CFP Education Program Module 11 Insurance PDF

CFP Education Program Module 11 Insurance CFP Education Program Introduction Insurance involves a protective measure where a contract binds one party to indemnify another party in return for a sum of money, often referred to a...

CFP Education Program Module 11 Insurance CFP Education Program Introduction Insurance involves a protective measure where a contract binds one party to indemnify another party in return for a sum of money, often referred to as an insurance premium A contract is a legally enforceable agreement between two or more parties, and the terms “offer” and “acceptance” are two basic elements of a contract. If the agreement is to be enforceable by law: – there must be consideration (an exchange of values); MONEY! – the parties must have the legal capacity to enter into such a contract; – the parties must have the capacity to contract; and – there must be a legal intention by both parties to enter into a contract. CFP Education Program Insurance Contract A contract of insurance is similar to a regular contract, but some aspects are specifically unique to an insurance contract: Offer and Acceptance for Insurance and Consideration Offer and Acceptance for Insurance – The completion of an insurance application by an individual is generally considered an offer where the individual becomes the “offeror” Consideration – The payment of insurance premiums by the policy owner is consideration from one party, whereas the contract itself becomes the consideration put forth by the insurance carrier  CFP Education Program Insurance Contract cont. Parties Applicant The individual who completes the application for insurance and wishes to be the owner of the insurance contract becomes a party to the potential contract At the time that the contract becomes effective, in most situations the policy owner must have an insurable interest, otherwise the contract is considered void With property and casualty insurance, generally the only person(s) who can acquire insurance coverage is the person(s) who owns the property Insurance Carrier The party who accepts the applicant's offer  CFP Education Program Contract Formation Premium Payment – A policy, even if it is issued exactly as requested by the applicant, can only come into effect by delivery of the policy to the policy owner along with the collection of the first premium  CFP Education Program Principles of Insurance Contracts Insurable Interest – To discourage financial gain through speculation, the law requires that an individual have an insurable interest before a contract of insurance can be issued and be a valid contract – The requirement for an insurable interest is required for life insurance contracts only at the time that the contract is issued, subsequent to which ownership of a policy may be transferred at will and without any requirements for an insurable interest Principle of Indemnity – The concept of indemnification is one where an individual is compensated for a specific loss, with no possibility of profiting from the loss CFP Education Program Risk Management CFP Education Program The Risk Management Process  CFP Education Program The Risk Management Process cont. Step One: Setting Risk Management Objectives – The first step in undertaking the risk management process is to identify the objectives that form the basis for which the process is being undertaken – Ex: Ensure family has sufficient financial resources for “X” period of time in the event of premature death of one or both spouses Step Two: Identifying and Evaluating Risks – The next step is to identify risks that may impose financial losses as they relate specifically to the objective – The severity of the consequences arising from a potential outcome associated with a potential event are classified into three types: dire; substantial; and minor  CFP Education Program The Risk Management Process cont. Step Three: Selecting Strategies – Step Three involves considering and selecting strategies to address the specific risks that have been identified Risk Control Strategies These strategies are intended to reduce the probability of a risk occurring and/or reduce the severity of the consequences that could result from a potential risk, and have two classifications: – Risk Avoidance – Risk Reduction Risk Financing Strategies Risk financing involves strategies that assist in managing the costs associated with the occurrence of a particular risk, and include: – Risk Transfer/Sharing – Risk Retention (assume responsibility on your own)  CFP Education Program The Risk Management Process cont. Step Four: Implementation – The financial planner has a professional responsibility to assist the client in scheduling the necessary steps, and to work with the client and others as needed to ensure the implementation of the plan Step Five: Monitoring – Since an individual's circumstances, and marketplace products and information, are constantly changing, plans must be reviewed and updated regularly, with the financial planner documenting discussions with and decisions made by the client CFP Education Program Property and Casualty Insurance  CFP Education Program Automobile Insurance Much more complex than home insurance since, in each province and territory, specified levels and various types of coverage are mandatory Terminology – There are phrases and terms used in the automobile insurance contract that sometimes have specific meanings, and include: Legal Liability Negligence Named Insured (policy owner) Third Party (not party to insurance contract) Absolute Liability (suspended license driver injures pedestrian) No-Fault Deductible  CFP Education Program Automobile Insurance cont. Provincial Regulation – Automobile insurance laws are established at a provincial level with each province/territory legislating its own minimum standards as to the types and amounts of insurance each automobile owner must have to legally operate a vehicle – While each province has different rules and regulations, common principles prevail Bodily Injury Accident Benefits – Coverage for accident benefits provides compensation to the insured, to his/her passengers and to pedestrians, should any of these individuals die or become injured in an automobile collision  CFP Education Program Automobile Insurance cont. – Accident benefits coverage includes: medical treatment, including reimbursement for medical costs if not covered by any medical, surgical, dental or hospital plan or law, and various rehabilitation costs; payments towards funeral costs for those killed in an automobile accident; a weekly disability benefit based on prior income, employment and degree of disability, although the design differs significantly among provinces; and a payment following death of an injured insured party, where the amount depends on age, marital status and number of dependants Uninsured Motorists – While bodily injury coverage under the uninsured motorist benefit is available in all provinces/territories, an uninsured motorist still faces the possibility of criminal charges, and is liable for costs associated with at-fault accidents  CFP Education Program Automobile Insurance cont. Liability Third Party Liability Coverage – Covers the policy owner if his vehicle injures another party or damages that person's property, and the policy owner is found to be liable – If the resulting claim exceeds the insured's level of coverage, the motorist can be held personally liable for the shortfall  CFP Education Program Automobile Insurance cont. Driving Another Person's Automobile – The term “temporary substitute automobile” is used when an insured drives another person's vehicle – In the event of an accident, the insurance policy of the owner of the substitute vehicle is first in line to respond to any claims (always be insured) Damage to Vehicle Collision – This indemnifies the policy owner for losses that result when the policy owner's vehicle is damaged due to a collision – Owners of vehicles valued at low amounts may decide that the benefit of collision insurance does not warrant the relatively high cost  CFP Education Program Automobile Insurance cont. Comprehensive Insurance – This covers loss or damage to an insured automobile resulting from a variety of perils, such as fire, theft, vandalism or glass breakage, other than those covered under collision insurance Other Variations – Other variations of automobile insurance include “all perils” and “specified perils” Features – A variety of features can be incorporated in the design of an automobile insurance policy, and these include: Waiver of Depreciation; and Loss of Use (can negotiate different terms for rentals)  CFP Education Program Automobile Insurance cont. Premiums – Automobile insurance premiums are established based on a series of factors that reflect the degree of risk associated with the specific situation Driver – Considerations in the role the driver plays in the premium assessment include: geographic location of the policy owner; geographic region in which the insured vehicle will be driven on a regular basis (i.e., driving in the city is generally more risky than in a rural area and as such the premium is higher); the driving experience, driving record, age, sex and marital status of those who will be driving the vehicle either as a primary or secondary driver; and how the car will be used (i.e., for pleasure only or for commuting to work)  CFP Education Program Automobile Insurance cont. Vehicle – Factors specific to the vehicle that is to be insured are reflected in the setting of the premiums. These include: the total value of the vehicle to be insured; the repair/replacement cost; and type of vehicle including make and model (i.e., sportier cars are generally considered riskier and therefore result in a higher premium) Policy Design – The design of an insured's automobile policy will affect the total cost of the insurance program selected, and the components of a policy include: Insurance Deductible Liability Coverage Collision Coverage  CFP Education Program Automobile Insurance cont. Claims – An automobile accident must be reported to the insurance carrier in situations where: the insured plans to make a claim for benefits under the policy; or where, by law, the accident must be reported to the police – Should damage exceed a minimum level as established by law, or if death or physical injury is involved, the police will also need to be notified – There are set timelines for such things as notifying the insurance company of an accident, and when claim payments are made – If a repair makes the vehicle significantly better than it was prior to the accident, the insured may be asked to contribute to the cost of this betterment  CFP Education Program Home Insurance While the purchase of a home insurance policy is not mandatory, it involves insurance coverage for your home (if you own the building) and the contents of your home Types of Policies – Home insurance is generally bundled into predefined packages Comprehensive – Provides insurance coverage for both a building and its contents for all risks except those risks that are specifically excluded in the policy Basic/Named Perils – Provides insurance coverage for perils that are specifically named within the insurance policy  CFP Education Program Home Insurance cont. Broad – Provides all peril insurance coverage for the building and named-peril coverage for the contents covered by the policy No-Frills – Less common, this is a bare bones, minimal insurance plan offered by some insurers for properties that do not meet normal underwriting standards  CFP Education Program Home Insurance cont. Replacement Cost versus Actual Cash Value – Policy owner usually has the opportunity to select the basis upon which reimbursement of a loss is made when purchasing home insurance Replacement Cost the claim settlement amount does not take into account any deduction for depreciation, age, wear-and-tear or obsolescence the carrier provides reimbursement based on the cost of a replacement item most carriers require that the lost or damaged item be repaired or replaced with an item of similar kind and quality Actual Cash Value the insurance carrier will value the loss based on the actual value takes into account depreciation, age, wear-and-tear and obsolescence, as it relates to the insured item that has been lost or damaged  CFP Education Program Home Insurance cont. Claims – The insurer should be contacted as soon as possible when an insured encounters an insured loss – In the further case of burglary, robbery or theft, the police must also be informed – The insurer may use “subrogation” and sue the third party to recover damages it has paid to the insured, if a third party was responsible for causing the loss Additional Living Expenses – Many policies include coverage for additional living expenses when an insured peril causes the insured's home to be unfit to live in – If a tenant in the insured's home must leave because of damage to the insured residence, most home insurance policies will also cover lost net rental income during the rebuilding  CFP Education Program Home Insurance cont. Uninsurable Peril – Home insurance is intended only to protect policy owners from unpredictable events that are sudden and accidental and, as such, there are a number of perils that are uninsurable, such as damage from insects or rodents (floods)  CFP Education Program Home Insurance cont. Liability Coverage – Most home insurance policies include coverage for personal liability insurance that provides the insured and others within his immediate household with protection for legal liability to others, often referred to as third parties (housekeeper vs employees of home business) – Liability insurance under a homeowner's policy does not normally include a deductible, and generally covers losses that arise through ownership of such things like boats and sailboats, and self-propelled lawnmowers or snow blowers Excess Liability Coverage – This extends liability protection beyond what is covered by a basic homeowner's or automobile policy  CFP Education Program Home Insurance cont. Cottage – May be insured under same policy as an insured's home or separately Tenant Insurance – Tenants are responsible for damage or harm they may cause to any part of the building in which they live, as well as to others who visit or live on the premises – Tenants also have personal property that should be insured against damage, theft, or other similar types of losses, which are available in a “tenant's package” or a “tenant's improvement coverage” Condominium Insurance – Condominium owners have title to their own condominium unit, and a condominium owner's insurance policy normally covers the contents of the unit  CFP Education Program Other Types of Coverage Business Insurance – An individual who is in business has the need for a variety of business insurance coverages that should be reviewed with qualified insurance advisors Product Liability Insurance – There are insurance products available that allow an individual distributing or selling a product to share/transfer the financial risk of potential liability risks Professional Liability Insurance – Professional liability insurance is available to professionals to protect them against suits brought by clients and others, under carefully described conditions CFP Education Program Government Health Insurance  CFP Education Program Canada Health Act Introduction – The Canada Health Act is Canada's federal heath insurance legislation that establishes the criteria and conditions that the provinces/territories must adhere to in order to qualify for full federal contributions under the Canada Health and Social Transfer (CHST) – The roots of the Canada Health Act date back to 1947, when Saskatchewan established the first provincial public universal hospital insurance scheme; by 1961, all 10 provinces and two territories had introduced public insurance plans – In 1984, the federal Parliament unanimously passed the Canada Health Act (CHA), intended to ensure universal access to health care services for all eligible residents of Canada, regardless of their location or income level  CFP Education Program Canada Health Act cont. Program Criteria – The Canada Health Act contains five criteria that the provinces and territories must meet in order to qualify for the full federal cash contributions under the CHST: public administration; comprehensiveness; universality; portability; and accessibility Public Administration – The provincial/territorial health insurance plan must be administered and operated on a non-profit basis by a public authority  CFP Education Program Canada Health Act cont. Comprehensiveness – The provincial/territorial health care insurance must cover all medically necessary insured health services, including hospital, physician and surgical-dental