guaranteed issue policy.............................................................................. 20 2.2.1.5 Non-traditional disability insurance plans.................................................... 21 2.2.2 Individual policy benefits............................................................................................ 22 2.2.2.1 Amount of benefit......................................................................................... 22 2.2.2.2 Waiting period.............................................................................................. 24 2.2.2.3 Benefit period............................................................................................... 25 2.2.2.4 Exclusions and limitations........................................................................... 25 2.2.2.5 Denial of benefits......................................................................................... 26 2.2.2.6 Rehabilitation benefit................................................................................... 28 2.2.2.7 Benefits for recurring disability..................................................................... 28 2.2.2.8 Benefits for presumptive disability............................................................... 31 2.2.2.9 Survivor benefit............................................................................................ 31 2.2.3 Individual policy premium factors.............................................................................. 32 2.2.3.1 Impact of gender and age............................................................................ 32 2.2.3.2 Health issues............................................................................................... 32 2.2.3.3 Definitions of disability................................................................................. 33 Accident and sickness insurance vi 2.2.3.4 Occupational clause.................................................................................... 35 2.2.3.5 Waiver of premium....................................................................................... 36 2.2.4 Riders to address needs............................................................................................ 37 2.2.4.1 Concept of customization............................................................................ 37 2.2.4.2 Differences between “equivalent” riders...................................................... 37 2.2.4.3 Future purchase option (FPO)..................................................................... 37 2.2.4.4 Cost-of-living adjustment (COLA)................................................................ 39 2.2.4.5 Accidental death and dismemberment (AD&D)........................................... 40 2.2.4.6 Partial and residual disability benefits.......................................................... 40 2.2.4.7 Return of premium (ROP)............................................................................ 42 2.2.4.8 Ratings and exclusion riders........................................................................ 42 2.2.4.9 Hospitalization benefit.................................................................................. 43 2.2.5 Taxation of individual disability insurance (DI) benefits............................................. 44 2.2.5.1 Tax treatment of premiums and benefits...................................................... 44 2.2.5.2 Taxation differences between personally owned and corporately owned disability insurance (DI) policies....................................................... 44 2.2.6 Conversion of policy.................................................................................................. 45 2.3 Group disability insurance.................................................................................................... 45 2.3.1 Providers of group disability insurance...................................................................... 45 2.3.1.1 Employer...................................................................................................... 46 2.3.1.2 Association.................................................................................................. 46 2.3.2 Types of group disability insurance (DI) policies....................................................... 47 2.3.2.1 Short-term disability (STD).......................................................................... 47 2.3.2.2 Long-term disability (LTD)............................................................................ 48 2.3.2.3 Disability during a leave of absence............................................................ 49 2.3.3 Plan enrolment and membership............................................................................... 49 2.3.3.1 Qualification period...................................................................................... 49 2.3.3.2 Premium payment........................................................................................ 50 2.3.3.3 Terminating membership............................................................................. 50 2.3.4 Amount of benefit...................................................................................................... 50 2.3.4.1 Non-evidence maximum (without medical evidence).................................. 51 2.3.4.2 Overall maximum with medical evidence..................................................... 51 2.3.4.3 All-source maximum (also sometimes called “group offset amendment”)... 52 2.3.4.4 Denial of benefits......................................................................................... 53 Accident and sickness insurance vii 2.3.5 Taxation of group disability insurance benefits.......................................................... 53 2.3.6 Integrating a group policy with an individual policy.................................................... 55 2.4 Creditor disability insurance (and other providers)............................................................... 56 2.4.1 Amount of benefit...................................................................................................... 56 2.4.2 Taxation of creditor disability insurance benefits....................................................... 57 2.5 How they compare............................................................................................................... 57 CHAPTER 3 INSURANCE TO PROTECT ASSETS 3.1 Critical illness (CI) (or dread disease) insurance.................................................................. 59 3.1.1 Coverage provided.................................................................................................... 60 3.1.1.1 Minimum/Maximum issue ages................................................................... 60 3.1.1.2 Minimum/Maximum face amount................................................................. 60 3.1.1.3 Qualification period...................................................................................... 61 3.1.1.4 Survival (waiting) period.............................................................................. 61 3.1.1.5 Duration of coverage................................................................................... 61 3.1.2 Types of policies........................................................................................................ 61 3.1.3 Conditions covered.................................................................................................... 62 3.1.3.1 “Big 4” – heart attack, stroke, cancer, and coronary bypass surgery........... 63 3.1.3.2 Expanded coverage..................................................................................... 63 3.1.4 Riders available......................................................................................................... 64 3.1.4.1 Return of premium (ROP)............................................................................ 64 3.1.4.2 Waiver of premium....................................................................................... 65 3.1.5 Payment of benefits................................................................................................... 65 3.1.5.1 Tax treatment of critical illness premiums, benefits and return of premium benefit....................................................................................... 67 3.2 Long-term care..................................................................................................................... 67 3.2.1 Canadian demographics............................................................................................ 67 3.2.2 Long-term care options.............................................................................................. 69 3.2.2.1 Home care................................................................................................... 69 3.2.2.2 Respite care................................................................................................. 69 Accident and sickness insurance viii 3.2.2.3 Assisted living.............................................................................................. 70 3.2.2.4 Nursing home (facility) care......................................................................... 70 3.2.3 Providers of long-term care....................................................................................... 71 3.2.3.1 Publicly funded facilities............................................................................... 71 3.2.3.2 Publicly funded home care.......................................................................... 71 3.2.4 Cost of long-term care............................................................................................... 71 3.3 Individual long-term care (LTC) insurance.......................................................................... 