CHAPTER 2 (Insurance Policy Provisions)

Question 1

Chapter 2 - INSURANCE POLICY PROVISIONS

When a life insurance company enters into a contract of insurance, it issues…

Answer 1

When a life insurance company enters into a contract of insurance, it issues a “policy.”

The policy and all amendments are generally also referred to as the insurance contract.

Question 2

What are other kinds of policies or products marketed by life insurance companies but do not resemble traditional life insurance policies?

Answer 2

• Annuities;
• Segregated funds (individual variable insurance policy (IVIC));
• Registered retirement products;
• Pension products.

Question 3

Individual life insurance contracts are entered into between two parties, what are they?

Answer 3

• Insurer;
• Policyholder (also known as the insured)

[Ref.2.1]

Question 4

Ethics Terminology

Successor policyholder

Answer 4

The identity of the new owner; when the ownership of the policy is transferred to the new owner.

Also Known as contingent policyholder, successor-owner or subrogated owner.

Question 5

Ethics Terminology

Beneficiary

Answer 5

A person to whom or for whose benefit insurance money is payable.

Question 6

Who are the preferred beneficiaries in a life insurance contract?

Answer 6

• Spouse (including the common law spouse);
• Child;
• Grandchild;
• Parent of the life insured.

These certain individuals are commonly known as “protected” or “family class” beneficiaries.

[Ref. 2.1.4]

Question 7

Ethics Terminology

Irrevocable beneficiary

Answer 7

A beneficiary with guaranteed benefits who gives consent and authorization of policy modifications.

Question 8

TRUE OR FALSE?

The designation of an irrevocable beneficiary, does not render the policy exemption from execution of judgment and seizure.

Answer 8

FALSE

The designation of an irrevocable beneficiary, even though not of the “preferred beneficiary class,” also renders the policy exempt from execution of judgment and seizure.

[Ref.2.1.4.1]

Question 9

Ethics Terminology

Contingent Beneficiary

Answer 9

A secondary beneficiary, to address the possibility that the primary beneficiary might die before the life insured.

Question 10

TRUE OR FALSE?

Insurance companies also offer group insurance policies, insuring the lives or health of a defined pool of individuals (and often their spouses and dependents) under one policy.

Answer 10

TRUE

Question 11

Ethics Terminology

Plan Sponsor

Answer 11

The employer, or a union, or professional association, or some other entity representing a group plan policy

The sponsor (group insured, or group policyholder) enters into the master contract/policy with the insurer.

Question 12

TRUE OR FALSE?

Under group policies, the person or member whose life is insured is known as the Beneficiary.

Answer 12

FALSE

Under group policies, the person or member whose life is insured is known as the “group life insured.”

[Ref. 2.1.5.3]

Question 13

TRUE OR FALSE?

Coverage in group plans may also include spouses, and children typically further defined by age or financial dependency, but don’t include educational status (as fulltime students).

Answer 13

FALSE

Coverage may also include spouses, and children typically further defined by age or financial dependency, or educational status (as fulltime students).

[Ref. 2.1.5.3]

Question 14

TRUE OR FALSE?

Many group plans offer the ability to apply for “optional” increased insurance coverage, which is not subject to individual underwriting.

Answer 14

FALSE

Many plans offer the ability to apply for “optional” increased insurance coverage, which is subject to individual underwriting.

[Ref. 2.1.5.3]

Question 15

What are two reasons why memberships in group plans are mandatory?

Answer 15

1. So that the insurer can count on a relatively constant number of lives, upon which the premiums may be calculated.
2. To prevent the “anti-selection” of the risks.

Question 16

The group life insured may designate beneficiaries to receive the insurance benefit for which they are the life insured.

Answer 16

TRUE

Question 17

The process of forming any contract is often described as having two steps, what are they?

Answer 17

1. Offer
2. Acceptance

Question 18

With an insurance contract, the concept of offer and acceptance is unique, Explain how?