Universality – There must be uniform terms and conditions for the insured health services to which all insured residents of a province/territory are entitled Portability – Coverage for insured services must be maintained when an insured person moves or travels outside his home jurisdiction, or travels outside Canada, within certain limits  CFP Education Program Canada Health Act cont. Accessibility – Reasonable access by insured persons to medically necessary hospital and physician services must be unimpeded by: financial barriers, such as user charges or extra-billing; or other barriers, such as discrimination based on age, health or financial circumstances  CFP Education Program Provincial Health Insurance Plans Provincial plans vary widely as to the services they cover and the methods they use to finance their plans Services Insured Health Care Services – Insured health care services are medically necessary hospital, physician and surgical-dental services for individuals who are insured under a provincial health care plan, and are further defined under the CHA to include medically necessary: in-and-out patient services, including a ward or standard accommodations; nursing services; diagnostic services, including items such as blood work and x-rays; use of operating rooms and anesthetic facilities; and drugs administered in the hospital  CFP Education Program Provincial Health Insurance Plans cont. Other Health Care Services – The provinces/territories are free to include additional services on their own terms and conditions (ambulance services) Services Not Covered – Any services provided by a physician or hospital that are not considered medically necessary do not have to be included in a provincial health care plan Covered Individuals – To be insured under a provincial health plan, an individual must be an eligible resident of a province or territory – The Canada Health Act defines a resident of a province as a person lawfully entitled to be or remain in Canada  CFP Education Program Provincial Health Insurance Plans cont. Taxation Implications – Where a province levies a “provincial health tax” to employers to help cover the cost of providing provincial health insurance, there is no taxable benefit charged to the employee – Where the province/territory charges a premium to their residents for provincial health coverage: if the individual pays the premium on his own, there is no tax deduction available and no relief available through the non-refundable tax credits; and if an employer pays the premium on behalf of an employee, the employer's payment is charged as a taxable benefit to the employee. Benefits – Benefits received under a provincial health plan are not a taxable benefit to the recipient, so are received tax-free CFP Education Program Private Medical Insurance  CFP Education Program Introduction Private health insurance is often termed as supplementary insurance, and the private insurance industry picks up where public plans leave off Canadian law stipulates that private insurance cannot offer coverage for services that are specifically covered by a provincial plan, though, in some instances, private insurance can provide reimbursement for amounts incurred beyond that which the public insurance plan covers Examples of supplementary services through private insurance include such things as drug coverage and dental insurance, and these types of services are generally offered through two types of private insurance: group insurance and individual health insurance  CFP Education Program Extended Health Coverage The benefits and services covered under an extended health benefit are intended to supplement those benefits covered under the provincial health plan, and may include: prescription drugs; semi-private and private hospital accommodation; medical and hospital expenses incurred outside of Canada (usually while travelling and within prescribed limits, maximums, etc.); services of paramedical professionals (i.e., chiropractors, physiotherapists and optometrists); vision care (i.e. some eye examinations, eyeglasses or contact lenses); hearing aids; and special appliances and equipment (i.e, fiberglass casts, artificial limbs, prostheses)  CFP Education Program Dental Insurance Coverage The types of services included in dental plans depend upon the level of plan purchased, and can generally be divided into three categories: – basic preventative services that include regular check-ups, hygiene and basic fillings and extractions; – major services that are more extensive, including such items as restorative work, crowns and bridges; – orthodontic treatment is sometimes limited to children but may also be extended to adult members  CFP Education Program Plan Design The price of health and dental plans is contingent on a number of factors in addition to the actual services covered under the plan, and these factors include the integration of deductibles, coinsurance and plan maximums Deductible – A deductible for a health or dental plan is an amount of eligible expenses that the plan member is responsible to pay before the insurance coverage picks up any payment Coinsurance – A coinsurance is a percentage of eligible expenses, in excess of any deductible, for which the plan member is responsible  CFP Education Program Plan Design cont. Maximum – There are a number of benefits that include an overall maximum, meaning that there is a dollar limit as to the amount of eligible expenses that will be covered under the plan – Maximums are employed because, otherwise, some benefits might be unaffordable, such as orthodontics Selection – For most group insurance plans, the policy owner selects the amount of the coinsurance and deductible – The policy owner may also have some say in the selection of internal maximums, but not all; the carrier quite often establishes internal maximums on other aspects, such as out-of-country benefits  CFP Education Program Plan Design cont. Out-of-Canada Coverage – When travelling out of Canada, an individual's provincial health plan will pay, in Canadian dollars, for the same services that would be covered in an individual's home province, if such services are required on an emergency basis – Private out-of-country coverage, often referred to as out-of-Canada coverage, is often included as a benefit covered under a group extended health insurance plan or an individual health insurance plan – Many individuals assume they have out-of-country coverage through their group insurance plan, which may be true, but there are many situations where the coverage could be inadequate or may not be as originally anticipated, or the fact that many group plans limit out-of- country coverage to a 30 or 60-day maximum – Individual out-of-country coverage can be purchased directly from specialized insurance carriers to cover out-of-country travel  CFP Education Program Taxation Implications Premiums – The premium paid by an employer on behalf of an employee for health and/or dental benefits is: tax deductible by the employer as a business expense; and not considered a taxable benefit to the employee Benefits – Health and dental benefits received under a private health plan are not a taxable benefit to the recipient, so are received tax-free CFP Education Program Taxation Implications Go to Creditor Insurance Separate Slide Deck CFP Education Program Unit 11 Individual Insurance Contracts  CFP Education Program Introduction Throughout history there are numerous examples of drawing a small, proportional amount from the assets of all to prevent the financial ruin of an unfortunate individual We now know this concept as the basic principle of insurance: a small amount collected from many can be used to alleviate the financial distress of a few, provided that a system for predicting the chance of losses is reasonable to the circumstances The purchase of a life insurance policy results in the transfer of the true risk of loss from the individual to the insurance carrier, and the insurance company uses science to minimize the overall risk associated with the issuance of life insurance contracts  CFP Education Program Parties To The Contract Insurer/Carrier – Life insurance carriers are owned in two different ways: Stock Company The insurance company issues share capital similar to other corporations In Canada, federal insurance laws require that stock-based insurance carriers have two classes of directors, where one class is