72 3.3.1 Purpose/Who needs it............................................................................................... 73 3.3.2 Advantages................................................................................................................ 73 3.3.3 Coverage provided.................................................................................................... 74 3.3.3.1 Activities of daily living (ADLs)..................................................................... 75 3.3.4 Long-term care riders available................................................................................. 76 3.3.4.1 Cost of living adjustment (COLA)................................................................ 76 3.3.4.2 Return of premium (ROP)............................................................................ 76 3.3.5 Policy benefits........................................................................................................... 77 3.3.5.1 Tax treatment of long-term care benefits..................................................... 77 3.3.6 Premiums.................................................................................................................. 78 3.3.6.1 Tax treatment of long-term care premiums.................................................. 78 3.4 Co-ordinating long-term care (LTC) insurance with other types of accident and sickness insurance...................................................................................... 78 3.4.1 Long-term care (LTC) insurance and disability insurance......................................... 79 3.4.2 Long-term care (LTC) insurance and critical illness (CI) insurance........................... 79 3.5 Limitations of critical illness (CI) insurance and long-term care (LTC) insurance................. 80 CHAPTER 4 INSURANCE TO PROTECT SAVINGS 4.1 Types of extended health coverage to protect savings........................................................ 82 4.1.1 Individual extended health insurance........................................................................ 82 4.1.2 Group extended health coverage.............................................................................. 82 4.2 Types of individual extended health coverage..................................................................... 83 4.2.1 Medical care.............................................................................................................. 83 Accident and sickness insurance ix 4.2.1.1 Coverage provided...................................................................................... 83 4.2.1.2 Deductibles and co-insurance..................................................................... 84 4.2.2 Dental care................................................................................................................ 85 4.2.2.1 Coverage provided...................................................................................... 85 4.2.2.2 Deductibles and co-insurance..................................................................... 86 4.2.3 Travel insurance........................................................................................................ 86 4.2.3.1 Coverage provided by an insurer................................................................. 87 4.2.3.2 Coverage provided through a credit card.................................................... 87 4.2.3.3 Pre-existing conditions................................................................................. 87 4.2.3.4 Benefits........................................................................................................ 88 4.2.3.5 Factors affecting premiums......................................................................... 89 4.2.4 Taxation of individual extended health insurance premiums and benefits................. 90 4.3 Group extended health coverage......................................................................................... 90 4.3.1 Types of coverage..................................................................................................... 90 4.3.1.1 Prescription drugs........................................................................................ 91 4.3.1.2 Enhanced medical and hospital care........................................................... 91 4.3.1.3 Dental care.................................................................................................. 92 4.3.1.4 Vision care................................................................................................... 93 4.3.1.5 Accidental death and dismemberment (AD&D)........................................... 93 4.3.2 Benefits...................................................................................................................... 94 4.3.2.1 Deductibles and co-insurance..................................................................... 94 4.3.2.2 Reimbursement........................................................................................... 96 4.3.2.3 Direct billing................................................................................................. 97 4.3.3 Taxation of group extended health insurance premiums and benefits...................... 97 4.3.3.1 Premiums and the medical expense tax credit............................................ 97 4.3.4 Integrating an individual policy with a group policy.................................................... 97 4.4 Comparing individual and group policies.............................................................................. 98 CHAPTER 5 INSURANCE TO PROTECT BUSINESSES 5.1 Forms of business ownership............................................................................................... 101 5.1.1 Sole proprietorship.................................................................................................... 101 Accident and sickness insurance x 5.1.2 Partnership................................................................................................................ 102 5.1.3 Corporation................................................................................................................ 102 5.1.3.1 Privately held............................................................................................... 103 5.1.3.2 Publicly held................................................................................................. 103 5.2 Risks to the business owner................................................................................................. 103 5.2.1 Inability to work.......................................................................................................... 104 5.2.2 Inability to sell the business....................................................................................... 104 5.2.2.1 In the event of disability............................................................................... 104 5.2.3 Loss of a key employee............................................................................................. 105 5.2.3.1 In the event of prolonged disability.............................................................. 105 5.3 Insurance to address owners’ inability to work..................................................................... 105 5.3.1 Disability business overhead expense (BOE) insurance........................................... 106 5.3.1.1 Purpose of the coverage.............................................................................. 106 5.3.1.2 Who needs/qualifies for business overhead expense (BOE) insurance?....... 106 5.3.1.3 Definition of disability................................................................................... 106 5.3.1.4 What expenses qualify for reimbursement?................................................ 107 5.3.1.5 Benefits........................................................................................................ 107 5.3.1.6 Waiting period.............................................................................................. 108 5.3.1.7 Benefit maximums....................................................................................... 108 5.3.1.8 Carryover of benefits/expenses................................................................... 108 5.3.1.9 Provisions/exclusions.................................................................................. 109 5.3.1.10 Tax treatment of premiums and benefits...................................................... 110 5.3.2 Business loan protection disability insurance............................................................ 110 5.3.2.1 Purpose....................................................................................................... 110 5.3.2.2 Who needs the coverage?........................................................................... 111 5.3.2.3 Eligible loans................................................................................................ 111 5.3.2.4 Who qualifies for such coverage?................................................................ 111 5.3.2.5 Benefits........................................................................................................ 111 5.3.2.6 Optional benefits.......................................................................................... 112 5.3.2.7 Exclusions.................................................................................................... 112 5.3.2.8 Tax treatment of premiums and benefits...................................................... 