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Insurance policies are designed to meet certain needs; the right policy for the
client will depend on his or her need and circumstances. Clients can make the
mistake of focussing on one need. In working through the answer to why
insurance is needed, you and your client may determine that more than one policy
is necessary.
Life Insurance
All life insurance policies are either term insurance or permanent insurance.
Term insurance is insurance for a period of time that ends on an expiry date. If
the life insured dies before the expiry date, then the insurer pays the death Expiry date
The day term
benefit to the beneficiary whose name appears in the policy. If the life insured insurance coverage
does not die, there is no refund of premiums and no payment made by the insurer. ends.
Death benefit
The money that is
Permanent insurance is, for the most part, insurance for life. The policy expires on paid to the
the day the life insured dies. At that point, the insurer pays the death benefit to the beneficiary upon
death of the insured.
beneficiary.
Coverage for life insurance begins on the effective date of the policy. This date
Effective date
The date the life is set out on the face page of the policy.
insurance contract
takes effect.
When a person dies with life insurance in force (between the effective date and
Face page
The face page or when it expires), the face amount of the policy (also called the death benefit), is
schedule of the
paid to the beneficiary according to the settlement option selected. Usually, the
contract contains
many details death benefit is paid in a lump sum to the beneficiary. There is no requirement to
relevant to the
policy. pay tax on the death benefit; it is tax-free.
Face amount
The face amount is Term Insurance
the amount of
insurance that has Term insurance is life insurance for a specific period of time, or up to a certain
been acquired and age. The period of time is called the term. Terms are typically available for 1, 5,
for which the
premium pays. 10, 15, or 20 years or as a Term-to-65 policy. Term insurance is generally not
Settlement
available for purchase after 70 years of age.
option
There are a
number of ways Term insurance can be purchased with a single premium or a series of premiums
the death benefit
can be received by
paid monthly, quarterly, semi-annually, or annually.
the beneficiary. A
lump-sum cash
payment is most Term insurance has great appeal, because a small amount of premium buys a lot of
typical.
coverage. A male in his mid-forties might only need to pay about $60 a month in
premiums for a five-year term policy that has a $500,000 death benefit. That
makes term insurance seem cheap, right?
The answer is yes — and no. The premiums are inexpensive for those who are
younger, because the chance of premature death is very low. Therefore, there is
very little risk that the insurer will have to pay the death benefit.
However, with advancing age, premiums become much more costly, because the
chance of death is much higher. As noted above, the risk for the insurer at age 70
becomes so great that term policies are not issued.
If a person does not die while a term policy is in force, there is no refund of
premiums to the policy owner or payment to the beneficiary. The money spent on
premiums has transferred the risk of death during the period of the policy from the
life insured to the insurer.
Term insurance is often an entry-level product. Younger clients and those without
the financial ability to acquire more costly insurance will find the low premiums
appealing. Some clients buy term because of the large amount of coverage that
can be acquired at the lowest cost of all types of policies. Still others may lack the
knowledge or ability to understand more complex forms of insurance.
Term is the perfect insurance policy for needs that are temporary (think:
“termporary”). Clients will see term premiums quoted on the television or on
websites. Chances are the product that is sold this way is a level term policy.
A person who buys level term insurance knows exactly how much it will cost,
how much it will pay out, who will receive the death benefit, and when the
insurance expires.
Other forms of term insurance that are less common are increasing term,
decreasing term, and renewable term.
Increasing term insurance covers a life that is increasing in economic value. For
example, a lawyer who has just graduated and is just beginning to build a client
base.
Renewal Option
Renewable term insurance policies give the policy owner the ability to renew
the policy. The policy owner can expect:
A higher premium on renewal. The new premium is called the guaranteed
renewal rate, and it is stated to the policy owner when the policy is taken
out.
Guaranteed renewability, because the life insured is guaranteed to be
insured, regardless of his or her health
The same face amount every time the policy renews; it is paid to the
beneficiary if the life insured dies
Renewable term insurance allows the insured to renew the policy until a date — or
age — specified in the policy.
The most common renewal periods are 1, 5, 10, and 20 years. A 10-year Mortality risk
Mortality risk is a
renewable policy, for example, will renew every 10 years without evidence of factor used in
underwriting the
insurability. The premiums for each renewable period will reflect the mortality policy by which the
risk for that period, which increases due to the attained age of the life insured. risk of death is rated.
For instance, high
This is one reason the premiums at each renewal are higher than the premium of mortality risk = high
premium.
the previous period.
Attained age
The age of the life
insured at the time of
renewal.
Having a
renewable policy
means that there is
no requirement to
show good health
when the renewal
periods end.
Sam purchased a term-to-65 policy, whose death benefit increases at 5% per year.
He purchased this policy so that his death benefit keeps pace with his increasing
income of about 3% per year (and therefore his family’s lifestyle), as well as to
compensate for inflation, which he figures will be around 2% per year. His premium
will increase every year to reflect this increase in death benefit. What type of term + FILE
policy did Sam purchase?
See file 4
A Level for discussion on
term insurance
B Increasing
C Decreasing
D Renewable
Convertible Option
A term policy may be a convertible policy. If a policy is both renewable and
convertible, it is customarily called an R&C policy.