elected by the shareholders while the other class is elected by the policyholders who own participating policies, which is a type of insurance policy whereby the policy owner is entitled to participate in the profits of the company Mutual Company The company is owned and operated by and for the benefit of its policy owners Mutual insurers have no share capital and thus no shareholders to receive any profits; profits are returned to policy owners through dividends With a mutual company, there is only one class of directors: those elected by the policy owners  CFP Education Program Parties To The Contract cont. Policy Owner – With life insurance, the “policy owner” is the individual with whom the insurance carrier forms a contract – The policy owner has the right to name a beneficiary to receive the benefit specified under the terms of the insurance contract, has the authority to deal with the insurance policy in any way he or she chooses, unless she signs away some or all rights, and has the right to access the cash value in the policy or to borrow against the policy's cash value – Ownership of a life insurance contract may be transferred through an “absolute assignment” to another person who then becomes the owner of the policy with full authority – Where the policy owner differs from the life insured, the policy owner has the right to name a “successor” or “contingent owner”, who then becomes the new owner if the current owner dies before the life insured  CFP Education Program Parties To The Contract cont. Life Insured – Under an individual life insurance policy, the person whose life is insured is commonly referred to as the life insured – Restrictions within Canadian insurance law require that an individual have an “insurable interest” before a contract of insurance can be issued and become valid Joint Life – A policy where there is more than one life insured is referred to as a “joint life policy” Joint-Last-to-Die The policy is based on two or more lives and where the policy pays a death benefit upon the last death of the group of life insureds Joint-First-to-Die The policy is based on two or more lives and where the policy pays a death benefit upon the first death within the group of life insureds  CFP Education Program Beneficiary Designation Revocable versus Irrevocable – There are two types of beneficiary designations available to a policy owner: Irrevocable While the beneficiary remains alive, the policy owner may not alter or revoke the designation without the prior consent of the beneficiary The policy owner's control over the policy is limited and she requires the consent of the irrevocable beneficiary in order to do such things as alter or revoke the beneficiary designation or surrender the policy Revocable The policy owner retains the right to alter the beneficiary designation without obtaining the prior consent of the beneficiary A revocable beneficiary has no legal right to any proceeds or decisions regarding the policy until after the death of the life insured  CFP Education Program Beneficiary Designation cont. Designating a Beneficiary A Named Beneficiary – The policy owner has the opportunity to name a desired beneficiary in the insurance application, and this will appear on the actual policy – The following are the advantages of naming a specific beneficiary to receive the insurance proceeds: The insurance money is paid directly to the beneficiary and does not form part of the deceased person's estate Upon satisfactory proof of claim, the life insurance proceeds are paid promptly by the insurance carrier, which provides the beneficiary with a liquid asset The proceeds paid out under a life insurance policy are a private matter between the beneficiary and the insurance carrier, so when money is paid directly to a named beneficiary, it provides a high degree of privacy Upon the life insured's death, the named beneficiary is entitled to the proceeds, which are therefore protected from the policy owner's creditors Unlike wills, where other persons can contest the deceased's wishes, the proceeds paid to a named beneficiary are rarely subject to legal contest  CFP Education Program Beneficiary Designation cont. Estate as a Beneficiary – Advantages: The payment of proceeds into the estate can provide a liquid asset that facilitates payment of the policy owner's debts and obligations, and can fund bequests Administration of an estate in receipt of significant cash will be easier, more flexible, and may allow for retention of valued family or business assets that might otherwise need to be sold to raise cash – Disadvantages: The potential for the policy owner's creditors to access the insurance funds through the estate The fact that assets passing through the estate, including life insurance proceeds, are subject to probate fees  CFP Education Program Beneficiary Designation cont. Minor as a Beneficiary – Minors cannot provide a valid discharge to the insurance company – The policy owner can arrange for the appointment of a trustee to assume control of the life insurance proceeds on behalf of the minor child Contingent Beneficiary – The contingent beneficiary is entitled to the proceeds of the policy if the first-named beneficiary predeceases the life insured  CFP Education Program Settlement Options Most insurance policy proceeds are paid out as a lump-sum amount to the beneficiary, however the insurance policy also provides for different forms of payment known as “settlement options” These can include: – Payment of the full lump sum amount; – The money can be held on deposit; or – The moneys may be paid out as an annuity through instalments If settlement options are not pre-selected by the policy owner, the beneficiary has the option of selecting any of the settlement options offered in the insurance policy  CFP Education Program Contract Formation Void and Voidable Contracts Void Contract → the contract is simply considered invalid and there is no opportunity for correction of the invalid issue (providing fraudulent medical evidence) Voidable Contract → there is a fault with the contract but the fault can be corrected Policy Delivery (takes effect) – Where a contract has been issued as applied for, and where the first premium has been paid in full, it is possible to simply deliver the contract to the insured – Where the first premium has not been paid, the policy will not take effect until the first premium is paid  CFP Education Program Contract Formation cont. Rescission Right – Also known as the “10-day free look”, this is a 10-day period during which the policy owner has the opportunity to cancel the policy and receive a full refund of any premiums paid Incontestability Period – What an insurance contract becomes after the 2-year contestability period has expired Misstatement of Age – Special rules apply in situations where the correct age of the life insured, on the date of the policy application, exceeds a maximum age limit imposed by the carrier – Otherwise, an age correction can be made to an innocent misstatement of age  CFP Education Program Contract Formation cont. Grace Period – The period of time, generally 30 days, after which a premium payment has been missed, that insurance coverage remains in force, although the policy would be considered to be in an overdue position – If the premium remains unpaid after the grace period, the policy has “lapsed” and is no longer in effect Policy Reinstatement – If a policy lapses for non-payment of premiums, the insured has the right to request that the policy be reinstated at any time during the two-year period immediately following the date of the policy lapse. Along with a request for reinstatement, the insured must: pay all back premiums and any other indebtedness on the policy; and provide evidence of the good health and insurability of the life insured – The criteria for reinstatement of a policy differs by insurance carrier  CFP Education Program Contract Formation cont. Suicide Clause – Commonly, individual life insurance policies include an exclusion period for death by suicide, typically one or two years, during an initial period after the insurance policy is first issued – This is done to discourage the purchase of a life insurance policy in anticipation of committing suicide  CFP Education Program Premiums Life Expectancy – Refers to the average length of time a person is expected to live based on the person's prevailing age and specific death rates Life Expectancy at Birth by Sex, 1979-1999 Source: Health Canada Performance Report For the period ending March 31, 2003  CFP Education Program Premiums cont. Mortality – Given that the term “mortality” refers to death, the phrase “mortality rate” is used to describe the rate of death expected in the upcoming year based on prevailing age – Mortality rates can be measured based on a wide set of criteria, which normally includes age, sex and smoking status Premium Calculation – The three main factors used in pricing an insurance product are mortality cost, carrier operating expenses, and the expected investment return on the premiums or contributions into the plan Premium = Mortality Cost + Operating Expenses - Investment Return  CFP Education Program Premiums cont. This graph illustrates the pattern of mortality, where mortality increases year over year.  