Answer 18

Under the law of the Canadian common law jurisdictions, it is the insurer’s tender of the policy which constitutes the “offer”, and the “acceptance” that takes place only when the applicant decides to take (receive) the policy.

Question 19

life insurance policies have several additional requirements before they are considered to be valid and in effect. Name some of the requirements. (name at least three)

Answer 19

• Application for insurance and representation of risk;
• Temporary or conditional insurance coverage;
• Changes in insurability;
• Acceptance of application by insurer;
• Payment of initial premium;
• Delivery of policy

[Ref. 2.2.1]

Question 20

TRUE OR FALSE?

An applicant may be able to obtain temporary coverage during the underwriting process.

If he can answer “yes” to three or four temporary insurance questions confirming his good health and that he has not been in hospital or ill, this separate insurance agreement can provide limited insurance coverage, typically for 120 days.

Answer 20

An applicant may be able to obtain temporary coverage during the underwriting process.

If he can answer “no” to three or four temporary insurance questions confirming his good health and that he has not been in hospital or ill, this separate insurance agreement can provide limited insurance coverage, typically for 90 days.

[Ref. 2.2.1.2]

Question 21

TRUE OR FALSE?

The amount of temporary insurance coverage available varies between insurers, but is typically set as 85% of the face amount being applied for. Maximum limits are not required.

Answer 21

FALSE

The amount of temporary insurance coverage available varies between insurers, but is typically set as the lesser of the face amount being applied for, or a maximum limit set by the insurer.

[Ref. 2.2.1.2]

Question 22

TRUE OR FALSE?

If there has been a change in insurability between application and policy delivery, the policy can still take effect, even if it was delivered and the first premium taken.

Answer 22

FALSE

If there has been a change in insurability between application and policy delivery, the policy does not take effect, even if it was delivered and the first premium taken.

[Ref. 2.2.1.3]

Question 23

TRUE OR FALSE?

Change in insurability between application and policy delivery means the risk disclosed in the application and underwritten by the insurance company is different than the actual risk present at the time the policy is delivered to the policyholder.

Answer 23

TRUE

Question 24

In regards to the application and delivery process, the policy is not in force until all delivery requirements have been obtained and the first premium paid.

Answer 24

TRUE

Question 25

A policy may be **annulled** or cancelled either **voluntarily** by the owner or for limited **specific reasons** by the insurer. Name three reasons.

Answer 25

- Rescission: 10-day-free look - Surrender - Expiry or termination

Question 26

*TRUE OR FALSE?* In regards to life insurance policies and According to Canadian Life and Health Insurance Association (CLHIA), policyholder can rescind an insurance contract within 7 days of signing it or accepting delivery of the policy, without penalty and with a reimbursement of the premiums paid.

Answer 26

FALSE According to Canadian Life and Health Insurance Association (CLHIA), policyholder can rescind an insurance contract within **10 days** of signing it or accepting delivery of the policy, without penalty and with a reimbursement of the premiums paid. *For **individual annuity contracts relating to segregated funds** there is also a **2-business-days** rescission right under CLHIA’s Guideline G2* | [Ref 2.3.1]

Question 27

*TRUE OR FALSE?* Individual life policies are referred to as “unilateral” contracts, in that the individual policyholder can always cancel the policy at any time

Answer 27

TRUE

Question 28

*TRUE OR FALSE?* Guaranteed renewable and convertible term policies have age limits. They cannot be renewed after a specified age, and they also cannot be converted to permanent insurance after a specified age.

Answer 28

TRUE

Question 29

Life insurance policies can be cancelled by the insurer before their coverage expires. What are three possible reasons?

Answer 29

1. Termination for fraud, 2. misrepresentation or concealment; 3. Termination for non-payment *(Accident & sickness insurance premiums, and Life insurance)*

Question 30

An applicant for insurance and/or the proposed insured person *(if they are not the same person)* commit insurance fraud when they do one of the following...

Answer 30

- Make a deliberate misstatement; - Deliberately omit to inform the insurer of a material fact; - Obtain insurance for which the policyholder or insured person does not qualify.