112 5.4 Insurance to address the owner’s inability to sell the business............................................ 113 5.4.1 Buy/sell agreements.................................................................................................. 113 Accident and sickness insurance xi 5.4.1.1 Purpose of an agreement............................................................................ 113 5.4.1.2 Parties to the agreement............................................................................. 114 5.4.1.3 Elements of an agreement........................................................................... 114 5.4.1.4 Types of agreement..................................................................................... 116 5.4.1.5 Taxation issues............................................................................................ 117 5.4.2 Disability buyout insurance........................................................................................ 117 5.4.2.1 Definition of total disability........................................................................... 118 5.4.2.2 Waiting period.............................................................................................. 118 5.4.2.3 Benefit and benefit period............................................................................ 118 5.4.2.4 Coverage amount........................................................................................ 118 5.4.2.5 Features of the policy.................................................................................. 118 5.4.2.6 Termination of coverage.............................................................................. 119 5.4.2.7 Tax treatment of premiums and benefits...................................................... 119 5.5 Insurance to address the loss of a key employee................................................................ 120 5.5.1 Key person insurance............................................................................................... 121 5.5.1.1 Who is a “key person”?................................................................................ 121 5.5.1.2 Purpose of the coverage.............................................................................. 121 5.5.1.3 Terms of the contract................................................................................... 121 5.5.1.4 Riders......................................................................................................... 122 5.5.1.5 Benefits........................................................................................................ 122 5.5.1.6 Waiting and benefit periods......................................................................... 122 5.5.1.7 Tax treatment of premiums and benefits...................................................... 122 5.6 Other types of business insurance plans............................................................................. 123 5.6.1 Employee health trusts (EHTs).................................................................................. 123 5.6.2 Personal health spending plans (PHSPs)................................................................. 123 5.6.3 Grouped disability/critical illness plans...................................................................... 124 5.7 Taxation of benefits.............................................................................................................. 125 5.8 Integrating business and personal disability coverage......................................................... 128 5.8.1 Owner’s need for personal insurance........................................................................ 128 Accident and sickness insurance xii CHAPTER 6 CLIENT PROFILE 6.1 Personal situation of client................................................................................................... 131 6.1.1 Personal details......................................................................................................... 132 6.1.1.1 Age.............................................................................................................. 132 6.1.1.2 Gender......................................................................................................... 132 6.1.1.3 Sports, hobbies, activities or pursuits.......................................................... 132 6.1.2 Marital status............................................................................................................. 133 6.1.3 Dependents............................................................................................................... 134 6.1.4 Occupation................................................................................................................ 135 6.1.4.1 Duties........................................................................................................... 135 6.1.4.2 Work history................................................................................................. 135 6.1.4.3 Future work plans........................................................................................ 136 6.1.5 Health........................................................................................................................ 136 6.1.5.1 Personal health history............................................................................... 136 6.1.5.2 Family health history................................................................................... 137 6.1.6 Retirement goals....................................................................................................... 137 6.1.6.1 Travel and living abroad or living at home................................................... 137 6.2 Client income........................................................................................................................ 138 6.2.1 Sources of earned income......................................................................................... 138 6.2.1.1 Salary, bonuses and commission income from working.............................. 138 6.2.1.2 Business income.......................................................................................... 139 6.2.2 Sources of unearned income..................................................................................... 139 6.2.2.1 Income earned by spouse........................................................................... 139 6.2.2.2 Investment income....................................................................................... 140 6.2.2.3 Support payments........................................................................................ 140 6.2.2.4 Pension income........................................................................................... 140 6.2.2.5 Royalties and other income sources............................................................ 141 6.2.2.6 Disability income.......................................................................................... 141 6.2.3 In-kind income........................................................................................................... 142 6.2.3.1 Contribution to elder care from stay-at-home caregiver.............................. 142 6.2.3.2 Community programs.................................................................................. 142 Accident and sickness insurance xiii 6.2.4 Other sources of income........................................................................................... 142 6.2.4.1 Emergency funds and other assets............................................................. 143 6.3 Client expenses.................................................................................................................... 143 6.3.1 Living expenses......................................................................................................... 144 6.3.1.1 Mortgage statement or rental agreement.................................................... 144 6.3.1.2 Bank statements.......................................................................................... 144 6.3.1.3 Budget......................................................................................................... 144 6.3.2 Savings and investments.......................................................................................... 145 6.3.2.1 Registered investment account statements................................................. 146 6.3.2.2 Non-registered investment account statements.......................................... 147 6.3.2.3 Pension plan statements............................................................................. 147 6.3.2.4 Life insurance statements............................................................................ 147 6.3.3 Debt........................................................................................................................... 148 6.3.3.1 Personal line of credit and Home Equity Line of Credit (HELOC) statements................................................................................................... 148 6.3.3.2 Credit card statements................................................................................. 149 6.3.3.3 Tax liabilities................................................................................................. 149 6.3.3.4 Other liabilities............................................................................................. 150 6.4 Financial situation of the client............................................................................................. 