Know These COLD

Welcome to Know These COLD!

Know These COLD was designed to be a list on all of the key concepts in the LLQP course.
These are the topics that are tested most often on the exams. To you, the student, this means
these are the topics you need to know COLD.
Use Know These COLD as a checklist after you have finished reading a chapter in the LLQP
Coursebook to ensure that you understand all of the concepts in that chapter.
Insurance Section
Chapter 1: An Overview of the Canadian Life Insurance Industry
o KTC: Click here for KTC topics in Chapter 1
Chapter 2: How are you Qualified to Sell Insurance?
o KTC: Click here for KTC topics in Chapter 2
Chapter 3: Why do I need Insurance?
o KTC: Click here for KTC topics in Chapter 3
Chapter 4: What Type of Insurance Should I Have?
o KTC: Click here for KTC topics in Chapter 4
Chapter 5: Do I need Business Insurance?
o KTC: Click here for KTC topics in Chapter 5
Chapter 6: What about Group Insurance?
o KTC: Click here for KTC topics in Chapter 6
Chapter 7: What about Government Insurance?
o KTC: Click here for KTC topics in Chapter 7
Chapter 8: How much Insurance should I Have?
o KTC: Click here for KTC topics in Chapter 8
Chapter 9: Which Insurance Company is best for me?
o KTC: Click here for KTC topics in Chapter 9
Chapter 10: How do I apply?
o KTC: Click here for KTC topics in Chapter 10
Chapter 11: How do I get my Money?
o KTC: Click here for KTC topics in Chapter 11

Investment Section
Chapter 14: Why should I Invest?
o KTC: Click here for KTC topics in Chapter 14
Chapter 15: Why should I buy investments from a life agent?
o KTC: Click here for KTC topics in Chapter 15
Chapter 16: How much should I invest?
o KTC: Click here for KTC topics in Chapter 16
Chapter 17: What are the different types of investments?
o KTC: Click here for KTC topics in Chapter 17
Chapter 18: What are the risks?
o KTC: Click here for KTC topics in Chapter 18

Retirement Section
Chapter 21: When Can I Retire?
o KTC: Click here for KTC topics in Chapter 21
Chapter 22: Where will my Money come from?
o KTC: Click here for KTC topics in Chapter 22
Chapter 23: How can I keep more of my retirement income?
o KTC: Click here for KTC topics in Chapter 23

Know These COLD

INSURANCE SECTION
Chapter 1: An Overview of the Canadian Life Insurance Industry
The basics of insurance
Know the following definitions:
o Insurance contract (a unilateral contract)
o Policy owner (the insured can also be the life insured)
o Policy premiums
o Claim
o Face amount
o Life insured
o Beneficiary
o Coverage
o Underwriting
Other concepts
o Disability income insurance
o Health insurance
o Agents and agency contract
o Brokers and insurers
Other sales channels
o Fraternal organizations
o Benefit consultants
Regulatory bodies
o CLHIA
o Courts
o Governments
o OSFI
Acts
o Uniform life insurance act
o Uniform accident and sickness act

Chapter 2: How Are You Qualified to Sell Insurance?

Agent requirements
What is the difference between actual authority and apparent authority?
What are the rights and obligations in an agency relationship?
What are the four principles of ethical conduct
Due diligence
Fiduciary responsibility
What are the 5 situations that allow personal information to be provided to others?
Holding out
Commission
Replacement
Surrender
Cash surrender value
Tied selling
Misrepresentation
Commission splitting
Churning
Twisting
Lapse
Contract provisions
Conflicts of interest
What are 3 unfair trade practices?
What are the 7 areas that Errors and Omission insurance protects agents and carriers?

Chapter 3: Why Do I Need Insurance?

What are 3 predictable risks?
What are the 2 measures of risk?
o Risk: Click here if you want to see additional examples (other than in the text).
Estate/Estate planning
Retirement planning
Final expenses
Continuing expenses
Dependency period
What are the 3 risk management strategies?
The difference between term and permanent insurance
Reinsurance
What is a risk not managed by insurance?
What are the different approaches to risk comparison?

Chapter 4: What Type of Insurance Should I Have?

Effective date
Face page/Face amount
Settlement option
Level term, increasing term, decreasing term, renewable term insurance
o Term Insurance: Click here if you want to see additional examples (other than
in the text).
Mortality risk
Attained age
Renewable and convertible option (R&C)
Incontestability
Suicide clause
What is the difference between whole life and limited payment life?
o Limited payment insurance: Click here if you want to see additional examples
(other than in the text).
Dividends (par and non-par policies)
Policy reserve
What are the 3 non-forfeiture options?
o Non-forfeiture options: Click here if you want to see additional examples
(other than in the text).
Grace period (when does coverage end?)
How are dividends used to purchase more life insurance? (3 ways)
How are dividends used to reduce premiums?
What are 4 needs answered by whole life insurance?
How does adjustable premium whole life insurance work?
What is an advantage of term-to-100 insurance?
What is unique about Universal life insurance?
o Universal Life: Click here if you want to see additional examples (other than in
the text).
How is unbundling a benefit to a policy owner?
What is the difference between yearly renewable term (YRT) and level cost of insurance
(LCOI)?
Disposed
Compounding
What are the 3 features of universal life that are similar to whole life?
What are the 2 unique features of universal life?
What are the 8 riders that can be attached to a life insurance policy?