CFP Education Program Premiums cont. Age – On average, the risk of death increases the older one becomes, so as an individual ages, the probability of death in the next year increases Gender – Since, as the statistics indicate, on average, men are not expected to live as long as women, males have a higher mortality cost than females Smoking Status – Since smokers are more likely to contract an illness, they pay higher premiums, which is about 40 per cent higher – Each insurance carrier has its own definition of what constitutes a smoker; some may be more lenient when it comes to cigars, for example  CFP Education Program Premiums cont. Rating – When an insurance policy is issued based on “standard rates”, this suggests that the life insured is assessed as being similar to the average or expected, where standard is expressed as 100 per cent – Risk factors determine an individual’s “rating”, so, for example, a policy that has a 150 per cent rating would be one where the insurance carrier is willing to issue the contract but at a charge based on 150 per cent of the standard premium Uninsurable – The term used where the life insured's health or other factor considered material to the underwriting is judged to be at a level of risk greater than what the insurance carrier is willing to accept  CFP Education Program Premiums cont. Preferred Rates – Some insurance carriers have developed new rating approaches to premiums where they reward individuals whose personal risk profile is viewed as being superior to the expected average – For some products, the carrier is willing to offer preferred ratings where the individual pays a premium that is less than that charged for a standard risk profile – These enhanced premium structures are commonly referred to as “preferred premiums” or rates  CFP Education Program Underwriting Health – The life insured's current health and physical condition, as well as the health history, is a significant consideration in the underwriting process – The life insured's family health history is also a consideration Character, Occupation – Both are considered in the underwriting process Occupation → Where an individual's occupation places the life insured in a position of risk greater than the average, it may cause the carrier to adjust the insurance premium to reflect the increased risk, or may contribute to the carrier's decision that the risk is uninsurable Character → If there is a pattern of behaviour that could indicate an increased risk for the carrier, such as a history of speeding while driving, this would be a consideration in the acceptance and pricing of the risk  CFP Education Program Riders A “rider” is an endorsement or supplement that is added to the basic insurance policy to increase the features under the policy as part of the overall plan design o Waiver of Premium o Accidental Death and Dismemberment o Guaranteed Insurability o Cost of Living o Term Riders (additional insurance- term on top of permanent)  CFP Education Program Terminology Face Amount – The “face amount” of a policy is the stated amount of money on the face of the policy that is paid in the event of the life insured's death Beneficiary – The “beneficiary” of a life insurance policy is the person named in the policy as the individual who is to receive the life insurance proceeds upon the death of the life insured Adjusted Cost Basis – The “adjusted cost basis” (ACB) of a life insurance policy is the sum of all premiums paid less the sum of the net cost of pure insurance  CFP Education Program Terminology cont. Exempt and Non-Exempt Policies – “Exempt Policy” → One designed primarily to provide life insurance protection, allows for tax free growth until policy is terminated – “Non-Exempt Policy” → One that does not meet the required definition of exempt as established under the Act and as such it is deemed to be designed primarily as an investment, and not a life insurance policy, taxed on an annual basis  CFP Education Program Temporary Versus Permanent An individual's need for insurance may be short-term or perhaps temporary, where the need is for a specific period of time In this case, it makes sense to purchase a product designed specifically to address the temporary or shorter-term need for insurance, such as Term insurance Permanent insurance is coverage designed to provide insurance coverage throughout the insured's lifetime, such as whole life, universal life, and Term-to-100  CFP Education Program Living Benefits When an individual is diagnosed with a terminal illness, it is becoming increasingly common for insurance carriers to allow a life insured, who is terminally ill, to receive a partial pre-payment of the death benefit, know as a “living benefit” This type of loan/advance is treated as an advance against the eventual payment of the life insurance proceeds CFP Education Program Term Life Insurance  CFP Education Program Introduction Term life insurance provides life insurance coverage for a limited time or period, which is reflective of the word “term” The period for the insurance coverage will vary, with the contract normally expiring at a maximum age such as age 65, 70 or 75 or 85 Term insurance is a type of insurance product developed to address a need that is temporary in nature, where there is no permanent need for life insurance coverage There are a variety of different term insurance products on the market, some of which simply expire at the end of a specified term and others that can be renewed for multiple terms  CFP Education Program Benefit Amount With the purpose of providing insurance for temporary needs or for a specific period of time, term insurance can be established with a fixed level of coverage throughout the term of the insurance contract or it can be designed with a decreasing level of coverage, such as insurance designed to cover a mortgage throughout an individual's lifetime  CFP Education Program Renewable Some of the more common forms of term insurance include: – One-year, annual renewable term, often referred to as yearly renewable term – Five-year, 10-year and 20-year term insurance – Term to age 65, where the premium is set at the point of issue and remains constant until the end of the term, at age 65 It is common for one, five, ten and twenty-year term insurance products to offer the insured the opportunity to renew the policy at the end of each successive term, up to a maximum age of the life insured CFP Education Program Renewable cont.  CFP Education Program Convertible “Convertible Feature” → Whereby the insured is given the opportunity to convert the term insurance product to a permanent insurance product offered through the issuing insurance carrier, without the need to provide evidence of insurability For affordability reasons, an individual might initially purchase term insurance to cover a financial need, knowing that at a future point she intends to convert the term insurance to a permanent policy  CFP Education Program Policy Expiration With term life insurance, the insurance carrier normally sets a maximum age with regard to the life insured, after which the policy completely terminates, with no opportunity to renew If the need for insurance coverage remains as a policy expiration date approaches, conversion of the policy to a permanent product may be a wise consideration Common ages at which a term insurance policy expires include age 65, age 70, 75 and 85  CFP Education Program Product Pricing and Premiums With term insurance, the insurance carrier's premium schedule takes into consideration the carrier's mortality costs and expenses Generally, premiums for term life insurance are relatively low in the early years and increase through each successive renewal An individual may decide to pay monthly, quarterly or semi- annually, depending upon which options the insurance carrier makes available CFP Education Program Whole Life Insurance  CFP Education Program Introduction Whole life insurance is the most traditional type of permanent insurance, which is intended to provide coverage for as long as the life insured lives The face amount of the insurance policy and the premium are established at the time that the policy is purchased and remain fixed throughout the time that the policy remains in force A whole life policy may also be known as a “straight life policy” or an “ordinary life policy”  CFP Education Program Plan Design Reserve – In simple terms, the reserve on a whole life policy is: Premiums paid to date plus Interest earned less Mortality and plan expense charges CFP Education Program Plan Design cont.  