Question 31

*TRUE OR FALSE?* In regards to insurance, when fraud is involved, the incontestability period can apply unless the Canadian Life and Health Insurance Association (CLHIA) guidelines approves the fraudulent act.

Answer 31

FALSE In regards to insurance, when fraud is involved, the incontestability period does **not** apply. | [Ref 2.4.1]

Question 32

*TRUE OR FALSE?* If a mistake in age was somehow not discovered until the policy was already in force, including because the applicant lied, the different Insurance Acts contains statutory protection against termination for misstatement of age. The insurer would be entitled to cancel the contract without any coverage adjustments.

Answer 32

FALSE If a mistake in age was somehow not discovered until the policy was already in force, including because the applicant lied, the different Insurance Acts contains statutory protection against termination for misstatement of age. The insurer would be entitled to **amend the contract and adjust the coverage to match premiums paid** *(unless contractual age limits for policy coverage issued would be violated, in which case termination could be effected)*, or **adjust the premiums to the correct amount for the true age** If the applicant misrepresents some factual information, the insurer would be entitled to adjust the proposed coverage to that which the premium would have acquired if the truth had been known. | [Ref 2.4.1.1]

Question 33

*TRUE OR FALSE?* During the contestability period, If a misrepresentation or concealment other than age that is in good faith is discovered during the first two years of the policy, the insurer would have the option of cancelling the policy.

Answer 33

TRUE

Question 34

# *Ethics Terminology* Incontestability Period

Answer 34

Once the policy has been in force for two years, the insurer can only cancel it based on a fraudulent misrepresentation or concealment.

Question 35

# *Ethics Terminology* Insurance Fraud

Answer 35

- Also known as intentional deception - an attempt to get insurance that would otherwise not be offered, or to acquire it on better terms than the applicant was entitled to on a true statement of the facts.

Question 36

*TRUE OR FALSE?* In regards to non-payment of *accident & sickness insurance* premiums, the notice of termination from the insurer will take effect and the coverage will end after 7 business days written notice measured from the day after it is mailed.

Answer 36

FALSE In regards to non-payment, of *accident & sickness insurance* premiums, the notice of termination will take effect and the coverage will end after **10 days** written notice measured from the day after it is mailed. | [Ref. 2.4.2]

Question 37

*TRUE OR FALSE?* If life insurance policy premiums are not paid in a timely fashion, any term life policy or permanent life policy with no cash values will also terminate without any grace period

Answer 37

FALSE If life insurance policy premiums are not paid in a timely fashion, any term life policy or permanent life policy with no cash values will also terminate, subject to a **30 days grace period** | [Ref. 2.4.3]

Question 38

Cancellation of policy is not final. **The insurer** is obliged to reinstate the individual life insurance under some following conditions, what are they?

Answer 38

- The client applies for the reinstatement within **two years** of the date of the cancellation; and - The insurer determines that the insured still meets the insurability conditions of the cancelled contract

Question 39

# *Ethics Terminology* Absolute Assignment

Answer 39

The transfer of ownership of the policy.

Question 40

*TRUE OR FALSE?* A change in ownership is a disposition for tax purposes, and may result in taxable gains for the assignor.

Answer 40

TRUE

Question 41

*TRUE OR FALSE?* In an absolute assignment, the person who becomes the new owner, has all the rights of the original policyholder *(the assignee)*, except the right to designate a new beneficiary or to withdraw money from the policy.

Answer 41

FALSE The person who becomes the new owner, the absolute assignee, has all the rights of the original policyholder *(the assignee)*, **including** the right to designate a new beneficiary or to withdraw money from the policy. | [Ref .2.5.1]

Question 42

# *Ethics Terminology* Collateral Assignment

Answer 42

The policyholder **assigns ownership** of the policy to the lender, but only as collateral which **restricts** the policyholder from doing anything with their policy that could affect the value of the security. *When the loan is paid, the collateral assignee releases their right to the policy and full ownership reverts to the original policyholder.*

Question 43

*TRUE OR FALSE?* Some insurance policies entitle the policyholder to receive an advance payment of a portion of the death benefit if the person whose life is insured is diagnosed with a terminal illness and has only a short time to live.