The convertible option on a renewable term insurance policy gives the policy
owner the right to convert the term policy to a permanent life insurance policy for
Copyright © 2011 Oliver Publishing Inc. All rights reserved. 49
LLQP
It may be expected that a policy with a renewable and convertible option will be a
bit more expensive than a non-renewable policy.
Permanent Insurance
Permanent insurance is in force for the lifetime of the life insured. The beneficiary
of the policy receives the amount of the death benefit when the life insured dies.
Premiums for permanent insurance are considerably more expensive than for an
equivalent face amount of term insurance, because, unlike term, the insurer knows
with absolute certainty that the death benefit will have to be paid at some point.
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Like term insurance, permanent insurance can be purchased with a single lump- See file 7 for
sum premium or premiums paid monthly, quarterly, semi-annually, or annually. limited payment non-
par whole life
insurance.
Permanent insurance is available as:
Whole life insurance;
Whole life
Adjustable premium whole life insurance; A whole life policy
sees the same
Term-to-100 insurance; premium paid for life.
Universal life insurance.
Limited payment
life
Limited payment life
Whole Life Insurance sees the premium
Whole life insurance is available as: whole life, in which the premiums are paid limited to a number
of payments over a
until the life insured dies, and limited payment life, which requires premiums to specified time or to a
be paid over a specified period of time or to a specified age. For instance, a 20-pay specified age.
life policy requires premiums to be paid for 20 years. The coverage, however, is
life-long. A payments-to-age-65 policy requires premiums to be paid until the life
WATCH
insured is 65. Again, the coverage is permanent.
Whole Life
Insurance:
“I have a whole life policy, Introduction
because I know my pension will
always be able to pay my
premiums. But the policy for my
wife was a 10-pay policy. I paid
these premiums while I was still
working and had the finances to
make the payments easily. Her
coverage is permanent, even
though the premiums were
not.”
Which of the following types of policy does not provide permanent insurance
coverage?
When an agent proposes whole life insurance to a client, the agent can emphasize
features that benefit the policy owner during his or her lifetime. They include:
The policy reserve;
Policy dividends.
Dividends
A whole life policy is
available as a
participating, or par, The Policy Reserve
policy, in which During the early years of a whole life policy, the policy owner pays more in
dividends may be
received. If dividends premiums than coverage requires. This creates a “policy reserve.” The policy
are not received from
the policy, it is called reserve, or cash reserve, increases with every premium payment and by compound
a non-par policy. growth on the savings within the reserve.
Dividends are not
guaranteed; you will
learn more about
them later in this
If a policy owner no longer wants insurance coverage, then part of the value of the
chapter. policy reserve can be received by the policy owner via the policy’s cash
surrender value (CSV). Cash surrender value is exactly what it says: cash paid to
the policy owner in return for the surrender of the policy. Thus, unlike the case
with term insurance, the policy owner receives “money back” if the policy is
discontinued.
Since the greatest personal risk is that of becoming disabled, why would someone
want to buy whole life insurance?
The policy reserve also provides the policy owner with the ability to:
Non-forfeiture Borrow from the CSV with a policy loan;
options
The three non- Use a non-forfeiture option.
forfeiture options
are the automatic
premium loan, Taking a Policy Loan: Up to 90% of the cash surrender value (CSV) of a policy
extended term
insurance, and can be borrowed from the insurer by the policy owner in a policy loan. Interest on
reduced paid-up the loan is charged at the rate set by the insurer, which is usually competitive with
insurance. Each
option provides the rates offered by banks or other lending institutions.
policy owner with a
way of maintaining
insurance coverage. If the policy owner dies before the loan is repaid, the outstanding amount of the
Cash surrender value
forfeits insurance loan, plus interest, is deducted from the death benefit. It is possible, therefore, to
coverage.
seriously erode the value of the death benefit with a large loan.
Automatic Premium Loan (APL): When a policy owner forgets to pay the
premium or is short of money when the premium is due, the policy will remain in
force by using an automatic premium loan.
The APL automatically — without the necessity of the policy owner taking any
action — charges premiums as a policy loan against the cash surrender value of
the policy to continue insurance coverage. It can be used until the policy owner
recommences premium payments or until the amount of the loan plus interest
equals the cash surrender value of the policy. Coverage will end when the grace Grace period
The grace period is
period following the final premium payment ends. So, if the final policy premium 30 or 31 days after
the premium due
date is January 1, the grace period will keep the policy in force for another 30 or date.
31 days. The death benefit (less loan amount) will be paid if the life insured dies
during the grace period. The policy will lapse as of January 31. Death after that
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date will not be covered.
See file 5 for
information on the
Extended Term Insurance (ETI): This option allows the policy owner who stops grace period.
paying premiums to keep coverage in force by using the cash surrender value of
the policy as a lump-sum premium to buy term insurance. The face amount of the
term policy that is acquired will be the same as the whole life policy; however, its Riders
term will be based on the attained age of the life insured when this option is A rider is a benefit
or extra coverage
selected. Riders and other benefits from the original policy will be cancelled. that is attached to
the main policy.
Riders help to
customize the
policy to more
closely match the
needs of the
customer.
Reduced Paid-up Insurance (RPU): Whereas ETI uses cash surrender value to
switch permanent coverage to term coverage — much like the reverse of the
convertible term option — reduced paid-up insurance uses the cash surrender
Paid-up
value of the whole life policy as a lump-sum premium for a whole-life policy that
Paid-up means is paid-up. The policy owner sacrifices the amount of coverage that he or she had
there are no
further premiums previously for a lesser face amount, but the policy continues as a permanent
to be paid.
policy.