CFP Education Program Plan Design cont. Cash Value - The portion of the reserve that the insurance carrier is willing to “give back” to the policy owner as a non-forfeiture right Cash Surrender Value - If a policy owner terminates her whole life insurance coverage, the cash value in the plan would be paid to the plan owner less any surrender charges Participating Policy - A whole life policy where the owner of the policy shares in the profits of the insurance carrier through the receipt of dividends  CFP Education Program Plan Design cont. Non-Participating Policy – A “non-participating” whole life policy is a policy where the policy owner does not participate in any of the profits of the insurance carrier Dividends – A dividend paid to an owner of a participating policy is considered to be the equivalent of a refund of premium – There are generally five options available to the recipients of dividends:  CFP Education Program Surrender Charges The cost of issuing an insurance policy is quite substantial and it takes several years of insurance premiums for an insurance carrier to break even on the expenses associated with issuing the policy For this reason, permanent insurance policies often include a “surrender charge” when a policy is cancelled These tend to be quite high in the early years of the policy and reduce through time  CFP Education Program Premiums Premiums for whole life insurance are paid in advance of the coverage period The premium schedule can be developed as an integral part of the plan design, and can be paid annually, quarterly, or even monthly  CFP Education Program Policy Loans General – As a whole life policy ages, the build-up of cash value begins to accumulate and many policies offer the policy owner the ability to borrow funds from the cash value in the policy, within defined limits – If a policy is surrendered when a policy loan is outstanding, any loan balance and interest indebtedness is repaid from the cash surrender value  CFP Education Program Collateral Assignment “Collateral Assignment” → A policy owner can assign the policy itself, or the policy's cash value, which has built up over the years, as security for a loan, where the creditor is someone other than the life insurance carrier With a collateral assignment, the policy owner offers the policy as security for the loan  CFP Education Program Death Benefit The death benefit paid under a life insurance policy is comprised of the policy's face amount plus any enhancements When a death benefit is paid out under the policy, any indebtedness, such as a policy loan or outstanding premium, will reduce the total amount of benefit paid to the beneficiary  CFP Education Program Non-Forfeiture Options The contract for a permanent life insurance policy sets out the options available to the policy owner if she should decide to discontinue premium payments on a life insurance policy that has an accumulated cash value, known as “non-forfeiture options” These include: o Cash Surrender Value (take the cash) o Automatic Premium Loan (keep the insurance, until cash runs out) o Extended Term Insurance (Use cash to buy as much term as possible) o Reduced Paid-Up Insurance (Buy as much permanent as cash will let you) CFP Education Program Universal Life Insurance  CFP Education Program Introduction Relatively new, having first become popular in the early 1980s, when traditional insurance products did not seem to meet the changing needs of consumers Soaring interest rates combined with consumers' interest in managing their own investments created the demand for a new insurance product A universal life policy is a type of permanent insurance, designed to address long-term needs, and includes various components that provide choices for the consumer Features → Varying amount of coverage, payment flexibility, interest-sensitive investments  CFP Education Program Product The three main factors used in pricing an insurance product include: – Mortality cost – Expenses – Expected rate of return on the premiums or contributions into the plan With a universal life policy, the words “contributions” or “deposits” are often substituted for the word “premium” The three components identified under each UL policy include: – Mortality charges under the policy – Expenses charged by the carrier for the policy – Investment earnings within the policy  CFP Education Program Product cont. Mortality Charges – At the time of purchase, the policy owner decides the type of mortality charges that will apply under the policy – There are a variety of options to choose from, but the most common are yearly term rates and level term-to-100 rates “Yearly term rates” → Based on the probability that death will occur in the upcoming year “Level term rates” → Consider the increasing cost associated with an increasing probability of death each year Expense Charges – The policy generally includes: Monthly administration fee Possibly transaction fees related to administrative services  CFP Education Program Product cont. Investments – Universal life policies provide the policy owner with a range of investment options that generally include fixed-interest options such as: Simple savings account Guaranteed term deposits Equity options Index options  CFP Education Program Cash Surrender Value = Cash Value - (Sum of any policy loan outstanding + Any applicable surrender charges) The surrender charges tend to be very high in the early years of the policy and decrease through time as the policy ages  CFP Education Program Death Benefit Options Level Face (least expensive) – Provides a fixed, level amount of insurance, using which, the insurance carrier's cost of insurance (mortality cost) decreases over time as the policy's accumulated value increases Level Face Plus Deposits – Combines the face amount of the policy and the gross amount of the deposits made into the plan Level Face Plus Account Value – Pays the beneficiary the face amount of the policy plus the value held within the policy account Indexed Death Benefit (Most expensive) – Policy owner may select to index the death benefit on an annual basis  CFP Education Program Non-Forfeiture Options Non-forfeiture options provide the policy owner with alternatives if she chooses to discontinue premium payments Under a universal life policy, the mortality and expense charges must be covered annually for the policy to remain in force For those plans that build up cash value in the accumulating account, the annual mortality and expense charges are withdrawn from the accumulating account  CFP Education Program Policy Loan and Illustration Policy Loan – Any amount up to the cash surrender value of the policy is available to the policy owner as a policy loan CFP Education Program Term-To-100  CFP Education Program Introduction Term-to-100 insurance is a type of permanent insurance product that provides insurance coverage to age 100 In many situations, the coverage remains in force after the life insured reaches 100, but there are no further premium payments required Generally, premiums for the term-to-100 policy are level and guaranteed The term-to-100 policy is non-participating  CFP Education Program Product Design The design of a term-to-100 policy can differ by carrier While some plans require premiums until age 100, other carriers may establish a premium schedule based on a limited payment period such as 20 or 25 years, or to age 65 While older term-to-100 plans do not normally have a build