Answer 43

TRUE

Question 44

Some kinds of permanent insurance provide for the buildup of cash values. If the policy is cancelled by the policyholder, the **amount** that they will **receive in cash** is called...

Answer 44

If the policy is cancelled by the policyholder, the amount that they will receive in cash is called the **cash surrender value (CSV)**.

Question 45

*TRUE OR FALSE?* An insurance policy loan has limits created by the taxation of life policy transactions. If too much money is borrowed on an insurance policy, the policy can lapse or be terminated.

Answer 45

FALSE An insurance policy loan has limits created by the taxation of life policy transactions. If too much money is borrowed on an insurance policy, it can **trigger policy gains taxable as income to the policyholder**. | [Ref .2.5.1]

Question 46

*TRUE OR FALSE?* When a third party lender takes a collateral assignment of a policy as security, there is no limit on the size of the loan apart from those established by the lender’s loan underwriting criteria.

Answer 46

TRUE - *If granted, the size of the loan will usually be a percentage of the value of the CSV.*

Question 47

With the agreement of the insurer, an insurance policy may have additional coverages added to it through documents sometimes called...

Answer 47

With the agreement of the insurer, an insurance policy may have additional coverages added to it through documents sometimes called “**riders**,” more commonly now referred to as “**additional**” or **"attached” benefits.**

Question 48

*FILL IN THE BLANK!* Group insurance means a type of insurance in which a single insurance policy, sometimes called ________ covers specified people who can be called_________, and their eligible dependents, against a specific risk or risks

Answer 48

Group insurance means a type of insurance in which a single insurance policy, sometimes called **a “master policy,”** covers specified people who can be called **plan members (or participants)**, and their eligible dependents, against a specific risk or risks. | [Ref.2.6.2]

Question 49

*FILL IN THE BLANK!* The plan sponsor, called the _________ *(or in legislation called the__________)*, is the entity that contracts with the insurer.

Answer 49

The plan sponsor, called the **group policyholder** *(or in legislation called the **group insured**)*, is the entity that contracts with the insurer.

Question 50

*TRUE OR FALSE?* When the group policyholder is an employer, the employer is responsible for paying the premiums owed to the insurer *(even though the cost sharing might be 50% by the employer and 50% by the employee)*

Answer 50

TRUE

Question 51

Group plans can cover a wide array of benefits, including...

Answer 51

- Life insurance; - Accidental death and dismemberment insurance; - Short term disability and long term disability plans (income replacement); - Critical illness coverage; - Health care and dental care.

Question 52

# *Ethics Terminology* Administrative services only (ASO)

Answer 52

When the plan sponsor of a group plan choose to **hire an insurer** to process, adjudicate and administer claims and payments on their behalf. In that case, the insurer does not fund benefit payments.

Question 53

*TRUE OR FALSE?* When a group insured person leaves the group, he has *(if under 65)* a group conversion privilege to convert his group life insurance policy into an Individual Variable Insurance Contract. This right must be exercised within 60 days after the date of termination of the plan member’s life coverage under the group insurance contract.

Answer 53

FALSE When a group insured person leaves the group, he has *(if under 65)* a group conversion privilege to convert his group life insurance policy into an **Individual insurance policy** *(without having to undergo any underwriting)*. This right must be exercised within **31 days** after the date of termination of the plan member’s life coverage under the group insurance contract. | [Ref. 2.6.2.6]

Question 54

*FILL IN THE BLANK!* In regards to individual disability Insurance, there is an optional increase that permits the policyholder to increase coverage to keep pace with increases in income. It is typically called__________ .

Answer 54

In regards to individual disability Insurance, there is an optional increase that permits the policyholder to increase coverage to keep pace with increases in income. It is typically called a **“future income option” (FIO).**

Question 55

*TRUE OR FALSE?* In regards to Critical Illness, If the person is diagnosed with a covered critical illness and survives for a period of usually 30 days, the insurer pays a monthly benefit amount.