The new face amount will be based on the attained age of the life insured and the
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cash surrender value in the policy.
See file 6 for
the distinction
between ETI and
RPU provides many of the features of the original whole-life policy, including a
RPU. cash surrender value and insurance coverage for the lifetime of the insured. Riders
and other benefits are cancelled.
WATCH
Whole Life
Insurance:
Non-forfeiture
Values
Policy Dividends
Whole life policies may be non-participating policies, in which case the policy Dividends
Dividends are paid
owner is not entitled to a dividend. Whole life policies may be participating to participating
policy owners when
whole-life policies, in which case the policy owner is entitled to receive dividends a surplus in the
from any surplus in the reserves of the insurer. Obviously, participating policies reserves exists
with the insurer.
are a bit more expensive than a corresponding non-participating policy.
Policy dividends paid by an insurer are different from the dividends that are paid
if you own stocks of a company. Policy dividends are a distribution of surplus
earnings held in the participating account established by the insurer that receives
premiums from participating policies.
A surplus is created when the insurer incorrectly overestimates mortality rates and
expenses, and/or underestimates its investment earnings. It is mandatory for the
insurer to keep reserves to meet its insurance obligations, but once those reserves
are exceeded, the excess is distributed to the par-policy owners as a dividend.
Dividends are not guaranteed, and their amount can vary year to year. They begin
at the end of the first year of a policy and are paid after the first premium in the
Segregated fund
second year has been received by the insurer. A segregated fund is
a type of investment
available through
When the policy owner completes the application for a participating policy, he or insurers that provides
a guarantee to the
she must indicate how the policy dividends will be received. There are three basic investor that either
purposes to which policy dividends can be put: 75% or 100%
(depending on the
As savings; contract) of their
deposits will be
To acquire more life insurance; retuned on the death
To reduce premiums. of the policy owner or
on the maturity of
the contract. More
Dividends as Savings: The savings option will see policy dividends: information on
segregated funds will
Paid by cheque once a year to the policy owner; be provided in the
Investment module.
Left on deposit with the insurer to accumulate interest;
Invested in a segregated fund, mutual funds.
Dividends Used for More Life Insurance: The policy owner can select:
Paid-up additions (PUAs);
Special term additions (also known as the fifth-dividend option);
Term additions.
Paid-up addition: A paid-up addition (PUA) uses the policy dividends to buy
additional insurance. As its name suggests, this insurance is paid-up — it needs no
premiums. It is usually a participating policy (par policy) in its own right, with its
own cash surrender value. Paid-up additions add to the face value, cash surrender
value, and loan value of the original policy.
A medical exam is not required in order to purchase paid-up additions. Also, they
can be surrendered individually any year without affecting the actual policy and
received as cash or used to pay premiums.
WATCH Term addition: A term addition uses the whole dividend to buy a non-renewable
Whole-Life one-year term addition that will be paid if the life insured dies during that year. A
Insurance:
Participating
medical exam is not required in order to purchase term addition.
Policies.
If a participating whole life insurance policy was being used in a business, which
form of dividend payment will help the face amount of the insurance policy keep
pace with the cost of living?
A A segregated fund
B Paid-up additions
C A special term addition
D A term addition
Dividends Used to Reduce Premiums: The use of dividends to reduce the policy
owner’s outlay for premiums is called premium offset. The simplest method for a
policy owner to use to reduce premiums using dividends from a participating
policy is to apply the cash received towards the premium payment. There is a
benefit and a disadvantage to choosing this course of action. The benefit is that the
policy owner reduces his or her outlay towards the premium. For instance, when
the annual premium is $3,200 and the policy owner receives $200 in dividends,
the premium is reduced by the dividends to $3,000 ($3,200 – $200). The
disadvantage is that the policy owner is not acquiring more life insurance via
additions.
Paid-up additions (PUAs) can be used towards premiums by using the dividends
of the PUAs or cashing in individual PUAs. Thus, if the annual premium is
$3,200, and the policy owner has reinvested dividends each year in a PUA, he or
she might receive $100 in dividends from PUAs. The policy owner could then use
the $100 against the $3,200 premium to reduce the premium to $3,100 ($3,200 –
$100). The policy owner could also sacrifice a single PUA, receive its cash
surrender value ($200), and use the $200 towards the premium, so that the
premium is then reduced to $3,000 ($3,200 – $200). The premium can also be
reduced by a combination of PUA dividends and PUA cash surrender value.
ADDITIONAL
Needs Answered by Whole Life Insurance READING
Estate planning: If it is necessary for the policy owner to have life insurance in
Estate
force at the time of death in order to provide for beneficiaries or to pay capital planning and
taxes on
gains tax on property willed to beneficiaries, or to cover final expenses, then death
whole life insurance provides the security of knowing the death benefit will be
available for these uses.
The need for tax-deferred savings: Each premium adds value to the policy
reserve, and will not be taxed annually provided the growth falls within limits set
out in the Income Tax Act (ITA).
The need to build collateral: The CSV is an asset that can be pledged as
collateral for a secured loan at a lending institution. A secured loan is easier to
obtain and carries a lower cost of borrowing.
What is a benefit of whole life insurance that is not provided by term insurance?