150 6.4.1 Net financial position................................................................................................. 150 6.4.1.1 Review of assets.......................................................................................... 151 6.4.1.2 Debt............................................................................................................. 151 6.4.1.3 Cash flow statement.................................................................................... 152 6.5 Insurance situation of the client............................................................................................ 154 6.5.1 Personal and/or group coverage in place.................................................................. 154 6.5.1.1 Type of policy/policies.................................................................................. 154 6.5.1.2 Characteristics of coverage......................................................................... 155 6.5.1.3 Cost of coverage.......................................................................................... 155 6.5.2 Government coverage............................................................................................... 155 6.5.2.1 Employment Insurance (EI)......................................................................... 156 6.5.2.2 Canada Pension Plan (CPP)/Québec Pension Plan (QPP)....................... 157 Accident and sickness insurance xiv 6.5.2.3 Workers’ Compensation............................................................................... 158 6.5.2.4 Tax treatment of contributions paid and benefits received under government programs...................................................................... 158 6.6 When the client profile is finalized........................................................................................ 159 CHAPTER 7 INSURANCE RECOMMENDATION, CONTRACT AND SERVICE NEEDS 7.1 Insurance recommendation.................................................................................................. 162 7.1.1 Basis for the recommendation................................................................................... 163 7.1.2 Recommendations to manage premiums.................................................................. 163 7.1.2.1 Extending waiting period, shortening benefit period, reduced benefits and nature of the contract............................................................................ 163 7.1.3 Head office modifications for non-standard risks....................................................... 165 7.1.3.1 Suggesting exclusions, limitations and ratings............................................ 165 7.1.3.2 Suggesting deductibles................................................................................ 165 7.1.4 Providing quotes........................................................................................................ 166 7.1.5 Documenting the recommendation............................................................................ 167 7.1.5.1 Rationale for recommendation..................................................................... 167 7.1.5.2 Client expectations...................................................................................... 167 7.1.6 Presenting complementary policies........................................................................... 168 7.1.7 Revising the recommendation................................................................................... 169 7.2 Application for insurance...................................................................................................... 169 7.2.1 Attention to detail required......................................................................................... 169 7.2.1.1 Naming of beneficiary.................................................................................. 170 7.2.2 Agent’s contribution to application............................................................................. 171 7.2.2.1 Agent’s comments....................................................................................... 172 7.2.2.2 Medical questions........................................................................................ 173 7.2.2.3 Inspection report.......................................................................................... 173 7.2.2.4 Hazardous sports and occupations questionnaires..................................... 174 7.2.3 Necessary documents and procedures..................................................................... 174 7.2.3.1 Medical exam............................................................................................... 174 7.2.3.2 Confirmation of income................................................................................ 175 7.2.3.3 Replacing existing coverage........................................................................ 175 Accident and sickness insurance xv 7.3 Underwriting by insurer........................................................................................................ 176 7.3.1 Factors affecting premiums....................................................................................... 176 7.3.1.1 Morbidity rates............................................................................................. 177 7.3.1.2 Ratings and exclusions................................................................................ 177 7.3.2 Financial underwriting................................................................................................ 177 7.3.3 Medical underwriting.................................................................................................. 178 7.3.3.1 Attending Physician’s Statement (APS)....................................................... 178 7.3.3.2 Medical Information Bureau (MIB)............................................................... 179 7.4 Insurance contract................................................................................................................ 179 7.4.1 Need for prompt delivery........................................................................................... 179 7.4.2 Need for agent awareness of change between the signature of the application and the delivery of the contract..................................................... 180 7.4.2.1 Dealing with rated cases.............................................................................. 181 7.4.3 Providing contract disclosure..................................................................................... 182 7.4.3.1 Factors that limit coverage (statutory provisions)........................................ 182 7.4.3.2 Tax treatment of premiums benefits............................................................. 183 7.4.4 Policy feature opportunities....................................................................................... 183 7.5 Policy claims......................................................................................................................... 185 7.5.1 Requirements for a claim........................................................................................... 185 7.5.1.1 Receipts....................................................................................................... 186 7.5.1.2 Medical proof of diagnosis or treatment....................................................... 186 7.5.1.3 Review factors that reduce benefits............................................................. 186 7.6 Client service........................................................................................................................ 187 7.6.1 Agent’s service role................................................................................................... 187 7.6.1.1 Providing claim forms and other relevant documents.................................. 187 7.6.1.2 Importance of promptness and accuracy..................................................... 188 7.6.1.3 Strategy for ongoing awareness of client situation and needs.................... 188 7.6.1.4 Documenting services provided................................................................... 189 7.7 How Insurers react in a pandemic........................................................................................ 189 Accident and sickness insurance xvi CHAPTER 8 GROUP PLAN SPECIFICS 8.1 Understanding the group...................................................................................................... 194 8.1.1 Makeup of the group.................................................................................................. 195 8.1.1.1 Number of members.................................................................................... 195 8.1.1.2 Age/Gender................................................................................................. 195 8.1.1.3 Turnover rate............................................................................................... 195 8.1.2 Nature of the business............................................................................................... 196 8.1.3 Comparative businesses........................................................................................... 196 8.1.4 Employee data sheet................................................................................................. 196 8.2 Products and services.......................................................................................................... 197 8.2.1 Elements of an Employee Assistance Plan (EAP)..................................................... 198 8.2.2 Group insurer’s services............................................................................................ 