Answer 55

FALSE In regards to Critical Illness, If the person is diagnosed with a covered critical illness and survives for a period of usually 30 days, the insurer pays a **lump sum amount.**

Question 56

All **disability and long-term care** insurance plans in Canada have a specific wait period before benefits are payable. Waiting periods are usually...

Answer 56

30 days, 90 days, 180 days or longer.

Question 57

# *Ethics Terminology* Annuities

Answer 57

Annuities are policies issued by insurers or other financial institutions where they agree to pay a fixed amount to a payee over a specified period of time.

Question 58

*TRUE OR FALSE?* Annuity contracts may be used as investments, financial security, tax planning, estate planning but not creditor protection.

Answer 58

FALSE Annuity contracts may be used as investments, financial security, tax planning, estate planning **and/or creditor protection**. | [Ref. 2.6.4]

Question 59

*FILL IN THE BLANK!* In regards to annuities, If the duration of the payments is determined by a person’s life, it is called _________. If the payments are for a defined period of time, it is called a __________or ___________.

Answer 59

If the duration of the payments is determined by a person’s life, it is called a “**life annuity.**” If the payments are for a defined period of time, it is called a “**term certain**” or “**fixed-term annuity**.

Question 60

*TRUE OR FALSE?* Annuities can only be issued as individual annuity contracts.

Answer 60

FALSE Annuities can be issued as **individual or as group annuity contracts**. | [Ref. 2.6.4]

Question 61

Annuities can be purchased as registered contracts *(RRSP, RRIF, TFSA, RRP, DPSP, LIF, LIRA, etc.)*, or as unregistered contracts.

Answer 61

TRUE

Question 62

For all registered annuity contracts *(RRSP, RRIF, LIF, LIRA, DPDP, TFSA, etc.)*, the policyholder, the annuitant *(life insured)* and the payee are always the same person.

Answer 62

TRUE

Question 63

# *Ethics Terminology* Immediate Annuity

Answer 63

Annuities called immediate **or payout annuities** provide that the first payment will begin on the next **defined periodic annuity frequency period**, whether that is **monthly, quarterly, semi-annually** or on the first anniversary date *(annually)*.

Question 64

# *Ethics Terminology* Differed Annuity

Answer 64

An annuity that has an **accumulation of income over time** with payments to start at a later date.

Question 65

*TRUE OR FALSE?* An employer cannot use a group annuity contract with a life insurance company to capitalize a pension fund as well as other registered or unregistered contracts.

Answer 65

FALSE An employer **may use a group annuity contract** with a life insurance company to capitalize a pension fund, a PRPP *(Pooled Registered Pension Plan)*, a group RRSPs, a DPSPs, as well as other registered or unregistered contracts. | [Ref. 2.6.4.6]

Question 66

# *Ethics Terminology* Structured settlements

Answer 66

A structured settlement means that the court awards or the litigants agree to a customized stream of damage payments to be funded through the purchase usually by the defendant or the defendants’ insurer of a structured settlement annuity. *No tax implications on settlement to the plaintiff*

Question 67

# *Ethics Terminology* Segregated Fund

Answer 67

- Also known as an individual variable insurance contract (IVIC) - Annuity contract owned and managed by insurance companies where the premiums are invested which credits values to the policy if the underlying funds grow in value. - *These policies guarantee to pay at least 75% of what the policyholder paid to the plan before age 75, on death or maturity, even if the investments are worth less.*

Question 68

The CLHIA Guideline G2—Individual Variable Insurance Policies Relating to Segregated Funds, establishes industry standards including standards for... *(name at least three)*

Answer 68

- Advertising disclosure; - Pre-sale disclosure requirements; - Policy disclosure, including minimum contractual terms; - Policyholder rights; - Audit and accounting requirements; - Investment disclosure; - Minimum investments standards; - Corporate governance of segregated funds; - Partitioning of assets held in segregated funds; - Closing of segregated funds; and - Fundamental changes to and merger of segregated funds. *Note, however, that segregated funds are also available through group annuity contracts. In that case, CLHIA’s Guideline G2 does not apply and there is no guarantee for segregated funds purchased under a group annuity contract.* | [Ref. 2.6.5]

Question 69

Group annuity contracts are governed by...