At the end of each guarantee period, a comparison will be made between the new
investment yield and the yield at the beginning of the period.
This plan is popular in an economy in which interest rates are rising. However, it
will fall from favour when interest rates decrease and policy owners are
confronted with paying more premiums for the same coverage or reducing
coverage for the same premium.
“Term-to-100 insurance
has given me one of the
key benefits of term
insurance ─ lower
premiums – with one of
the key benefits of
permanent insurance ─
life insurance coverage I
can count on until I turn
100.”
T-100 is every bit as useful for estate-planning purposes for individuals and
businesses as other forms of permanent insurance.
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Why would a customer choose T-100 over whole life?
See file 10
A Premiums are lower
for a case study on
the use of T-100. B She wants dividends
C She wants life insurance without additional benefits
D A and C
Universal life is an effective tool for tax planning and estate planning, because it is
a permanent policy.
Universal life
insurance
An interest-rate-
sensitive policy that
We have already discussed how a whole life policy builds up a policy reserve
is a unique from overpayment of premiums in the early years of the policy. Universal life may
combination of
insurance and also build a reserve from the investment account or accounts that comprise a part
investment. of the policy. The management of the investment account is in the hands of the
policy owner. The account value of the universal life policy is the total of all the
investments in the investment account, less deductions for the current month’s
expenses.
The universal life policy owner must make the decisions about how to invest the
account value. The policy owner takes on the investment risk that is borne by the
insurer when the policy is whole life. The agent will provide valuable information
and guidance to assist with investment decisions, but, ultimately, the responsibility
for those decisions rests with the policy owner.
The policy owner must also choose how premiums will be structured and the
death-benefit options of the policy. Together, these choices allow an insured to
tailor the policy to meet his or her needs.
As mentioned, one of the key features of universal life is its flexibility. The policy
owner can increase or decrease the face amount of the insurance with satisfactory
evidence of insurability, add more lives to be insured under the policy and
substitute one life insured for another. The amount and duration of the premiums
and how the savings are invested are also highly flexible.
Flexibility also extends to the death benefit. A whole life policy owner receives
the cash value of their policy if it is surrendered or borrowed against. On death,
the beneficiary receives the sum insured less an amount that may be reduced if a
policy loan has been taken. Therefore, they receive the cash value or the sum
insured. Universal life policy owners can choose to receive the cash value of their
policy in addition to the sum insured on death.
What are the decisions that must be made by a universal life insurance policy
owner?
A The face amount, the investment of funds, how the premiums will be charged, and
death benefits
B The investment of funds, how the insurance will be costed, and death benefits
C The face amount, the life insured, the beneficiary, the investment of funds, how
the premiums will be charged, and the form of death benefit
D The face amount, the beneficiary, and the investment of funds
There are three separate parts to a universal policy — insurance, investment, and
expenses. Unlike other types of policies where the factors that determine the price
of the policy are not revealed to the policy owner, a universal life policy lists
separately the cost of insurance (the mortality charge applied to the policy), the
growth rate applied to the account value of the policy, and the expense charges of
the insurer (for administration, expenses, and sales costs) as they apply to the
Unbundling
policy. The term used to describe this separation is unbundling. Unbundling makes
all the cost aspects
of the universal life
Unbundling these costs is considered to be a very important feature of universal policy transparent.
life, because of the benefit to the policy owner. He or she can see exactly how
much growth is occurring in the account, the rate of growth, and the costs of
insurance and expenses. Thus, each of the premium pricing factors can be
monitored separately from the others; amongst other information, this reveals a
true picture of investment performance. By being able to monitor investments, the
policy owner is better aware of whether changes to the investments are warranted.
The policy owner must choose whether the life insurance premium will be based
Yearly renewable on a yearly renewable term (YRT) rate (that increases annually) or a level cost
term(YRT)
Yearly renewable term of insurance (LCOI) rate (that remains constant, or level, for life and is based on
increases in cost upon term-to-100 rates). The cost for insurance is deducted from the policy owner’s
every renewal.
account monthly.
Level cost of
insurance (LCOI) The choice between the two rates should be made with care, because each has
premiums stay level
for the duration of the special considerations. YRT premiums will be low initially, but as the insured
policy.
ages, premiums will escalate. LCOI premiums may be higher initially, but will
remain constant over time. The cash values in each policy also accumulate at
different rates.
As the following diagram illustrates, at some point the two rates will be equal. As
a general rule — although this will vary depending on the age of the insured at
onset, and on interest rates — this point will be between eight and twelve years
into the contract, and the cash values may be equal in about the twentieth year of
the contract.
Premium T-100
cost
1 2 3 4 5 6 7 8 9 10
Years
N.B. Universal life policies are usually non-participating; that is, they do not
receive policy dividends.
WATCH
The minimum premium is designed to keep the policy in force to age 100. There Universal Life
Mortality
is a maximum premium allowable; it is defined by a formula in the Income Tax Costing
Act (ITA). If the maximum is exceeded, the policy loses its tax status as an
insurance policy and is classified as a non-exempt policy subject to tax as an
investment that must be reported annually.
The policy owner has the option of having premiums increased or decreased,
based on minimum requirements and maximums allowed, or they can be stopped
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and restarted, if the account value can pay the cost of insurance and expenses.
This is unique to universal life. See file 11 on
how a U.L. policy can
be presented.