200 8.2.2.1 Plan member enrolment.............................................................................. 200 8.2.2.2 Premium billing............................................................................................ 201 8.2.2.3 Claims adjudication...................................................................................... 201 8.2.3 Group brokerage services......................................................................................... 201 8.3 Coverage.............................................................................................................................. 202 8.3.1 Existing coverage...................................................................................................... 202 8.3.1.1 Existing plan design..................................................................................... 203 8.3.1.2 Claims experience....................................................................................... 203 8.3.1.3 Satisfaction with current group provider...................................................... 203 8.3.2 Proposed new coverage............................................................................................ 203 8.3.2.1 New plan design.......................................................................................... 204 8.3.3 Funding formulas....................................................................................................... 205 8.3.3.1 Non-refund accounting................................................................................ 205 8.3.3.2 Refund accounting....................................................................................... 205 8.3.3.3 Administrative Services Only (ASO)............................................................ 206 8.3.4 Responsibility for premium payment......................................................................... 206 8.3.4.1 Non-contributory.......................................................................................... 206 8.3.4.2 Contributory................................................................................................. 206 Accident and sickness insurance xvii 8.4 Costs.................................................................................................................................... 207 8.4.1 Premium rates........................................................................................................... 207 8.4.1.1 Manual rating............................................................................................... 208 8.4.1.2 Experience rating......................................................................................... 208 8.4.1.3 Blended rating.............................................................................................. 208 8.4.1.4 Credibility..................................................................................................... 208 8.4.2 Taxation and group plan registration......................................................................... 209 8.4.2.1 Employee payment of long-term disability premium.................................... 209 8.4.2.2 Registration of short-term disability plan with Employment and Social Development Canada (ESDC)................................................... 210 8.4.2.3 Group premium tax...................................................................................... 210 8.4.3 Claims experience and other product cost drivers.................................................... 211 8.5 Claims administration........................................................................................................... 211 8.6 Co-ordination of benefits...................................................................................................... 212 8.7 Agent’s service role.............................................................................................................. 213 8.7.1 Ongoing awareness of client situation and needs..................................................... 214 8.7.2 Documentation of service provided........................................................................... 214 CONCLUSION............................................................................................................................. 215 APPENDIX A Adults aged 15 years and older with at least one disability.......................................................... 217 BIBLIOGRAPHY.......................................................................................................................... 218 Accident and sickness insurance xviii LIST OF DIAGRAMS AND TABLES CHAPTER 2 Table 2.1 Comparison of mortgage disability insurance and individual disability insurance coverage..................................................................................... 18 Diagram 2.1 Recurring disability with two waiting periods............................................... 28 Diagram 2.2 Recurring disability with a single waiting period.......................................... 29 Diagram 2.3 Recurring disability with extended benefit period........................................ 30 Diagram 2.4 Group disability insurance benefit amounts............................................... 51 Table 2.2 Taxation of disability insurance premiums and benefits based on payor............................................................................................ 54 Table 2.3 Characteristics of individual, group and creditor income protection............ 57 CHAPTER 3 Diagram 3.1 Age pyramid of the population, Canada, 2003 and 2023............................ 68 Table 3.1 Monthly costs (not subsidized) for full-time nursing care facilities by province.................................................................................................. 72 Table 3.2 Characteristics of disability insurance, critical illness insurance and long-term care insurance...................................................................... 79 CHAPTER 4 Table 4.1 Sample accidental death and dismemberment schedule of loss................ 94 Table 4.2 Characteristics of individual and group extended health insurance policies......................................................................................................... 99 CHAPTER 5 Table 5.1 Income tax implications of premiums paid and benefits received for business accident and sickness and disability coverage....................... 126 Accident and sickness insurance xix CHAPTER 6 Table 6.1 Taxation of contributions paid for government programs............................ 158 Table 6.2 Taxation of benefits received from government programs.......................... 159 APPENDIX A Adults aged 15 years and older with at least one disability.......................................................... 217 Accident and sickness insurance xx LIST OF ABBREVIATIONS A&S Accident and sickness ACB Adjusted cost base AD&D Accidental death and dismemberment ADLs Activities of daily living APS Attending physician’s statement ASO Administrative services only BOE Business overhead expense CCAC Community Care Access Centre CI Critical illness COB Co-ordination of benefits COLA Cost of living adjustment CPI Consumer Price Index CPP Canada Pension Plan CRA Canada Revenue Agency CSD Canadian Survey on Disability CSV Cash surrender value DI Disability insurance DTC Disability Tax Credit EAP Employee assistance plan EHT Employee health trust EI Employment Insurance ESDC Employment and Social Development Canada FPO Future purchase option GA General agency GIB Guaranteed insurability benefit GIO Guaranteed insurability option HBP Home Buyers’ Plan HELOC Home Equity Line of Credit HWT Health and welfare trust Accident and sickness insurance xxi LLQP Life Licence Qualification Program LTC Long-term care insurance LTD Long-term disability MIB Medical Information Bureau OAS Old Age Security PHSP Personal health spending plan/Private health services plan POA Powers of attorney PUC Paid-up capital QPIP Québec parental insurance plan QPP Québec Pension Plan RDSP Registered disability savings plan RFQ Request for a quote ROP Return of premium RRIF Registered retirement income fund RRSP Registered retirement savings plan STD Short-term disability TFSA Tax-free saving account WP Waiting period Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 1 CHAPTER 1 FINANCIAL PROTECTION PROVIDED BY ACCIDENT AND SICKNESS INSURANCE Competency component ▪ Assess the client’s needs and situation. Competency sub-component ▪ Articulate the client’s needs based on the risks that could affect his or her financial situation. Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 2 1 FINANCIAL PROTECTION PROVIDED BY ACCIDENT AND SICKNESS INSURANCE The Insurance Companies Acts of the various provinces define what is considered to be “accident and sickness” (A&S) insurance. The provincial Acts are similar in content and most will include the following when defining A&S insurance: ▪ Benefits for loss resulting from accidental bodily injury, including death, suffered by the life insured; ▪ Benefits for loss resulting from the sickness or disability of the life insured; ▪ Refund of expenses incurred due to sickness or accidental bodily injury suffered by the life insured; ▪ Refund of expenses incurred due to medical treatment of the life insured. More simply put, accident and sickness insurance relieves insured individuals of the burdens of medical expenses or income loss arising from illness, injury or necessary medical treatment not covered by the provincial health insurance plans. This Chapter describes the risks that businesses, individuals and their families face, and the ensuing needs that are met by various types of A&S insurance products. The products themselves, as well as the process of recommending and implementing them, will be discussed in more detail in the Chapters to come. 1.1 For individuals and their families Although various types of accident and sickness insurance can play a critical role in protecting the financial viability and longevity of many businesses, the primary role of most A&S policies is to protect the finances of individuals and their families during times of medical or health crisis. 