Answer 69

**The relevant insurance and income tax legislation**, as well as by **CLHIA’s Guideline** G12 entitled *Capital Accumulation Plans.* | [Ref. 2.6.6]

Question 70

Pension funds capitalized as group annuities contracts are not only governed by the relevant provincial or territorial Insurance and Income Tax Acts but also and primarily by...

Answer 70

The relevant Pension Benefits Act | [Ref. 2.6.6]

Question 71

There is a pension regulator for each province, except...

Answer 71

**Prince Edward Island**, which does not have pension benefits legislation.

Question 72

For Yukon, Northwest Territories and Nunavut as well as businesses that are within the legislative authority of the Parliament of Canada, the pension regulator is...

Answer 72

Office of Superintendent of Financial Institutions (OSFI)

Question 73

There are **two principal types of pension benefits plans** under the relevant pension legislation:

Answer 73

- Defined benefit pension plans (DBPP) - Defined contribution plans (DCPP)

Question 74

# *Ethics Terminology* Defined benefit pension plan (DBPP)

Answer 74

A pension plan where the pensioner’s entitlement is defined based on a formula in relation to income earned during the employment period, and years of service, and not based on the financial performance of the plan.

Question 75

# *Ethics Terminology* Defined contribution pension plan (DCPP)

Answer 75

- A pension plan where benefits are payable and determined by members and/or employer contributions and investment performance within the plan on those contributions. - The employee typically can select the investment choices his funds are invested in from a range of options offered to plan members.

Question 76

# *Ethics Terminology* Pooled registered pension plan (PRPP)

Answer 76

Pension plan for individuals who are self-employed or do not have access to an employer-sponsored pension plan

Question 77

# *Ethics Terminology* Deferred profit-sharing plan (DPSP)

Answer 77

A retirement savings vehicle that permits employers to distribute some of the company’s profits to a plan for the benefit of some or all employees. Only the employer contributes, and the terms and conditions set by the employer can be very flexible. Contributions vest after two years, and can be recovered by employees when they leave employment and transferred to another DPSP, an RRSP or another pension plan.

Question 78

# *Ethics Terminology* Tax-free savings account (TFSA)

Answer 78

Canadian Savings account that limits to how much money can be deposited each year. Unused deposit room is carried forward

Question 79

# *Ethics Terminology* Registered retirement savings plans (RRSP)

Answer 79

An account that has flexibility for unrestricted withdrawal at any time, subject to withholding tax.

Question 80

# *Ethics Terminology* Registered retirement income fund (RRIF)

Answer 80

A retirement income payout plan with the greatest opportunity for income deferral through minimized withdrawals. No withdrawals necessary until age 71. Provides the most flexibility for maximum, unrestricted withdrawals, subject to withholding tax.

Question 81

# *Ethics Terminology* Locked-in retirement account (LIRA)

Answer 81

Another type of registered retirement savings plan containing funds transferred from a pension plan. Plan holders are generally unable to withdraw any amounts before age 55

Question 82

# *Ethics Terminology* Life income fund (LIF)

Answer 82

A type of retirement plan investors may transfer their pension into if they leave a pension plan.

Question 83

In regards to **Statutory Conditions**, The provincial and territorial insurance acts exert considerable control over provisions that are incorporated into life policies. This includes a requirement that all the policy terms and conditions must be set out in full when the policy is issued. What are the documents that constitute the entire agreement between the parties?

Answer 83

- Application; - Policy; - Any document attached to the insurance policy when issued; - Any amendment *(also called rider, endorsement or addendum)* to the policy agreed to in writing after the policy is issued | [Ref 2.6.1.1]