If the policy owner fails to maintain enough funds in the account to pay the
mortality charge and expenses, the insurer gives the policy owner a period — at
least 30 days — to make a premium payment to cover the shortfall. If the policy
owner fails to pay these charges, the policy will lapse.
What is true of premiums paid for a universal life policy regardless of which premium
pricing method is used?
If the account value is used for premium payments, its value is reduced.
optional deposits
mortality charge
Premiums Account Value
investment
expenses
some expenses may be deducted
before premium is deposited
Premiums and deposits made to the account are invested by the policy owner in
investment products offered by the insurer. There are many products from which
to choose, including savings accounts, guaranteed term deposits, investment
funds.
The investment earnings grow within the account. The income within a tax-
Disposed exempt universal life policy does not have to be declared each year. This means
A policy is disposed in
many ways, including that taxes are not paid until the policy is disposed. Thus, the policy owner
surrender of the policy,
its absolute benefits from compounding (earning growth on growth).
assignment, or its
lapsation. Disposition is
a taxable event.
What factor might indicate changes to investments should be made in a universal life
policy?
Fundamentally, universal life policies offer two basic investment options: one + FILE
investment option guarantees the rate of return, such as would be received in a
See file 13 for
daily interest account, in Guaranteed Investment Certificates, or with Treasury guidelines on how to
bills; the other investment option provides no guarantees. Instead, investments select the best
investment.
fluctuate in relation to market performance by linking to market indexes or a vast
array of mutual funds or mutual-fund portfolios. An account need not be entirely
guaranteed (safely invested) or entirely non-guaranteed (risky investments); a
balanced portfolio holds both types of investments.
What type of return does the universal life policy owner receive when the
investments in the policy are linked to a mutual fund?
A Non-guaranteed return
B Guaranteed return
C Balanced return
D The return depends on the type of mutual fund
The challenge to the agent who is selling a universal life policy is to guide the
policy owner to the type of investment best suited to his or her needs and risk
tolerance. To do so, the agent and policy owner must understand the relationship
between risk and return. It is very simple: investments that are very safe (i.e., are
guaranteed) produce the lowest returns. Conversely, non-guaranteed investments
may deliver higher returns and the highest potential for losses.
Cash Surrender Value: The cash surrender value of the policy is determined by its
total account value. The total account value is the total of all the investments in
the investment account, less deductions for the current month’s expenses.
Adjusted cost basis
(ACB)
The adjusted cost basis
The CSV is the total account value, minus outstanding loans, minus surrender of a life insurance policy
charges. Many policies have a surrender charge that applies if the policy is is a number used to
determine whether a
surrendered. These may apply up to 20 years after the policy was issued. policy might be taxable
if it is disposed. The
amount paid in
Policy Loans: A policy loan cannot exceed the cash surrender value of the premiums is typically
the largest cost
account. There will be a tax implication if a loan exceeds the adjusted cost contributor to the ACB.
You will learn more
basis (ACB) of the policy. If the life insured dies with an outstanding policy loan, about ACB later in this
death benefits will be reduced by the amount remaining on the loan, plus interest. module.
Premium Offset: The need for future premiums can be eliminated by paying
larger-than-required premiums in the early years of the policy. The premiums are
then paid by the accumulated tax-sheltered investments in the account.
What is a benefit of universal life insurance that is not provided by whole life
insurance?
A Policy loans
B Cash surrender value
C The flexibility of the policy
D Guaranteed returns
Cash Withdrawal: A cash withdrawal can be made from a universal life policy. If
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not repaid, it may reduce the amount of the death benefit. The tax implications of
See file 14 withdrawals are addressed in the chapter “How Do I Get My Money?”
for a comparison of
term, whole life,
and universal life Death Benefit Choices: Universal life provides a variety of death benefits to
insurance.
reflect the nature of the policy as both insurance and as an investment. The policy
owner selects his or her preference when the application is made. Usually the
policy owner considers the needs of the beneficiary first. Other facts to be
weighed include the investment objectives of the policy owner, his or her ability
to pay premiums, and personal preferences. You will learn about these settlement
options in the section on applying for insurance.
What could reduce the amount of death benefit in a universal life policy?
A Cash withdrawals
B Policy loans
C Policy expenses
D A and B
Planning their estates: The need for permanent insurance and the death-
benefit options available fulfil the requirement for life insurance paid on
death.
Looking for flexibility: Some people will find the flexibility in a universal + FILE
life product appealing. See file 15
for a case study on
the use of a
Cost-oriented: People who want to monitor insurance expenses separately universal life
policy.
from investments will appreciate the “unbundled” aspect of universal life.
A key feature of benefits and riders is the flexibility they offer the policy owner.
Short-term needs can be met by adding a rider, and when it is no longer needed, it
can be allowed to expire or can be cancelled. In this way, a policy owner can
customize a standard policy to meet his or her exact needs as those needs change.
Riders stay in force until they expire. If a rider expires, its additional cost ceases.
If the policy type changes — such as when a term policy is converted to whole life
— riders attached to the original policy will no longer exist.
Accidents happen
every day. If an
accident causes
death within 365
days, the Accidental
Death Benefit
increases the amount
of the death benefit.
Riders include:
Guaranteed insurability benefit (GIB);
Accidental death benefit (ADB);
Accidental death and dismemberment (AD&D);
Monthly disability income benefit;
Waiver of premium benefit (WP);
Accelerated death benefit;
Parent waiver;
Term insurance.