What are the 5 ways disability insurance is provided through?

o Disability insurance: Click here if you want to see additional examples (other
than in the text).
What are the 3 types of disability income policies?
What are the 4 definitions of disability?
What is the difference between residual disability and partial disability?
o Residual and partial disability: Click here if you want to see additional
examples (other than in the text).
What are the 3 periods for disability benefit payments and how are premiums affected?
What are the 4 most common riders on a personal disability income policy?
What are the 6 other common riders on a personal disability income policy?
What are the 5 types of personal accident and sickness insurance?
What is unique about critical illness insurance (CII)?
What are the benefits of long-term care insurance?
Rescission period

Chapter 5: Do I Need Business Insurance?

What are the 3 business structures and what are the risks faces in each structure?
What is the difference between partnership interest and partnership property?
What are 2 more business risks and what are the ways to deal with them?
What is the difference between a buy-sell agreement and a cross-purchase agreement?
Key person insurance
What are 3 advantages of life insurance for business?
What are 3 uses for disability insurance in business?

Chapter 6: What about Group Insurance?

What are the 6 ways group life is available?
What is the difference between short-term disability (STD) and long-term disability (LTD)?
What 5 things does group extended health care (major medical) cover?
What 4 things do group dental plans cover?
What does vision care cover?
Accidental death and dismemberment (AD&D)

Chapter 7: What about Government Insurance?

What are the 3 benefits that CPP/QPP provides?
What are the 3 government-provided disability insurance plans?
Pensionable earnings
Severe and prolonged disability
What 4 things does EI provide benefits for?
Percentage of average earned earnings
What are the 5 ways the EI benefit will be reduced by?
Workers Compensation
What are the 6 basic medical services covered by Provincial health insurance?
What are 5 medical services not covered by Provincial health insurance?

Chapter 8: How Much Insurance should I Have?

Emergency fund
Re-adjustment period/last expenses
Dependency period/ongoing expenses
o Re-adjustment and dependency period: Click here if you want to see
additional examples (other than in the text).
Survivor life income needs/future needs
What is the difference between qualitative goals and quantitative goals?
Capital
What is the difference between nominal and real interest rates?
What is the formula for the Capitalization of income approach (Human life value
approach)?
o Capitalization of income approach: Click here if you want to see additional
examples (other than in the text).
What are the steps in the Capital retention approach (Capital needs approach)?
o Capital retention approach: Click here if you want to see additional examples
(other than in the text).
How is disability insurance coverage determined?
How is A&S insurance coverage determined?
How do you insure against the risk of estate inadequacy?
Principal residence
Marginal tax rate (MTR)
Capital gains in business
How does life insurance manage the need to supplement income?

Chapter 9: Which Insurance Company is best for me?

How are clients protected in their choice of insurance company (3 ways)?
What is the difference between criminal law and tort law?
What is Assuris guaranteed coverage for:
o Term insurance
o Universal life
o Whole life
o Annuities, disability, and long-term care
o Critical illness, travel, extended health, major medical
o Non-registered accumulation policies
o Segregated funds

Chapter 10: How do I Apply?

Material misrepresentation
Innocent/negligent misrepresentation
Fraud, forgery and theft
Constructive notice
Rated premiums
Exclusion rider
Medical Insurance Bureau (MIB)
What are the sources of information for a two-party and three-party contract and who
supplies them?
What are the 5 details addressed in the application for life insurance?
What are the 7 persons that can be an insurable interest?
Personal contract
Joint first-to-die and joint last-to-die
Name the 6 possible beneficiaries
Revocable and irrevocable
What are the 4 settlement options?
What are the 4 options for a Universal Life Death Benefit?
Deductibles and co-insurance (co-pay)
What is the difference between an individual and family deductible?
Master contract
Group insured
Certificate of insurance
Standard group
Contributory plan and Non-contributory plan
Non-discriminatory benefits schedule

What are the 4 eligibility criteria for joining a group plan?

What are the 3 essential duties of an agent when completing a contract?
Temporary insurance agreement (TIA)
Mortality rates (gender and smoking status)
What are the 2 ways a rated policy can increase premiums?
What is the difference between net premium and gross premium?
What is the difference between a tax deduction and a tax credit?
What are the 4 criteria that must be met for a policy to be used as collateral life
insurance?
Absolute assignment
Registered policies
What are the 4 criteria that establish morbidity rates?
What are the 3 other factors that affect a disability income replacement policy?
What are the 3 ratings that determine the premiums for group policies?
What are the 2 accounting methods used for fully-insured group plans?
Self-insured plans
Administrative Services Only (ASO) contract
Tax deductibility of group premiums
Contract of adhesion
What are the 5 basic components covered when a policy is issued?
What are the 6 elements that the Uniform Life Insurance Act states every policy must
clearly indicate?
What are the 7 provisions in a contract that define the rights of the policy owner?
What are the 5 non-standard elements of a contract?
What is the difference between an absolute assignment and a collateral assignment?
What are the 6 provisions that must be in a disability income policy?
What are the 7 exclusions that may be in a disability policy?
What are the 8 provisions that must be in a health insurance policy?
What are the 4 duties of an agent when delivering an A&S policy?