1.1.1 Financial goals of individuals and their families Most families have a fairly common set of goals that require regular cash flow and a surplus that can be invested for the long term. Although the specific amounts and details will vary from family to family, the three main financial goals remain similar: ▪ Accumulate wealth (patrimony); ▪ Create a retirement income; ▪ Meet family needs. Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 3 1.1.1.1 Wealth accumulation Once immediate needs (food, accommodation, clothing, means of travel, entertainment, etc.) have been provided for from current income, any surplus should first be allocated to setting up an emergency fund: three to six months of current expenses. Excess income can then be earmarked for wealth accumulation goals, both short and long-term. Wealth (assets) can be employed to achieve a wide variety of family goals: ▪ To be invested in a home or vacation property; ▪ Building a portfolio of securities, registered and non-registered, to provide additional current income, growth or funds to draw on in retirement; ▪ Building a legacy to pass along to the next generation or to posterity in general. 1.1.1.2 Retirement income At some point nearly everybody retires. But “retirement” means different things to different people: some want to travel, some want to sit by the lake at the cottage and enjoy nature, others want to spend their time engaging in community help projects. The list is as diverse as are people. But all types of retirement have one thing in common: they all require income in one degree or another. Retirement income can come from a variety of sources: ▪ Government pension plans (Canada/Québec Pension Plans (CPP and QPP) and Old Age Security (OAS)); ▪ Employment pension plans; ▪ Private pension plans (Registered Retirement Savings Plans (RRSPs)); ▪ Non-registered investments; ▪ Inheritances; ▪ Part-time employment or self-employment; ▪ Liquidation of assets. But almost all of these sources (except Old Age Security) require that the retiree has worked, saved and invested for a significant number of years prior to retirement. And continuity of work can be interrupted by a number of factors, including economic downturns and disability. It is in the area of disability and the recommendation of products that can replace income during periods of disability that the life insurance agent has a significant role to play in protecting the financial welfare of individuals and their families. 1.1.1.3 Family needs Prior to retirement and prior to (or concurrent with) investing for wealth accumulation, families need to generate income and set aside savings to meet ongoing family needs. Tuition (and room and board) for higher education for children, orthodontics, family vacations—these and more all need Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 4 to be provided for long before retirement. And many families are faced with providing extra support for special needs children, dependent aging parents or “boomerang” children forced by economics or other circumstances to return to the “nest.” 1.1.2 Financial risks that threaten individuals and their families Meeting the above-noted family goals is primarily dependent upon clients’ ability to generate sufficient income and savings over time. Unfortunately, there are a number of risks that could disrupt those plans, such as: ▪ Unexpected expenses; ▪ Loss of income or savings; ▪ Lower standard of living; ▪ Inflation; ▪ Longevity; ▪ Debt. 1.1.2.1 Unexpected expenses In theory, a budget will help clients to match income and expenses and prepare for future financial eventualities. But not everyone has a budget. Not everyone who has a budget is good at making a realistic budget. And certainly many people with budgets are not good at sticking to them. But even the best budget cannot anticipate every possible expense. Some expenses, like the need to replace a vehicle every six years or so, can be anticipated and planned for by setting up a “sinking” (savings) fund to prepare for the expense. But others may come “out of the blue” and have the potential to completely derail the family budget. EXAMPLE Emily, a single mother of 35 with two pre-teen children, suffered a debilitating stroke last year. Not only has she been unable to work and earn an income ever since, she had to spend $75,000 to modify her two-story home to accommodate her motorized wheelchair. The combination of income loss and medically related expenses have depleted her savings and much of her RRSPs and driven her into debt. The prospect of having to sell her house and move the family into an apartment is looming. Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 5 1.1.2.2 Loss of income During a person’s working years, especially the “early” years, financial success and security are all about income. Unless someone wins the lottery or inherits young, the only way that they can accumulate savings or a long-term asset base is by generating more income annually than they currently need to live on. But income is dependent upon both availability and the individual’s ability to continue working. And even those with jobs could suddenly find themselves without income if injury or illness caused a disability that kept them off the job for a prolonged period of time. 1.1.2.3 Loss of savings Either unplanned large expenses or a decline or loss of income, or both, could compel a family to draw down their savings to meet current demands. And depending on the amount of savings involved and the family income resources available, it could take years to build them up again. 1.1.2.4 Lower standard of living A lower standard of living is not really a risk in and of itself, but it may be a consequence of other losses: loss of income, loss of savings, loss of assets, etc., which in turn may all stem back to income lost or unexpected medical expenses incurred due to injury or illness. This “domino effect” could often be avoided if the client has an effective A&S insurance program in effect. Otherwise, changing financial circumstances could compel the family to sell one of their cars, move to a smaller home or a rental unit or cut back on, or eliminate, family vacations. And a reduced standard of living isn’t merely a physical change for the family; it could also create psychological changes that are a roadblock to ambition and productivity in the future. A reduced standard of living today could translate into substantially reduced income, assets and lifestyle in the future. 1.1.2.5 Inflation Using the Consumer Price Index (CPI) as a guide, for example, a “basket” of goods that cost $100 in 2004 cost $154.27 just 20 years later, in 2024,1 an increase of 54.7%; and that during a period of relatively low inflation (2.3%). Looking at the long term, $100 worth of goods bought in 1920 cost $1,784.44 one century later. Although inflation in Canada has been moderate over the past years (3.9% in 2023),2 it was not so long ago that it was at a much higher level (12.12% in 1982). 1. Bank of Canada. Inflation calculator. [online]. [Consulted May 22, 2024]. http://www.bankofcanada.ca/rates/related/inflation-calculator/ 2. Trading Economics. Canada Inflation Rate. [online]. [Consulted May 22, 2024]. http://www.tradingeconomics.com/canada/inflation-cpi Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 6 For those earning a living in times of high inflation, salaries have to increase substantially year over year just to allow the worker to maintain his standard of living. Likewise, disability income replacement products, like A&S disability insurance, need to be indexed to inflation in order for benefits to retain their buying power, particularly during periods of prolonged disability and/or high inflation. 1.1.2.6 Longevity For the past 50 years, life expectancy at age 65 has increased by approximately six years and should increase by about another three years over the next five decades.3 These increases mean a longer retirement life expectancy, with individuals taking their retirement at 65 needing income to support them for more than 20 years. Longevity risk is therefore the financial risk of a person outliving their expected lifespan and savings. In 2020-2022, 65-year-old men were expected to live until age 84.34, while 65-year-old women were expected to live until age 88.4 In general, people are living longer and spending more years in retirement. As a consequence clients are going to need to accumulate more retirement assets than in the past if they want to avoid “outliving their money.” Increased longevity has the same implications for care costs for the elderly. Those who live longer are more likely to incur health complications requiring in-home or institutional care and are likely to require that care for a longer period of time than in the past—both sound reasons to ensure that a strong long-term care insurance program is in place. Not only has the average lifespan of “retirees” increased by over 50% over the past century or so, but so has the cost of living longer. In 1900 most people who lived well into their 70s, but who had health problems, were cared for at home, by their families. Today it is more common for the elderly who are in need of care to live in chronic care facilities: “retirement homes” or nursing care facilities. With nursing home costs running as high as $5,000 a month, with monthly fees for private retirement homes often running much higher than that, many seniors may well be faced with outliving their money and being dependent on the government or their children. In any event, many will find themselves in the position of being able to leave a much smaller (or no) estate for the benefit of their children. 