The extra insurance is usually limited to the face amount of the policy or to an
amount specified in the rider.
The GIB is useful to add more insurance if the circumstances of the life insured
have changed since the policy was first acquired. The events may be specified
within the policy, or, if not specified, they may include: increased income,
increased debts, marriage, divorce, and the need to guarantee obligations to an ex-
spouse and children, having a child or another child, or acquiring debt as a sole
proprietor or partner of a business.
Accidents not covered include: suicide, war, riot, an unlawful act, or aviation
accidents in which the insured was not flying on a commercial airline as a fare-
paying customer.
The premium for the ADB depends on the age of the life insured and the premium
payment period. An ADB is usually not available to those over 55 and ends at age
60.
As with the ADB rider, death must be attributed solely to an accident and must
occur within 365 days of the accident. Coverage is usually limited to those under
age 60 or 65.
The amount of the benefit is linked to the face amount, usually as a fixed-dollar
amount per $1,000 of life coverage.
This rider may also include a waiver of premium benefit that will waive Waive
To waive means to
premiums during a period of total disability. temporarily put aside
or give up.
The waiver of premium rider pays the premiums on a policy if the life insured is
disabled. There is a three- to six-month waiting period after the start of a
qualifying total disability, during which time premium payments continue. From
that point onward, the premiums are paid by the insurer. Some waivers pay the
premium retroactively from the beginning of the disability if the disability
continues after the waiting period, and any premiums that were paid are refunded.
The definition of disability will be provided in the policy, but most policies
exclude disabilities caused by an injury that is intentionally self-inflicted, an
injury caused while committing an illegal act, a condition that existed before the
rider was issued, and an injury sustained by military personnel during an act of
war.
If the life insured dies, the face amount will not be reduced by the premiums paid
on behalf of the policy owner by the insurance company.
During a period of
disability, the waiver
of premium rider
transfers
responsibility for
premium payments
from the disabled
policy owner to the
insurance company.
In essence, the
company pays itself.
A variation on this rider, called the waiver of premium for payor benefit covers
the policy owner if the contract is a three-party life insurance contract (the policy
owner and the life insured are two separate people). In this case, the policy owner
who is responsible for payment of the premiums is protected from having to make
premium payments if he or she is disabled. The same exclusions will apply as
when the contract is a two-party contract. However, the policy owner will have to
provide evidence of insurability when acquiring the policy containing this benefit.
The maximum that can be received is usually a percentage of the face amount
(often 50%), and there can be a dollar limit, too.
The life insured must meet certain requirements before receiving this benefit, such
as suffering from a specific or terminal disease.
In practice, even when a policy does not contain this rider, insurers have been
known to provide the policy owner with an “advance” against the death benefit of
the policy when the life insured has a terminal illness, especially in cases of
financial hardship.
Parent Waiver
When life insurance is placed by a parent on the life of a child, until the child is a
certain age. A parent waiver waives future premiums if the parent dies.
John wants a $500,000 permanent policy for payment of last expenses. He is 47 and
has a mortgage of $40,000, with four years left to pay. What would be an effective
way of structuring a policy for John?
Riders can also be added that cover lives in addition to that of the life insured.
Most commonly, these riders are used for a spouse and/or children. There is a
special child term rider, which covers children of the family for small amounts,
ranging from $1,000 to about $25,000. The premium for the child’s coverage is a
flat amount, unrelated to the number of children in the family, and so does not
require a change if the number of children changes. Coverage for the child usually
ends when the child turns 21 or 25, although an option is often provided that
permits the child to convert coverage into an individual life insurance policy
without providing evidence of insurability.
Disability insurance replaces the policy owner’s income in the event that he or
she becomes physically unable to work due to an accident or illness. Although
disability income insurance is perhaps less well-known than life insurance,
experts agree that disability coverage is essential — especially when statistics
reveal that the probability of being disabled is much greater than the chance of
premature death.
While many people are covered for the medical costs of injury or sickness
through provincial or private health insurance, without disability insurance they
are not prepared for the loss of wages that accompanies such an event. In general,
if a person counts on his or her job to pay the costs of daily living for themselves
or their family, that person needs disability coverage.
What is the difference between life insurance and disability income insurance?
A Cancellable Policy
This policy, also called a Commercial Policy, is issued on a “class” basis. A class
is formed when people are grouped together by age, gender, occupation, or type of
plan. A cancellable policy can be cancelled, and the premiums increased, benefits
reduced, or restrictions imposed by the insurer at renewal when the claims for the
class are higher than anticipated.
Which type of disability income insurance would a person select who wants to be
absolutely certain that their coverage would not be cancelled?
Total Disability
Total disability is classified by the ability of the policy owner to work at:
Any occupation (any occ); or
His or her regular occupation; or
His or her own occupation (own occ).
When any occupation is chosen, the policy owner would receive a disability
benefit when he or she is unable to work at any job. The policy owner cannot
receive any other income.
Therefore, if the policy owner claims he or she cannot work at his or her job, but
the policy is written to include any occupation, the claim may be turned down,
because the policy owner could work at another job, regardless of its suitability.
The regular occupation clause will provide a disability benefit to an insured who
is unable to perform the essential duties of his or her regular occupation. If the
insured earns a salary or wage from other employment, the policy benefit will be
reduced or eliminated by those employment earnings.