Chapter 11: How Do I Get My Money?

What 4 things does a claims examiner confirm before the benefit is paid?
What is the formula to calculate the net death benefit?
Last acquired
Annuitized
What is the formula to determine the adjusted cost base (ACB) of insurance?
Maximum tax actuarial reserve
What is the formula to determine the taxable gain for non-participating policies?
What is the formula to determine the taxable gain for participating policies?

Permanent disability
What is the formula to determine the claim for a residual disability benefit?
What is the formula to determine the claim for a partial disability benefit?
o Common insurance formulas: Click here if you want to see additional
examples (other than in the text).
Presumptive disability benefit
Recurring disability benefit
All sources maximum of LTD
Claims for waiver of premium (difference between disability and life policies)
Claims for A&S policies
Know the difference between who the primary carrier is and who the secondary carrier is
for the priority of payment for benefits when there is a coordination of benefits (COB)
o Co-ordination of benefits: Click here if you want to see additional examples
(other than in the text).
CPP offset
Subrogation
Employee Assistance Programs (EAP)

INVESTMENTS SECTION
Chapter 14:

Why should I Invest?

Difference between saving and investing

Compounding and the rule of 72
What are the two ways to invest and save tax?
What the rules for RESPs including the rules for CESGs and the Canada Learning Bond?
o Investments for education: Click here if you want to see additional examples
(other than in the text).
Registered disability savings plan
o Disability savings plan: Click here if you want to see additional examples
(other than in the text).
Tax-free savings accounts

Chapter 15:

Why should I buy investments from a life agent?

What are the 7 areas of knowledge for knowing your client?

What are the 5 areas of fiduciary responsibility?
What are the 4 pillars of our financial system?
What is the difference between mutual insurance and stock insurance companies?

Chapter 16:

How much should I invest?

Know the difference between quantitative and qualitative data

What are the 4 personal factors that affect savings?
What are the 3 investment returns?
What is the difference between net and gross returns?
Know the investment risk-return chart
Know the formula for real rate of return and real rate of return after taxes
Fiscal policy vs. monetary policy

Chapter 17: What are the different types of investments?

What are the 5 categories of investments and give examples of each category?
What are the 3 different types of provincial savings bonds?
What is the difference between a par dividend and a stock dividend?
Futures/Options/Warrants/Forwards
How is the NAV of a mutual fund calculated?
Right of withdrawal or redemption
Taxation of mutual funds
Know the chart on Characteristics of Mutual Funds
Know all aspects of segregated funds, especially maturity guarantees, death benefit
guarantees, policy-based guarantees and deposit-based guarantees
Know the difference between a contract annuitant and a contract beneficiary
Know the difference of how value grows in seg fund as opposed to a mutual fund
Know the difference between the linear reduction method and the proportional reduction
method
Know the seg fund investor profile
Know the taxation of seg fund allocations
Know the different types of annuities
Know the chart comparing life annuities
What are 2 ways market value adjustment is calculated?
What is a structured settlement annuity?

Chapter 18: What are the risks?

Know the fund risk-return chart
What are the 3 risks of not investing?
What are the 9 types of financial risks?
Describe the 4 providers of investment risk

RETIREMENT SECTION
Chapter 21: When can I Retire?
What are the 6 things the planner and client must assess?
Name the 4 things involved in the implementation of the retirement planning process
Chapter 22: Where will my money come from?
What are the 4 broad sources of retirement income and give examples of each?
Know the 4 investments that do not qualify for a self-directed RRSP
Know the chart for calculating RRSP contributions
o Calculating RRSP contributions: Click here if you want to see additional
examples (other than in the text).
What happens to a RRSP upon death?
Know the rules regarding the Home Buyers Plan
Know the rules regarding the Lifelong Learning Plan
Know the 6 transfer options for locked-in RRSP funds
Know all the rules regarding RRIFs
Know all the rules regarding Locked-in Retirement accounts (LIRAs) and unlocking
o Locked in funds: Click here if you want to see additional examples (other than
in the text).
What are the 3 forms an employer-sponsored RPP can take?
What are the differences between a defined benefit plan (DBP) and a defined contribution
plan (DCP/MPP)?
What are the 3 plans an insurance company offers to manage pension plans?
What are the 6 areas that provincial legislation covers to protect pension benefits?
Know the rules for DPSPs
o DPSPs: Click here if you want to see additional examples (other than in the
text).
Know the rules for Group RRSPs
Know the summary chart of RPPs
o Pension adjustments: Click here if you want to see additional examples (other
than in the text).
Know all the rules for the 4 types of Government Retirement Pensions
What is the formula for determining the CPP retirement pension?
Know the formula for determining early or late CPP retirement options
Know the summary chart of the CPP Retirement Pension
Chapter 23:

How can I keep more of my retirement income?