up of cash value, some carriers may offer a guaranteed value if a plan remains in force for a specified period  CFP Education Program Premiums The premium schedule for a term-to-100 plan will appear higher in the early years of the policy when compared with a five or 10-year term policy because the premium schedule is level throughout the term-to-100 policy payment period The cost of the term-to-100 plan is generally less than for a comparable whole life policy because the term-to-100 plan does not normally have the traditional build-up of cash value If a policy owner misses a premium payment, the standard grace period applies, but because there is generally no cash value, there are no options for any automatic premium payment from within the value of the policy  CFP Education Program Exempt and Non-Exempt Given that the term-to-100 policy is designed with the primary purpose of providing insurance protection only, the plan remains exempt with no income tax reporting required CFP Education Program Group Life Insurance  CFP Education Program Introduction It is common for employers to provide group benefits as an integral part of an employee's total compensation program; the scope of group benefits is quite wide and can include life insurance, dependant life insurance, health and dental as well as disability benefits. While group life insurance is commonly part of an employee's benefit package, it is also fairly common for associations to offer group life insurance to participating members There are variations in the types of group insurance plans available to individuals, but the general principles remain consistent across the plans  CFP Education Program Basic Principles o Policy Owner o Life Insured o Actively at Work o Coverage o Premiums  CFP Education Program Product Design Basic group life insurance, offered through an employer plan, is normally designed as a flat amount, or as a multiple of the plan member's annual earnings Most insurance carriers offer coverage for as long as the individual is employed, up to age 65 Group life insurance is one-year renewable term insurance that provides temporary insurance protection only, such as: – Employer-provided group life insurance – Creditor insurance – Association-provided group life insurance  CFP Education Program Beneficiary The life insured has the opportunity to designate a beneficiary to receive the proceeds upon her death By naming a beneficiary, other than an individual's estate, the proceeds paid at the time of death pass directly from the insurance carrier to the beneficiary and do not form part of the life insured's estate  CFP Education Program Evidence of Insurability Smaller-size group insurance plans may provide a very basic level of group insurance without any evidence of insurability by the plan members For larger-size group insurance plans, it is common to offer basic amounts of coverage, including group life insurance, without any evidence of good health from the plan members  CFP Education Program Conversion When a plan member terminates employment and therefore loses entitlement to the group life insurance, she is given the opportunity to convert lost coverage, up to a $200,000 maximum, to an individual life insurance policy without providing evidence of insurability Other events where an individual may be eligible to convert her coverage to an individual life insurance policy without providing evidence of insurability, include: – A plan member's loss of coverage upon reaching the maximum age covered by the plan – Termination of the whole group insurance plan  CFP Education Program Disability Provision Many group life insurance plans include a disability waiver of premium provision whereby the premium for the plan member's group life insurance is waived if she is assessed as being disabled within the definition of disability under the contract provision This can be a valuable benefit when a plan member requires protection, but due to a disability, may no longer be able to afford the ongoing premium  CFP Education Program Premiums When an employer purchases a group insurance plan, the composition of the group of covered employees has a direct impact on the calculation of the insurance premiums for each of the benefits With life insurance, the age, sex and occupation of the plan members within the employer's group will directly affect the premium A new premium rate is set each year based on the composition of plan members within the group  CFP Education Program Taxation of Group Life Insurance Premiums for group life insurance paid by the employer create a taxable benefit for the employee The group life insurance premium is a tax-deductible expense for the employer The death benefit is paid tax-free to the beneficiaries  CFP Education Program Appropriateness Group life insurance is the primary source of insurance protection for a significant number of Canadians because they are very common and group life insurance tends to be a core benefit within most employers' group plans When group insurance plans offer coverage amounts that are based on two or three times an individual's salary, for some people this may appear to be a substantial amount of coverage; however, because the coverage is dependent on continued employment, and the employer's continuation of the group plan, the coverage could disappear rapidly When an individual changes jobs, there may be a period during which she has no group insurance coverage CFP Education Program Disability Insurance  CFP Education Program Overview While life insurance provides protection for an individual in the event of premature death, disability insurance provides financial protection to an individual who becomes unable to work because of a health impairment Disability insurance pays a benefit during the insured individual's lifetime, and is commonly referred to as a living benefit  CFP Education Program A. Individual Disability Insurance Individual disability insurance provides a regular income when an insured individual suffers a disability Morbidity – Refers to the rate of incidence of disease and differs from mortality Occupational Classification – Occupations fall into classes: Class One (lowest risk) Class Two Class Three Class Four Class Five Class Six (highest)  CFP Education Program A. Individual Disability Insurance cont. Other Underwriting Factors – An individual's age and sex affects the determination of the premium established for the policy – An applicant's current health is an important consideration in the underwriting of her application. Similar to life insurance, an individual's health condition will determine if: She qualifies for coverage at standard rates An extra rating is applied to the policy rates Restrictions are written into the contract (where disability due to certain conditions is not covered) She may receive an outright decline  CFP Education Program A. Individual Disability Insurance cont. Policy Owner – The policy owner of an individual disability insurance contract may be the individual herself or may be another individual (business partner) Definition of Disability – There are generally three variations to the definition of disability: o Own Occupation o Regular Occupation o Any Occupation  CFP Education Program A. Individual Disability Insurance cont. Waiting/Elimination Period – The period of time that the individual must be disabled before becoming eligible to receive disability benefits is referred to as the “waiting period” or “elimination period” Benefit Period – The benefit period refers to the maximum period of time during which the individual is eligible to receive disability benefits resulting from any one disability Benefit Maximum – Each carrier sets out maximum benefit limits regardless of the individual's income – If individual pays premiums of her own policy, benefit is not taxed  CFP Education Program A. Individual Disability Insurance cont. Other Contractual Provisions Contract Guarantees o Cancellable/Non-Cancellable (can be changed by carrier / fixed) o Guaranteed Renewable (right to renew, must be employed, under specific age – carrier can increase premiums) o Conditionally Renewable (cannot decline based on bad health; however, could decline to renew all policies in a certain class) o Commercially Renewable (carrier has complete discretion) o Workers' Compensation Offset (carrier can lower premium if simultaneously payment is made from both plans)  CFP Education Program