1.1.2.7 Debt Debt can insidiously erode financial plans and goals. Debt, of course, reduces net worth—the value of a person’s assets less his liabilities. 3. Retraite Québec. Longevity risk. [online]. [Consulted June 17, 2024]. https://www.rrq.gouv.qc.ca/en/planification/risques-financiers-lies-retraite/Pages/risque-de-longevite.aspx 4. Statistics Canada. Life expectancy and deaths statistics. [online]. [Consulted June 19, 2024]. https://www.statcan.gc.ca/en/subjects-start/health/life_expectancy_and_deaths Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 7 Average household debt in Canada in 2023 rose to $1.80 of debt for every $1.00 of family disposable income.5 At the same time, total residential mortgage debt in Canada was $2,896.4 billion.6 But it is not just the amount of debt that is a concern, but the carrying costs on that debt, particularly credit debt. For example, consumer credit cards often carry annual interest rates on unpaid balances in the 18% to 24% range, if not higher. In fact, many Canadians who are entering retirement carry substantial debt load: an impediment to the long-term financial viability of their retirement plans. Debt servicing (interest and minimum payments) usually comes out of current income, and current income may be put at risk in the event of health problems, like disability or critical illness. A client’s failure to service debt could, in the extreme, result in lawsuits, foreclosure and bankruptcy unless insurance is put into place to replace the client’s own capacity to generate income or cover current medical costs. 1.1.3 Personal risks that threaten individuals and their families Aside from all the financial risks discussed above, people also face personal health risks that could derail their financial plans and imperil their financial security, such as likelihood of disability, loss of independence and costs of long-term care. 1.1.3.1 Likelihood of disability In 2022, 1 in 4 Canadians (or 8 million people) aged 15 years and older had at least one activity- limiting disability, according to the results of the Canadian Survey on Disability (CSD), 2022.7 Persons were identified as having a disability if they had difficulty performing tasks as a result of a long-term condition or health-related problem and experienced a limitation in their daily activities. The prevalence of disability increases steadily with age in Canada. However, over 823,050 youth aged 15 to 24 (27%) had at least one disability. In comparison, 24% (or 4.6 million) of working-age adults (aged 25 to 64) and 40% (or 2.5 million) of seniors aged 65 and older had at least one disability. Women (30%) have a higher prevalence of disability than men (24%) and this was the case for all age groups. In 2022, 59% of Canadians with disabilities had a “less severe” disability (classified as having a mild or moderate disability) and 41% had a “more severe” disability (classified as having a severe or very severe disability). In all cases, the disability was severe enough to limit their activities to some degree. 5. La Presse. Les Canadiens endettés de 2080 milliards. [online]. [Consulted August 6, 2024]. https://www.lapresse. ca/affaires/2023-05-25/dette-hypothecaire-residentielle/les-canadiens-endettes-de-2080-milliards.php [French]. 6. Statistics Canada. Household borrowing. [online]. [Consulted June 19, 2024]. https://www150.statcan.gc.ca/n1/daily-quotidien/231219/dq231219d-eng.htm 7. Statistics Canada. Canadian Survey on Disability, 2017 to 2022. [online]. [Consulted May 24, 2024]. https:// www150.statcan.gc.ca/n1/daily-quotidien/231201/dq231201b-eng.htm Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 8 1.1.3.2 Loss of independence and costs of long-term care Lastly, with people living longer and in receipt of better health care than in the past, there are more persons living for more years with medical conditions, both physical (stroke, Parkinson’s disease, for example) and cognitive (like Alzheimer’s), that leave them unable to care for themselves independently. Many of these people rely on long-term care facilities for basic daily living. 1.1.4 Needs met by accident and sickness insurance for individuals In the event of illness, injury or medical necessity, accident and sickness insurance can provide needed funds to buy time for employees, the self-employed, business owners and their families— time to recover and return to productivity, time to adapt to a changed health status and time to weather the storms of an unexpected financial burden. As such, the needs met by A&S insurance for individuals include protection for: ▪ Income; ▪ Savings; ▪ Assets. 1.1.4.1 Protection for income Although perhaps not immediately apparent from the title “accident and sickness insurance,” one of the most common forms of coverage is disability income protection: insurance that will replace a percentage of a person’s regular income from employment or self-employment if the life insured is ill or injured and unable to work. After a suitable waiting period following the onset of disability, during which no benefits are payable, the insured will receive a monthly income payment from the insurer. The benefits will be payable for a prescribed benefit period or until the disabled insured is able to return to work, whichever comes first. EXAMPLE Raoul is an independent contractor working in the plumbing trade, earning $80,000 a year. In order to protect his family financially, in the event that he becomes disabled for a period of time and unable to work, he has taken out a disability income replacement (A&S) insurance policy. The policy has a 90-day (three-month) waiting period, a tax-free monthly benefit of $4,000 and a five-year benefit period. If Raoul was to be injured and unable to work, after waiting for three months, the policy would begin to pay him $4,000 a month for up to five years, to replace income lost due to disability. Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 9 1.1.4.2 Protection for savings During a person’s working lifetime one of the many family goals is the accumulation of capital: savings (in bank accounts, term deposits and other short-term financial vehicles) as an emergency fund or for near-term financial goals (like an education fund, a boat or a new car, etc.) and investments (stocks, bonds, mutual funds, RRSPs) for longer-term goals like retirement. Unforeseen circumstances (sickness, disability, medical expenses, etc.) can lead to the erosion of both short-term and long-term savings. Fortunately, extended health insurance, which is a form of accident and sickness insurance, can defray the financial impact of many of these risks by providing needed cash to replace lost income or pay medical bills. EXAMPLE This has been an unusually difficult year for the Johnson family. Mrs. Johnson, who runs a consulting sole proprietorship business, was injured in a slip and fall accident in January and was unable to work for 8 months. As a result, she was unable to earn her regular $5,000 a month of consulting fees for those months, resulting in a nearly 50% reduction in family income. The Johnsons’ son was hit in the mouth with a puck in a recreational hockey game and required over $10,000 of reconstructive dental surgery. And the Johnsons’ daughter developed a serious viral infection requiring 10 days of hospital treatment in a private room, at a cost of $125 a day (10 × $125 = $1,250). Fortunately, Mrs. Johnson has individual disability insurance in the amount of $3,000 a month with a 3-month waiting period. Her 8-month disability was covered by $15,000 (5 months × $3,000). In addition, the extended health care plan of Mrs. Johnson’s employer reimburses the children’s hospital expenses. Without this coverage, the Johnsons’ savings would have been reduced by $21,250 ($1,250 + $5,000 + $15,000). 1.1.4.3 Protection for assets Most people save for their retirement, although amounts saved vary. For example, according to a survey published by the CBC,8 on September 13, 2017, 65.2% of Canadians put aside money for retirement in 2015 by making a contribution to either a registered pension plan, an RRSP or a TFSA. And those assets, among others, do not necessarily get consumed during the retirement years: they are often passed on to the next generation through the retirees’ estates. Or, at least, that is the intent. 8. CBC News. 65% of Canadians are saving for retirement, census shows. [online]. Revised September 13, 2017. [Consulted May 24, 2024]. http://www.cbc.ca/news/business/census-canadian-saving-1.4287219. Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 10 Unfortunately, health issues in the senior years can bring expenses that deplete retirement and estate assets. Most retirees’ group health benefits terminate at retirement, leaving them without coverage for dental and vision care expenses. The Canadian Life and Health Insurance Association reminds us that, depending on the province of residence, a place in a long-term care facility generally costs from $900 to over $5,000 per month. It all depends on the type of room and the funding offered by the provincial plan.9 Critical illness and long-term care insurance can provide benefits to offset much of these costs, permitting the senior to maintain the value of his estate, to pass on to his heirs. EXAMPLE Eudora, age 69, worked her whole life as a legal assistant, but never earning a large salary. She had no pension plan at her place of business, but did manage to accumulate about $250,000 in RRSPs and non-registered investments, in addition to her $150,000 home in rural P.E.I. To date she has been able to live off of her $1,250 a month ($15,000 a year) in government benefits and some interest and dividends from her investments. Eudora recently discovered that she has a degenerative disease that will force her to move into a nursing home, at a cost of $2,750 a month ($33,000 a year). Despite her health problems Eudora has a normal life expectancy of age 85 (16 years). The shortfall in her income versus the cost of the nursing home would require Eudora to liquidate $18,000 a year of her assets ($33,000 – $15,000), reducing her estate by about $290,000 over her lifetime ($18,000 × 16 years): money she had planned to leave to her three grand- nieces, to help them to get a start in life. Fortunately, Eudora took out a long-term care policy when she was in her mid-40s and it is now paid up. The policy will cover $1,000 of her monthly expenses ($12,000 annually), reducing the erosion of her estate by $96,000 over her lifetime (($18,000 – $12,000) × 16 years = $96,000), and enabling her to still leave a substantial legacy for her family – the balance of her RRSPs and non-registered investments, as well as her country home. 1.2 For business owners The needs and goals of business owners that require protection are, in many ways, similar to those of individuals and their families. That is because the “business owner” does not exist in a vacuum: he is both an individual and, often, a member of a family. The sections below describe goals, risks and needs of business owners as they relate to accident and sickness. 9. Canadian Life and Health Insurance Association (CLHIA). A Guide to Disability Insurance. [online]. [Consulted May 24, 2024]. http://clhia.uberflip.com/i/199350-a-guide-to-disability-insurance/0? Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 11 1.2.1 Goals All owners of private businesses typically have similar goals, which may change with circumstances and over time. The goals for the business/business owner translate directly into individual goals: ▪ Business profitability (income protection); ▪ Business succession (capital protection); ▪ Sale at fair market value (protection of estate value). 1.2.1.1 Business profitability At the outset of a new business, simple survival is often the immediate goal of the business owner(s). Once the business gets through the first year or two and has established itself, the goal of the owner(s) shifts from survival to profitability and growth. Whatever else their motives, business owners are in business to earn a living: for themselves, their families and their employees. Among the many factors that contribute to profitability is business continuity. 1.2.1.2 Business succession Many business owners consider their business to be their legacy: to carry on their reputation and identity beyond their working lives. And many of those would like to see the business eventually taken over by their children. This is true whether those children are indeed children, perhaps currently preschoolers, are in university, or are currently (or prospectively) employed in the business. However, the majority of “family-owned” private businesses do not transition down to the next generation, primarily because of a lack of planning. Even where the children might be willing to take over the business, a lack of proper preparation on the part of the family members wanting to take over can result in the business failing before any transition can be finalized. Chapter 5 of this manual outlines the role of accident and sickness (A&S) insurance to provide funds to cover the business operation expenses of a disabled owner, to ensure that he has a business to return to or to pass along to the next generation. 1.2.1.3 Sale at fair market value In many cases the business cannot be passed down to the next generation: there is no next generation, or the next generation is not capable of taking over the business, the members of the next generation cannot agree on how to divide up or carry on the business, or the next generation simply has their own life plans and are not interested in taking over the business. In such cases the next best scenario is for the retiring owner, or the estate of a deceased owner, to be able to sell the business for its fair market value. This can usually not be accomplished without forward planning. A spur-of-the-moment sale, unplanned, is often a “fire sale,” with potential successors or competitors looking to take advantage of the situation by paying a fraction of fair value for the business itself, its client/customer base or the hard assets of the business. Ideally, owners should Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 12 take the time to identify in advance a suitable buyer for a business, lock in that buyer and a fair price with appropriate legal documentation and ensure that adequate funding will be available, when needed, to provide for the purchase. Chapter 5 of this manual examines the role of accident and sickness insurance in securing the necessary funding, along with proper legal documentation such as a buy/sell agreement, to ensure that a disabled business owner can obtain a fair price for the business. 1.2.2 Business risk Business success or failure can be related to a number of factors, both internal and external. Such issues as productivity, quality of production and the management of finances and personnel are internal matters, subject to the control of the business owner. Risk is generally defined as the chance that a given result (usually negative) might occur. Risks may be systematic—common to the business environment itself, or unsystematic—unique to the client’s business itself. Businesses are, first and foremost, exposed to business risk (also known as unsystematic risk): factors that relate to a specific business, rather than to the market or the economy as a whole, that could impact profitability, or even survival, of the business. An important consideration in business risk is the health of the owner/operator and other key personnel: their ability to continue to provide services essential to the profitability and survival of the business. 1.2.3 Risk management When it comes to the risk that a business might suffer when an owner or an essential employee is injured or ill and unable to fulfill his function with the business, the business only has two options to deal with the costs associated with such a risk: ▪ Self-funding; ▪ Insurance. 1.2.3.1 Self-funding Self-funding risk is simply a form of risk retention—assumption of the cost of the risk by the business owner. An individual who wishes to self-fund the cost of a loss associated with a risk really only has three options: ▪ Pay the cost out of current cash flow; ▪ Borrow to acquire funds to pay the cost; ▪ Erode savings or sell assets. None of the options is very appealing. If the cost of the loss is the reduction or elimination of earned income due to disability, where is the current cash flow to come from to pay for it? Borrowed funds could be used to pay for the loss, but borrowing money can be expensive and the funds have to be repaid. If the borrower happens to be ill and unable to work, lenders may not Accident and sickness insurance Chapter 1 – Financial protection provided by accident and sickness insurance 13 find him to be an attractive risk: where would he get the cash flow to repay the loan? Savings or other assets could be sacrificed to pay for the loss, provided that the individual has the necessary assets. But those assets were likely earmarked for other purposes: needs that might go wanting, now or in the future. 1.2.3.2 Insurance The better solution than self-funding is often to insure against the potential loss posed by risks, such as death, disability or medical expenses triggered by injury or illness. For a modest premium, paid regularly to the insurance company, an individual can be assured that funds will be available, when needed, to replace income lost or expenses incurred due to disability or a medical crisis. Of course, the premiums paid for insurance may be “lost” if the insured person never needs to file a claim, but the cost of this loss is likely to be less than the loss that would be incurred if no insurance was present. Conventional wisdom usually says that, with insurance, “it is better to have it and not need it than to need it and not have it.” 1.2.4 Needs met by accident and sickness insurance for businesses Businesses, particularly smaller, private businesses, all rely upon two common factors for success: ongoing revenue generated by the efforts of owners and/or key employees of the business and hiring and keeping quality employees. If a business relies extensively upon the services of the owner or a key employee to generate the revenue needed to pay bills and turn a profit, a disability of more than a few days of such a person could spell the death of the business. Even if little or no revenue is coming in, expenses like rent, utilities, staff salaries and other payables still need to be met. Specific A&S insurance policies, such as business overhead expense (BOE) plans, among others, can provide funds to keep the business afloat financially for several months wh

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