Pension sharing
What are 5 ways to accomplish income splitting?

Key Concepts about Risk

There are three predictable risks:
1. death
2. disability
3. old age
There are two measures of risk:
1. severity
i.e. how bad is the risk
For example: death only happens once
2. frequency
i.e. how often is it likely to happen
For example: the flu causing loss of work can happen more than once
How does insurance address risk? How is risk transferred to insurance companies?
1. Life insurance replaces the loss of income and provides for assistance in paying debts,
obligations, and ensuring a fair distribution of a persons estate.
2. Disability insurance replaces loss of income during periods of unemployment due to
injury or sickness.
3. Travel insurance takes care of medical expenses while travelling.
4. Long-Term Care (LTC) insurance takes care of the costs of medical expenses and the
other needs of seniors (e.g. nursing home or live-in home care).
5. Critical Illness (CI) insurance takes care of unexpected expenses caused by dreaded
diseases such as cancer, heart disease, and strokes.
Old Age and Risk
Inadequate retirement planning has a risk of outliving a persons financial resources and
having a much lower standard of living during old age.
Using insurance products such as segregated funds and universal life insurance can
provide adequate investment returns to solve these risks.

Key Concepts about Term Insurance

It is very important to understand the concept of Term Insurance. There are four different
premium plans for term insurance. The key points for each plan are below.
1. Level Term Insurance (this is the most common type)
The premiums stay the same (level) over the term.
The insured (the policy owner) knows:
o Exactly how much the premium will cost
o The face amount that will stay the same (level) over the term
o Who will receive the benefit when the life insured dies
o When the insurance expires

2. Increasing Term Insurance

The premiums will increase over the term, as will the face amount.
This type of policy covers a life that is increasing in economic value.

3. Decreasing Term Insurance

The premiums will stay the same (level) over the term (e.g. 20 years or to age
65) but the face amount will decrease each year.
This type of policy covers a life that has decreasing financial obligations, like a
mortgage.
This type of policy is hardly ever used anymore.

4. Renewable Term Insurance

This policy is guaranteed to be renewed at various renewal periods (e.g. 1, 5, 10,
or 20 years or a particular age) regardless of the health of the life insured.
The face amount remains the same but the premiums increase at each renewal
date, which reflects the mortality risk.
Any premium change is guaranteed to the owner at the time the policy is taken
out.

Limited Payment Insurance

What is limited payment life insurance?
Limited payment life insurance limits the number of payments to a specific time period or to
a specified age.
Limited payment life insurance is not available on term policies.
For example: Cameron, the insured (owner of the policy), has taken a whole life policy out
on his wife, Heather (the life insured). Cameron has limited payment life insurance. He will
only pay premiums until he reaches his retirement age of 65. However, the coverage is
permanent and will remain in place as long as Heather is alive.
Remember: If the policy is not limited payment insurance, then the premium is paid as long
as the life insured is alive.

The Three Non-forfeiture Options

What does non-forfeiture mean?
The insured (the owner of the policy) has not surrendered (or forfeited) the policy, but
has kept the insurance coverage in place by using the Cash Surrender Value (CSV) of
the policy.
There are three non-forfeiture options.
1. Automatic Premium Loan (APL)
If a policy owner (the insured) forgets to pay the premium or is short of money
when the premium is due, the policy remains in force by using the policy
premium loan.
APL automatically charges premiums as a policy loan against the CSV.
The APL can be used until the owner recommences premium payments or the
amount of the loan plus interest equals the CSV of the policy.
Coverage ends when the grace period (either 30 or 31 days) ends. If the life
insured dies during the grace period, the death benefit will be paid.
2. Extended Term Insurance (ETI)
This option allows the owner to stop paying premiums but keeps some insurance
coverage in place by using the CSV to purchase term insurance.
The face value of the term insurance remains the same but the term is based on
the attained age of the life insured when this option is selected.
Riders and other benefits of the original whole life policy are cancelled.
3. Reduced Paid-Up insurance (RPU)
The owner uses the CSV to purchase a whole life policy with a lesser amount of
coverage.
There are no more premiums to be paid.
The new face amount is determined by the attained age and the CSV when this
option is selected.
When this option is selected, dividends are not received and other benefits are
cancelled.

Key Concepts about Universal Life Insurance

Universal Life is a more complex product than Term Insurance. It is important that you
understand the features of Universal Life Insurance for the LLQP exam.

Uniqueness
Universal Life Insurance combines insurance and investment.
The investment part of the account (the policy) can build a reserve similar to a policy
reserve of a whole life policy. Universal life policies are usually non-participating (i.e.
they do not receive policy dividends).
The management of the investment account (i.e. the investment decisions) is the
responsibility of the policy owner (the insured).
The owner chooses how premiums are structured and has options concerning the death
benefits in order to meet the owners specific needs.