When own occupation is selected, the policy owner can claim his or her disability
benefit when he or she is unable to perform the essential duties of his or her own
regular or previous occupation. Full benefits are paid, even if the person is
working at another occupation, as long as the insured cannot work at his or her
regular occupation.
Residual Disability
When a policy covers residual disability or provides residual disability as a rider,
a benefit is received when the insured is able to earn between 20% and 80% of his
or her salary by working.
Which definition of total disability allows the insured to earn employment income,
plus 100% of his or her disability income benefit?
A Residual benefit
B Any occupation
C Regular occupation
D Own occupation
Partial Disability
A partial disability definition provides coverage that is simply a percentage of the
total disability benefit. There is no formula used; it is simply a straight percentage
(usually 50%). For example, after a period of total disability, if an insured could
only perform some of the tasks of his or her occupation or can only work for part
of the time the insured normally works, the partial disability benefit is paid. The
benefit is paid only to a maximum number of months (usually 3 or 4 months).
Presumptive Disability
A presumptive disability claim will be honoured when the insured suffers the loss
of limbs, sight, hearing or speech, paraplegia or paralysis. Full benefits are
payable until the end of the benefit period or for life, regardless whether or not the
person can return to work.
Benefit Payments
The income or payment received by the policy owner is called the benefit. The
amount of benefit that will be received will be determined by reviewing all the
sources of income of the applicant. Income that is directly attributed to being
actively at work is the basis for the calculation. You will learn more about the
amount of benefit in the next chapter, as you determine how much insurance a
client should carry.
Elimination Period
The elimination period is a waiting period between disability and benefits. It is a
period of self-insurance, in which the insured retains the risk of disability.
“I eliminated coverage
for the first two
months of disability to
help reduce premiums.
My first benefit cheque
will be received at the
end of month three,
because disability
benefits are always
paid a month in
arrears.”
Qualification Period
A disability income policy with a residual definition may specify a period of time
after the accident or illness during which the insured must be totally disabled. This
period of time is called the qualification period. On completion of this period,
residual (or partial) benefits will then be available.
Usually policies issued to the top occupational classes do not have a qualification
period. The requirement for total disability to precede residual benefits may be
eliminated by a zero-day qualifying period rider. This is a rider attached to the
policy that reduces the qualification period to zero days of total disability before
partial benefits begin.
The qualification period is not the same as the elimination period or waiting
period. The elimination period is the period between disability and benefits; the
qualification period is the period between total disability and residual benefits.
Benefit Period
The benefit period is the length of time an income will be received; the longer the
benefit period, the higher the premiums. The most common benefit periods are
one year, two years, five years, or to age 65.
The top occupational classifications have the longest benefit periods (e.g., up to
age 65) while those at the bottom of the scale will have benefit periods restricted
to years or months.
An individual short-term disability policy has a benefit period of two years or less.
Some policies may have a benefit period of five years. An individual long-term
disability policy is one with a benefit period of five years or longer that begins
after the short-term disability or government benefits end, and traditionally
continues until age 65.
The premium may also be adjusted if the occupational classification of the insured
changes. The benefit period of the additional income will be the same as the
original policy.
WATCH
Riders: Future The future purchase option is available only as a rider to a policy and must be
Purchase
Option Rider
exercised before the insured is 50 years of age.
This rider is essential for a young policy owner; if the policy owner is disabled for
life at a young age, the purchasing power of the benefit would be greatly
diminished as the years progressed in the absence of a COLA rider.
“I have a disability
income policy to ensure
there will be an income
available for my family
if I become sick or
injured. My COLA
option means that,
even if I make a claim
in ten years, the
benefit will have kept
pace with inflation.”
The waiver of premium benefit with a disability income policy usually begins
within one to six months of disability; in other words, if the waiting period is three
months, premiums will be paid by the insured for three months and no longer.
Also, the premiums paid during this time may be returned, if the rider is structured
do so.
Rehabilitation Benefit
The rehabilitation benefit will cover the cost of any retraining or rehabilitation that
is not covered by other programs, such as those provided by the government. Its
Zero-Day Qualifying: Removes the requirement for total disability to occur before
residual benefits can be paid.
First-Day Hospital Coverage: Pays benefits from the first day of disability, when
the insured is confined to hospital.
Accidental Death and Dismemberment (AD&D): Just like the AD&D rider to a
life policy, the AD&D rider to a disability income policy pays a lump sum for
accidental death and all or part of that sum for dismemberment (loss of limb,
sight, etc.), depending on the loss.
Travel Assistance
In case of emergencies, when a person is travelling outside Canada, this policy
pays for health-care services required outside Canada that are not paid for by
provincial plans.
A basic travel assistance policy will cover hospital and medical costs incurred
while travelling outside Canada, repatriation (the cost of moving back to Canada if
the insured is totally disabled or returning his or her remains if death occurs
abroad), transfers to hospitals, any required travel by family members or
companions accompanying the insured, and assistance, such as translation
services. An enhanced policy can include almost all qualified costs of accident or
sickness.
Prescription Drugs
+ FILE This policy can pay some or all of the costs of prescription drugs via:
A reimbursement plan in which the insured pays for the drugs and is
See file 19
for a case study on reimbursed by the insurer;
the use of an A&S A pay direct plan in which the insured is provided with a drug insurance
policy.
plan card to pay for the drugs, and the pharmacy bills the insurer directly.