A. Individual Disability Insurance cont. Riders – Similar to individual life insurance, disability insurance provides the individual with the opportunity to enhance her benefit coverage through the addition of riders – A disability rider allows the applicant to customize the plan to closely align with her specific needs – Each rider is priced separately from the base price of the insurance o Automatic Coverage Enhancement (increase pay-out annually without needing to provide evidence of good health) o Cost of Living Adjustment o Premium Refund Rider (very specific, applies when no claims have been made over a long period of time)  CFP Education Program A. Individual Disability Insurance cont. Taxation Premiums – When an individual pays her own premium (paid with personal after- tax dollars) for an individual disability plan, the premium is not tax deductible and is not eligible for inclusion in any non-refundable tax credit Receipt of Benefits – When an individual pays her own premium for an individual disability plan, any benefit payments received under the policy are treated as non-taxable income  CFP Education Program C. Group Disability Insurance Introduction – The long-term nature of a disability claim can be very costly for an insurance carrier, so many are quite particular about the types of organizations they are willing to underwrite for long term disability benefits Characteristics – The basic principles of group insurance also apply to group disability insurance – With group disability insurance, the employer or association establish the key parameters of the group contract, given that the employer or association is the policy owner  CFP Education Program C. Group Disability Insurance cont. Product Design – The benefit under group long term disability insurance, offered through an employer plan, is normally designed as a percentage of the employee's annual earnings – Each insurance carrier establishes an overall maximum at which the benefit amount is capped – The premium charged for group disability benefits is derived based on a profile of the group, including such items as age, sex and occupation  CFP Education Program C. Group Disability Insurance cont. Taxation of Group Disability Insurance Then: (receipt of benefits If: (premium payments) under plan) employer paid the full premium and did not charge it as a benefit payments received are taxable benefit to the employee taxable employer paid the full premium benefit payments received are but charged it as a taxable non-taxable benefit to the employee benefit payments received are employee paid the full premium non-taxable employer and employee both benefit payments received are contributed to the premium and taxable but are reduced by any employer did not charge any amount employee contributed to portion as a taxable benefit to program the employee CFP Education Program Long Term Care Insurance  CFP Education Program Introduction The possibility of needing constant care or supervision because of failing health can create tremendous worry Long term care insurance is one of the options available to prepare for the financial consequences associated with the failing health that often occurs as we age Long term care insurance made its debut in Canada in the early 1990s  CFP Education Program Plan Features Plan Models o Income Model (specific amount paid, least restrictions, most flexible, most expensive) o Indemnity Model (reimbursed on daily benefit, restrictive, lower cost) o Reimbursement Model (only actual expenses reimbursed, most restrictive, reimbursed on daily/monthly, lowest cost) Level of Care – Each carrier's plan will differ with regard to the covered services and level of care that is dictated as an integral part of the policy – Types of care include home care as well as facility care Elimination/Waiting Period – The individual selects the elimination period at the time that the policy is purchased; can be 0, 30, 60 and 90 days  CFP Education Program Plan Features cont. Benefit Amount and Period – The daily benefit amount can range from $20 to $400 per day; or, this can be converted into a weekly or monthly amount – The maximum period for the benefit payment is established at the time of purchase and common benefit periods include one year, two years, five years, ten years and lifetime Exclusions – It is common for long term care plans to exclude specific conditions such as self-inflicted injuries, alcoholism, some drug addictions, and mental and nervous conditions with no organic cause  CFP Education Program Claim Eligibility To determine if an insured individual qualifies for benefits under a long term disability plan, the insurance carrier uses the “Activities of Daily Living” (ADL)as the measuring criteria The ADL are normally defined as bathing, dressing, toileting, transferring and eating; some carriers may also add continence If an individual is unable to perform two of the activities of daily living, they are judged as being eligible for benefits While the use of ADL’s is common across insurance carriers, the number of activities that an individual must be unable to perform in order to qualify for benefits may differ  CFP Education Program Covered Individuals The initial purchase of long term care insurance is commonly available for individuals ages 40 to 80 For those who reach age 80, it is common for the coverage to continue if it is already in force While some individuals may purchase a long term care policy for themselves, it is also quite permissible to purchase a plan for a relative such as a parent, in-law or spouse  CFP Education Program Premiums Most long term care policies are guaranteed renewable whereby the insurance carrier cannot cancel the policy provided the premiums are paid as required, but the carrier can make future premium changes for all policies in a particular class  CFP Education Program Income Tax Implications Premiums – Premiums paid for long term care insurance do not qualify as medical expenses and are not deductible in any way as a non-refundable tax credit Benefit Payments – Benefit payments received from a long term care policy are non- taxable and are not treated as income CFP Education Program Critical Illness Insurance  CFP Education Program Introduction With critical illness insurance the benefit is only dependant on the diagnosis of a covered illness; there is no link to loss of income, so an individual can be employed or unemployed and it will not affect the benefit payment  CFP Education Program Plan Features At the time that an individual completes an application for critical illness insurance, she selects the level of benefit that will be provided under the policy; generally amounts range from $25,000 through to $1 million There are different models of plans available that can include a permanent plan, a term plan, or the coverage may be available as a rider to some types of life insurance coverage A “term plan” for critical illness insurance is similar to a term plan for life insurance; the policy is established with a basic premium that continues until the first renewal  CFP Education Program Premium The cost of critical illness insurance varies depending upon the type of plan, plan design and benefit amount In addition, the individual's age, health and other medical and lifestyle information is used in establishing the premium  CFP Education Program Covered Illness The types of illnesses covered under a critical illness policy may vary by insurance carrier, but some examples include: ⧫ Cancer (life threatening) ⧫ Blindness ⧫ Coma ⧫ Loss of Limbs ⧫ Major Burns ⧫ Occupational HIV Infection ⧫ Stroke ⧫ Heart Attack ⧫ Kidney Failure ⧫ Multiple Sclerosis ⧫ Alzheimer’s Disease ⧫ Loss of Speech  CFP Education Program Claims To make a claim for benefits, the individual must survive with the diagnosed illness for a specified period, often in the 30 to 90-day range  CFP Education Program Income Tax Implications Critical illness insurance is a relatively new product in Canada and is not specifically addressed in the Act For some time now, the CRA has been examining the critical illness product as there is some uncertainty regarding its taxation For personally owned critical illness insurance, the two tax issues relate to the receipt of the benefit as well as the refund of premium on death For the interim, there remains some uncertainty regarding the CRA's position relative to the taxation associated with a critical illness policy