Flexibility
The face amount of the policy can be increased or decreased by the owner. Any change
will need satisfactory evidence of insurability.
The owner can add more lives to be insured and substitute one life insured for another.
There is flexibility in the amount and duration of the premiums.
How the savings portion is invested is also flexible, as long the policy is in force.
The policy owner can choose to receive the cash value of the policy in addition to the
sum insured on death of the life insured. This is different than a whole life policy where
the owner can receive the CSV upon surrender of the policy or the face amount upon
the death of the life insured.

Unbundling
There are three separate parts (insurance, investment, and expenses) to a universal policy. We
go into detail on each part on the next page.

1. The insurance part where the owner sees the cost of insurance (the mortality charge).
The mortality charge is based on:
o the age of the life insured

o risk classification depends on the life insureds gender, smoking status,

health factors, etc.
o the policys face amount
o the cost of insurance based on the net amount at risk (NAAR)
There are two options for premium payments:
1. Yearly renewable term (YRT). This is where the premium increases
annually. They are low initially but increase as the age of the life insured
increases.
2. Level cost of insurance (LCOI). The rates are based on term-to 100
rates.
The policy owner can have the premiums increased or decreased depending on
the minimum and maximums allowed.
Premiums can also be stopped and restarted, if the account value can pay the
monthly costs of insurance and expenses.
2. The investment part that shows the interest rate applied to the value of this section.
Thus, the owner can see the rate of growth of the investments.
3. The expenses charge to this type of policy (administration, other expenses, and sales
charges).

Key Concepts in Disability Policies

For insurance, disability occurs when an insured cannot work because of injury/illness.
Disability exists when:
The accident or illness (the condition) has occurred while the policy is in force. This
excludes pre-existing conditions, which are health conditions that the insured already
has. Pre-existing conditions could increase the premiums charged or even prevent the
issuance of a policy.
The condition must require medical attention.
The insured is under the care of a doctor.
The insured is not able to perform the essential duties of his or her occupation.
There are three types of disability income policies:
1. Cancellable Policy (also called a Commercial Policy)
Issued on a class basis. A class is formed when people are grouped together
by age, gender, occupation, or type of plan. When the claims for the class are
higher than anticipated, this type of policy can be cancelled, the premiums can
be increased, the benefits reduced, or restrictions imposed by the insurer.
2. Guaranteed Renewable Policy
This policy is guaranteed to be renewed until age 55 and usually until age 65.
Premiums can be increased when renewed if there is a higher claims experience
for the class but terms and conditions remain the same.
3. Non-cancellable and Guaranteed Renewable Policy
This has the highest premiums because it offers the greatest level of protection.
It is guaranteed to be renewed until the insured reaches age 65. The insurer
cannot cancel the policy, increase the premiums, add restrictive riders, or reduce
benefits. It can be converted to a guaranteed renewable policy, at age 65, if the
insured is still working.

How to Calculate Residual and Partial Disability

Residual disability
Residual disability is a rider on a disability policy that will pay a benefit when the insured
is able to earn between 20% and 80% of his or her pre-disability salary by working.
The formula for how much of the disability benefit will be paid is:
(pre-disability income income while working) (pre-disability income) x 100 = % of benefit to be received.

For example:
Claire was earning $8,000 a month before becoming disabled. Her disability benefit was set at
65% of her salary. After becoming disabled, she was able to earn $4,000 a month by working
part-time (50% of the time). What amount would Claire receive from her disability insurer?
What was her total income during this time?
Step 1: her disability benefit would be $8,000 x 65% (.65) = $5,200
Step 2: the percentage of the benefit while working part-time would be
($8,000 $4,000 = $4,000) $8,000 = .5 x 100 = 50% or $2,600/month (50% of $5,200)
Step 3: her total monthly income would be $4,000 + $2,600 = $6,600
Partial disability
Partial disability occurs when a straight percentage of the disability benefit is paid
depending on the amount of time the disabled person can work. It is paid to a maximum
number of months.
The formula for how much of the disability benefit will be paid is:
Total hours (100%) % of hours worked = % of benefit

For example:
Joan was earning $3,000 a month for working 35 hours per week and had a disability policy that
would pay her 60% of her earnings if she became disabled. After becoming disabled, Joan was
able to work 14 hours per week or 40% (14 35 x 100) of her previous schedule. What amount
would she receive as a partial disability?
Step 1: her disability benefit is $3,000 x 60% (.6) = $1,800
Step 2: total hours 100% hours worked 40% = disability benefit of 60%
Step 3: 60% x $1,800 = $1,080 partial disability

The Re-adjustment and the Dependency Period

It is very important to remember the difference between the re-adjustment period and the
dependency period.
The Re-adjustment Period
The re-adjustment period takes into account the last expenses that are needed to be
paid just after the death of the life insured.
These include funeral costs, probate fees, taxes, as well as the total of loans, credit
cards, and mortgage repayments.
It is also important to have at least three months of income available in case of
emergency for the survivors.