Dental Plans
Dental plans most commonly provide coverage for:
Basic preventative service: Examinations, consultations, X-rays,
diagnostic procedures, polishing, fillings, and anesthesia for any
preventative service;
Endodontics: Root-canal work, gum-disease treatment, and major
surgery;
Restorative services: Crowns and inlays, fixed bridgework, and
maintenance and replacement of appliances;
Orthodontics: Braces, usually for dependent children only;
Periodontic service: Dealing with teeth, bones, and gums; major surgeries
Prosthodontic service: To replace missing teeth with dentures, bridges,
crowns, caps, or veneers.
All dental-insurance
plans start by providing
preventative services,
such as semi-annual
check-ups, before
providing any other type
of service.
This is the only type of A&S policy in which a beneficiary will be designated. The
beneficiary will receive the lump-sum payment on the death of the insured.
Critical illness policies are most commonly used to remove the financial burden
once the insured becomes critically ill and is unable to work. In this context, it will
be used to provide the necessities of life, not to fulfil an item on the dream list.
The policy differs from life insurance in that the benefit is paid directly to the
insured. Unlike disability insurance, there is no requirement for earned income.
A CI policy is available for purchase up to age 65. Children may be covered, and
typically are added as a rider to the parent’s CI policy. Children are most often
insured for conditions associated with the young, such as cystic fibrosis.
All policies cover the top four health conditions: heart attack, cancer, stroke, and
heart bypass surgery. Thereafter, up to 23 other illnesses and conditions can be
covered. However, there will be differences between insurers on the definitions of
the illness covered, and the definition must be satisfied or the insured will be
unable to make a successful claim.
Cancer is an excellent case in point. Many people diagnosed with many types of
cancer recover, yet there are others that are terminal. Therefore, the coverage for
cancer in the policy must list the types of cancer covered, and the impact the
cancer must have on the insured before a benefit is paid. It would be tragic for an
insured to suffer a type of cancer not covered in the policy and find that his or her
CI policy would not make the anticipated payment.
Thus, very specific definitions of the nature and scope of conditions covered will
demand a higher premium than definitions that are vague and less likely to be
satisfied when a condition occurs.
Here are some examples of how the top four conditions will have to be satisfied:
Heart Attack:
An acute episode of heart disease due to insufficient blood supply to the heart
muscle, especially when caused by a coronary thrombosis or coronary occlusion.
Therefore, it is clear that the heart muscle must be affected for a claim to be
successful.
Cancer:
A malignant tumour of potentially unlimited growth that expands locally by
invasion and systematically by metastasis. However, some cancers are readily
treatable and even cancers such as breast cancer or prostate cancer, are not
necessarily fatal. There could be a delay before payment is made while the
severity of the cancer and the prognosis for the patient is determined.
Stroke:
A sudden diminution or loss of consciousness, sensation, and voluntary motion, WATCH
caused by a rupture or an obstruction of an artery of the brain by a blood clot.
A&S
Strokes have many degrees of severity; and critical illness would have to be Insurance:
Critical Illness
established for a claim. Insurance
Other Conditions:
Policies can be structured to provide benefits for the following conditions:
Blindness;
Deafness;
Kidney failure;
Major organ transplants;
Multiple sclerosis;;
Paralysis
Coma;
Others particular to each insurer.
All CI policies cover specific health conditions with the exception of:
A Cancer
B Heart attack
C Stroke
D HIV/AIDS
A long-term care policy can provide peace of mind by assuring that necessary care
can be afforded and will be provided.
Benefits
After an elimination period (ranging from zero days to 180 days), benefits for
long-term care insurance are paid weekly or monthly. Benefits are payable if there
is:
Cognitive impairment: an inability to think, perceive, reason, or
ADLs
remember; Activities of Daily
Inability to perform, unaided, two of the five activities of daily living Living or ADLs
include bathing,
(called ADLs): bathing, eating, dressing, toileting, or transferring eating, dressing,
toileting, and
positions of the body. Some policies include a sixth condition which is transferring
incontinence (lack of bladder control), in which case they have to have positions of the
body. The inability
two of the six conditions. to perform any two
of these activities
qualifies the insured
The length of the benefit period ranges from three years to life. for the long-term
care benefit.
Terms
The policy is guaranteed renewable and premiums are level for the duration of the
policy, including renewal periods. The insured must be between the ages of 31 and
Rescission period
80 (depending on the insurer); premiums become expensive with age, so the Insurance policies
policy should be taken out well before it may be needed. There is a 10-day provide a 10-day
period after the
rescission period. policy is delivered,
in which the
policyholder can
Riders are available for inflation protection, waiver of premium, and return of change his or her
mind, cancel the
premium. policy, and receive
back any money
that has been paid.
Limitations
After the rescission
Benefits will not be paid when there is a pre-existing condition, unless care begins period ends, the
at least six months after the policy’s effective date. policy can be
discontinued at any
time by not paying
the premiums, in
Impairment does not other words the
need to be physical for policy will lapse, but
the benefit to be money will not be
received from a long- refunded.
term care policy.
Cognitive impairment,
such as a loss of
memory, would be WATCH
reason enough for a
benefit to be paid. A&S
Insurance:
Long-term
Care
Insurance