The Dependency Period

The dependency period takes into account the ongoing expenses of the daily costs of
living for items such as food, clothing, holidays, and saving for post-secondary
education.
For children, the dependency period lasts until the last child reaches age 18 or 25, if
attending school full-time.

Capitalization of Income Approach

It is important to understand how to calculate the Capitalization of Income Approach.
Capitalization of Income Approach
This is also called the Human Life Value Approach.
This approach simply calculates the replacement of the income of the life insured to find
the face value of the insurance contract.
The formula = the annual income of the life insured a nominal rate of interest.
For example:
Peter earns $45,000 per year and is the primary wage-earner of the family. Using an
investment return (or nominal interest rate) of 4%, how much insurance is needed upon Peters
death using the Capitalization of Income Approach?
The calculation is:
$45,000 4% = $1,125,000
$1,125,000 invested at 4% will yield $45,000 annually
Drawbacks to using this approach include:
It does not take into account other sources of income, such as business income.
A constant income stream is calculated, yet any probable future increases (raises) are
not taken into account.
It ignores the specific financial commitments of the family.

Capital Retention Approach

The Capital Retention Approach (also called the Capital Needs Approach) is a way to figure out
how much life insurance is needed. This is one of the most time-consuming types of questions
on the LLQP exam. There are four steps. You must memorize these steps before the exam.
Steps in the Capital Retention Approach
1. Assets available at death final expenses = cash needs
If the question does not say that a RRSP will be rolled over to a spouse at death,
the full value of the RRSP is to be used as an asset available at death.
If a person already has insurance, the face value of the policy goes in this
section.
All final expenses needed are provided in the question.
Cash needs can be either a positive or negative number. If positive, they will
lower the amount of insurance needed.
2. Continuing income continuing expenses = income needs
If the surviving partner is still working, their income is included as part of the
continuing income.
Enter any business or rental income in this section.
The continuing expenses needed are provided in the question.
3. Income needs (from Step 2) interest rate = capitalized value
The interest rate will be given in the question. Always change to a decimal.
The capitalized value is the future value of a perpetual annuity (i.e. the payments
will continue indefinitely).
4. Capitalized value +/ cash needs = insurance needed
If cash needs (step 1) are a negative sum, add it to capitalized value. If they are
a positive sum, subtract them from capitalized value.

Lets do a sample question together!

Following is information on Doug and Pat Jones who have two children.
Net Worth Statement
Assets
Value of home
Bank account
Pats investment portfolio
Pats RRSP
Dougs RRSP
2 cars
Artwork
Total Assets

$400,000
$22,000
$75,000
$200,000
$200,000
$45,000
$80,000
$1,022,000

Liabilities
Mortgage
Credit cards
Car loans
Total Liabilities

$156,000
$11,500
$8,000
$175,500

Other information
Pats annual salary
Dougs annual salary
Pats life insurance
Dougs life insurance
Pats car
Dougs car
Annual education fund contribution
Funeral and burial costs for one
Pats annual contribution to investments
Taxes and legal fees upon death
Annual household expenses
Pats annual RRSP contributions
Dougs annual RRSP contributions

$82,000
$75,000
$100,000
$80,000
$25,000
$20,000
$8,000
$20,000
$15,000
$14,000
$45,000
$14,500
$13,500

If Pat died, Doug would sell his car and use Pats.
The artwork would not be liquidated if one died.
Both are the named beneficiaries of the others RRSP.
If Pat died, Doug would not liquidate the investment portfolio but continue to invest annually
Current interest rates, 2.8%,
Using the capital retention approach, what are the approximate insurance requirements of the Jones if
Pat died?
a)
b)
c)
d)

$0
$150,000
$300,000
$350,000

Correct answer c)
Rationale for correct answer:
Assets available at death
Bank account
Pats life insurance
Dougs car
Total

$22,000
$100,000
$20,000
$142,000 [A]

Final expenses
Funeral
Taxes and legal fees
Total liabilities
Total

$20,000
$14,000
$175,500
$209,500 [B]

Total cash needs: [A B]

$67,500

Continuing income sources

Dougs salary

$75,000 [D]

Continuing expenses
Annual education fund contribution
Annual household expenses
Dougs annual RRSP contributions
Annual contribution to investments
Total

$8,000
$45,000
$13,500
$15,000
$81,500 [E]

Income needs: [D E]

- $6,500 [F]

Total needs:
Capitalized value of Pats life [F] ($6,500 .028)
Plus cash needs [C] ($232,143 + $67,500)

$232,143 [G]
$299,643 [H]

Common Insurance Formulas

There are lots of insurance formulas to remember. Here are the most important ones!
1. Adjusted Cost Base (ACB) of Insurance:
ACB = Premiums paid net cost of pure insurance (NCPI) dividends
Example:
Tony has a whole life policy with a face value of $200,000. The cash surrender value
(CSV) is $85,000. Tony has paid $52,000 in premiums and received $13,500 in
dividends. The NCPI is $30,800. What is the ACB of the policy?
$52,000 $30,800 $13,500 = $7,700

2. Taxable Gain for Non-participating Policies:

Taxable Gain = CSV (premiums NCPI)
Example:
Liz has a limited payment life policy with a face value of $300,000. The CSV is $73,500.
Liz has paid $59,400 in premiums. The NCPI is $34,680. How much of the CSV must
be declared as income when Liz files her income tax return?
$73,500 ($59,400 $34,680 = $24,720) = $48,780

3. Taxable Gain for Participating Policies:

Taxable Gain = CSV (premiums NCPI dividends)
Example:
Buddy has a participating policy with a face value of $400,000. The CSV is $148,160
and Buddy has paid premiums of $79,200. The NCPI is $46,240. Buddy has received
dividends of $27,000. How much of the CSV must be declared as income when Buddy
files his income tax return?
$148,160 ($79,200 $46,240 $27,000 = $5,960) = $142,200

Co-ordination of Benefits
Determining the primary and secondary carriers for Co-ordination of Benefits (COB) is very
important when writing the LLQP exam. Memorize the chart in the Course Book on Priority of
Payment for Benefits.

Example # 1
Sam and Mary Briggs are both employed by firms with health plans. Sams plan does not
contain a COB. It has a $75 single deductible, a $150 family deductible, and an 80% coinsurance factor. Marys plan has a $50 single deductible, a $100 family deductible, and a 90%
co-insurance factor. Sams birthday is September 15, 1965. Marys birthday is August 23,
1967. Sams first claim for the year is $363.85. How much will be received as reimbursement
from each carrier?
Sams plan is the primary carrier since it does not have a COB.
The claim is for $363.85 the $75 single deductible = $288.85
$288.85 x 80% = $231.08 benefit from Sams plan
Two calculations from Marys plan:
1. If Marys plan had been the primary carrier:
$363.85 $50 = $313.85
$313.85 x 90% = $282.46
2. 100% of all eligible expenses reduced by payments made by the primary carrier:
$363.85 $231.08 = $132.77
Since the $132.77 is the lesser of the two calculations, Marys plan will pay this amount.

Example # 2
Assume Sams plan has a COB, as does Marys plan. The first claim is for their sons
prescription drugs of $288.45. How much will be received from each carrier?
Marys plan is the primary carrier since her birthday falls earlier in the calendar year.
$288.45 $50 family deductible = $238.45
$238.45 x 90% = $214.60

Two calculations from Sams plan:

1. If Sams plan had been the primary carrier.
$288.45 $75 family deductible = $213.45
$213.45 x 80% (.8) = $170.76
2. 100% of all eligible expenses reduced by payments made by the primary carrier.
$288.45 $214.60 = $73.85
Since the $73.85 is the lesser of the two, Sams plan will pay this amount.

Other rules to remember:

A group plan that does not contain COB is always the primary carrier.
Once the family deductible has been satisfied, subsequent claims for the year are not
reduced by the deductible.
Coinsurance applies to every claim.

Investments for Education

It is important to know the key rules about investments for educational purposes.

Registered Education Savings Plans (RESPs)

Contributions to the plan are not tax deductible; however, the growth in the plan is not
taxed until withdrawn.
Usually the withdrawals are made by the student who is in a much lower tax bracket
than the contributor, so the tax paid is at a lower rate.
There is no annual contribution limit but the maximum lifetime contribution is $50,000.

The Canada Education Savings Grant (CESG)

The CESG tops up contributions from the federal government.
The CESG will only add a grant of 40% of contributions up to $2,500 saved annually.
There are different limits based on family income that change each year.
There is a maximum lifetime grant of $7,200.

The Canada Learning Bond

This is for children who receive the National Child Benefit Supplement that is given to
families of modest income.
It provides $500, plus $25 for opening a RESP, and $100 per year for the next 15 years.

Registered Disability Savings Plans

The Registered Disability Savings Plan (RDSP) is a unique type of registered plan. It
encourages savings for the long-term financial security of the severely disabled.

Key Points about RDSP

Contributions to the DPSP are eligible for the Canada Disability Savings Grant.
Contributions
are
also
eligible
for
the
Canada
Disability
Savings
Bond, which is paid to lower income families.
Contributions are not tax deductible.
There is no annual contribution limit but there is a lifetime contribution limit of $200,000.
The Canada Disability Savings Grant will contribute funds equal to 100% to 300% of the
RDSP contributions up to a maximum of $3,500, depending on the income of the
beneficiarys family.
Another $1,000 will be contributed to the Canada Disability Savings Bond depending on
family income.

Calculating an RRSP Contribution

It will help you to memorize this calculation. Try to write it out without looking.
Calculating RRSP Contribution Limit
1. Taxation year _______________

Limit: (see below)

$__________

2. Earned income for the PREVIOUS year: __________ x .18 =

___________

3. Lesser of 1 or 2:

___________

4. Minus the Pension Adjustment for the PREVIOUS year:

___________

5. Minus the Past Service Pension Adjustment for CURRENT year:

___________

6. Equals current years RRSP deduction limit:

___________

7. Plus any unused RRSP deduction room from all previous years:

___________

8. Total RRSP deduction limit:

___________

9. Plus $2,000 over-contribution for those 19+ (if not already claimed)

___________

10. Total RRSP Contribution Limit

___________

What is included in Earned Income?

Employment income (less Union and Professional Dues)
Royalties
Supplementary Employment Insurance (not EI benefits)
Net Rental Income
Taxable alimony or maintenance payments
Disability payments from CPP/QPP (not from private plans)
Net Research Grants
Net income from self-employment
What is NOT included in Earned Income?
Investment Income
Capital Gains
Maximum Limits
In 2009, the maximum limit will be $21,000 (2010: $22,000).

Pension Adjustments
You will need to know the difference between a Pension Adjustment (PA) and a Past Service
Pension Adjustment (PSPA) when writing the LLQP exam.
Why do they affect a RRSP contribution?
Taxpayers who are self-employed have only one retirement vehicle that allows for tax
deductions based on contributions. It is a RRSP.
Tax payers who are members of a Registered Pension Plan (RPP) or a Deferred Profit
Savings Plan (DPSP) have retirement income in addition to their RRSP.
In order to make the retirement contributions and the potential for retirement earnings
fair, RRSP rules state that contributions to RPPs and DPSPs must reduce the allowable
contributions to personal RRSPs.
What is a pension adjustment (PA)?
It is simply the amount of total contribution made to a companys RPP or DPSP.
Much like the current years RRSP contribution is based on your previous years earned
income, your allowable RRSP contribution is reduced by your previous years PA.
What is a past service pension adjustment (PSPA)?
There are two situations where a PSPA occurs (these are only for defined benefit plans):
1. You joined a company that did not have a RPP. Five years later, they introduced a RPP.
The company is allowed to deposit five years worth of contributions to your plan. They
do not have to do it all in one year. Each years contribution of previous service reduces
your allowable RRSP contribution. A key difference to the PA is that it is the current
years PSPA that is used for your current years RRSP contribution, not the previous
years, as is the case for the PA.
2. Your company had a RPP when you joined five years ago. This year they improved the
benefits formula. For example, benefits might have increased from 1.5% to 2%. The
company is allowed to deposit five years worth of additional benefits to your plan. Once
again, they do not have to do it all in one year and it is the current years PSPA that
reduces your current years RRSP contribution.

Remember this chart. It will help you to understand in which years earned income, PA,
and PSPA is used to determine the current years RRSP allowable contribution.
Previous Year
Earned income
Pension Adjustment (PA)
Past Service Pension
Adjustment (PSPA)

Current Year

Locked-In Funds
There are different types of locked-in funds.
Why are registered pension funds (RPPs) locked-in?
Pension legislation prohibits people from receiving pension benefits until the retirement
date of the RPP is reached.
Locked-in funds can remain with the employer if the employee changes jobs and the
employers RPP allows it.
Some provinces have different rules regarding the transfer of locked-in funds.

Locked-in funds can be transferred to one of the following:

Locked-in RRSP, also known as a Locked-in Retirement Account (LIRA)
Life Income Fund (LIF) in all provinces except Saskatchewan
Locked-in Retirement Income Fund (LRIF), only in Newfoundland and Manitoba
Prescribed Registered Retirement Income Fund (PRIF), only in Saskatchewan and
Manitoba
Deferred Life Annuity, the annuity payments would begin at the allowed retirement age
Another RPP if the RPP permits

Remember, locked-in RRSPs may hold the same investments as regular RRSPs and can be
managed or self-directed.

Key Concepts about DPSPs

Unique features of Deferred Profit Sharing Plans (DPSPs)
Members (employees) of the plan are called the beneficiaries.
A beneficiary cannot be related to a shareholder who owns more than 10% of the voting
shares of the company.
Only the employer makes contributions to the plan on behalf of the employees (i.e. there
is no employee contribution).

The DPSP must clearly state the following:

The retirement age
Death and termination benefits
o The employer must pay all vested amounts to an employee (or his or her estate)
within 90 days after death or the employees termination.
o If an employees 71st birthday comes before the 90 days, it will take precedent.
o Partial withdrawals can be allowed.
How payments can be made
o Options include a lump sum cash and/or stock, periodic periods for no more than
a 10-year period, or a life annuity.
How the plan can be amended or terminated

Other things to know about DPSPs

Eligible investments of the plan are similar to RRSPs, except the plan is not allowed to
purchase the employers debt. However, the plan can purchase the companys treasury
shares.
The allowable contribution amounts are the lesser of 18% of an employees earnings or
50% of the allowable defined contribution pension plan (DCP/MPP) limits for any
particular year (for example, $11,000 for 2009).
Contributions can be made up to 120 days after the companys fiscal year-end.