Insurance and Risk Management

Question 1

What are four methods for managing risk?

Answer 1

1. Loss control - loss avoidance/prevention/reduction.
2. Risk transfer - shift cost of potential loss (insurance).
3. Risk financing - accepting cost of risk should it happen (putting money aside).
4. Shortfall risk - risk of not meeting a specified target.

Question 2

What are 5 steps to personal risk management?

Answer 2

1. Identify risk.
2. Evaluate risk.
3. Control risk.
4. Finance and management of risk.
5. Monitor and revise risk management plan.

Question 3

What is true of deductibles for insurance (think car insurance)?

Answer 3

1. Insured is responsible for any losses up to a certain limit in return for a lower premium. Higher loss coverage = lower premium.

Question 4

What are 5 fundamentals of Group Insurance?

Answer 4

1. Employee (EE) works actively full-time.
2. EE cannot determine amount of coverage.
3. EE contributions made through payroll deductions.
4. ER must contribute, usually 50%.
5. Must have enough people in group.

Question 5

What is a Private Health Services Plan (PHSP)?

Answer 5

1. Alternative to traditional health insurance.
2. Used by small businesses and self-employed.
3. Must cover at least 50% of employees.
4. 100% tax-free to employees.
5. Provides cost control to ER and flexibility to EE.

Question 6

What is Workers’ Compensation?

Answer 6

1. Provides benefit for injury sustained at work (e.g. WSIB in ON).
2. Benefit can replace 85% of after-tax income up to $6,000/month.

Question 7

What are the 3 types of occupation disability policies?

Answer 7

1. Own - Most common, preferred, expensive. Considered disabled as long as insured is unable to perform duties at work, even if they could at another job.
2. Regular - Like Own, but provides benefits if insured is not working another job.
3. Any - Most restrictive. After 2 years of benefits, if you can work any job the insured can stop paying benefits.

Question 8

What are some common disability benefit provisions?

Answer 8

1. Presumptive - receive full benefits if totally disabled (e.g. loss of speech, hearing, sight or two limbs).
2. Residual - receive reduced benefits while returning to work part-time.
3. Partial - unable to perform duties of job at least half of the time.
4. Recurrent - Receive benefits for second time off work due to same injury from previous claim.

Question 9

1. In determining the amount of life insurance, what should advisors focus on?

Answer 9

1. Last expenses - Medical bills, funeral costs, taxes, etc.
2. Mortgage, education, emergency funds.
3. Income for survivours - support kids, spouse.

Question 10

What are the types of life insurance contracts?

Answer 10

1. Two-party.
2. Third-party.
3. Group.

Question 11

What are 8 policy riders for life insurance?

Answer 11

1. Waiver of premium - premium waived if insured becomes disabled.
2. Level term rider - term insurance added to whole life policy.
3. Family coverage - insurance added on life of dependent.
4. Child term rider - insurance for policyholder’s children.
5. Spousal term rider - insurance for spouse left caring for kids.
6. Accidental death benefit - coverage paid if death is accidental.
7. Guaranteed insurability - add insurance periodically without proving insurability.
8. Cost of living rider - purchase 1-year term insurance equal to increase in cost of living.

Question 12

How does the cash value build in a permanent/whole life insurance policy?

Answer 12

1. Portion of premium goes to policy reserve (aka cash value).
2. Can be used to buy annuity when LI is no longer required.

Question 13

Who is suitable for whole life insurance?

Answer 13

1. People with high incomes who have maxed out tax-deferred accounts.
2. If you have a disabled dependent who needs care after you die.
3. Good for individuals who want to leave an estate.

Question 14

What is the difference between cash value and cash surrender value?

Answer 14

1. Cash value = sum of money building inside policy.
2. CSV = cash value - surrender charges - policy indebtedness.
3. Different is usually the charges associated with early termination of policy.

Question 15

What is the criteria to be eligible for critical illness?

Answer 15

1. Between age 18-65.
2. Haven’t been diagnosed with a CI previously.
3. Note: family history doesn’t impact eligibility, but can result in higher premium.

Question 16

What is critical illness insurance?

Answer 16

1. Pays out one-time lump sum benefit if you survive (at least 30 days) any illness or health condition listed in policy.

Question 17

What is the main benefit of group insurance?

Answer 17

1. Obtain coverage for all without evidence of insurability.

Question 18

What is a policy loan?

Answer 18

1. If you have a sizable cash value, you can choose to take out a loan against your policy.
2. Interest rates are lower than traditional bank loans.
3. Not obligated to replay loan since you’re borrowing from yourself.

Question 19

When does taking out a policy loan make sense?

Answer 19

1. Cannot qualify for standard loan or need cash fast.
2. Cannot afford policy’s annual premiums - keeps policy in effect.
3. Other loan options have higher interest rates.

Question 20

What does OSFI do?

Answer 20

1. Monitors solvency of insurance companies and dictates minimum capital and surplus requirements.

Question 21

When are annuities worth considering?

Answer 21

1. Current retirement income is too low.
2. Annuity can increase income, but you give up principal.

Question 22

What is a straight life annuity?

Answer 22

1. Provides guaranteed monthly/annual income until purchaser dies.
2. Provides most guaranteed income per dollar of premium paid because payments stop upon death, no residual payments.

Question 23

Who is a straight life annuity suitable for?

Answer 23

1. Someone with no dependents.
2. Wishes to receive highest payout.
3. Not concerned with leaving an estate.

Question 24

What is a joint life annuity?

Answer 24

1. Payments made as long as one spouse is alive.
2. Payments can remain the same or be reduced upon death of one spouse.

Question 25

What is a fixed-term (term-certain) annuity?

Answer 25

1. If annuitant dies before term ends, the estate/bene received unpaid balance of annuity as lump sum or installments.

Question 26

What is an integrated annuity?

Answer 26

1. Offered to early retirees to bridge the income gap until they receive benefits from OAS and CPP.

Question 27

How do you calculate the present value of an annuity?

Answer 27

1. PVa = [1 - (1 + r)^-n] / r

Question 28

What are the unique features of segregated funds?

Answer 28

1. Maturity guarantees (usually 75% after 10-year holding period or 100%). 2. Death benefits. 3. Creditor protection.

Question 29

What are the 3 types of guarantees?

Answer 29

1. Deposit-based - each deposit gets its own guarantee amount and maturity date. 2. Yearly policy-based - groups all deposits from each year and gives them same maturity date (simplicity). 3. Policy-based - bases all guarantees on date policy was first issued (most generous).

Question 30

Who does the reset date for maturity guarantees benefit?

Answer 30

1. The contract holder: - in rising markets, holder can lock in gains. - in falling markets, holder is protected by guarantee based on previous highs.

Question 31

How are top-up amounts taxed on segregated funds at maturity or at death?

Answer 31

1. At maturity: - Non-registered plan - taxable as capital gain. - Registered plan - not taxable at deposit, but included on T4RSP when withdrawn. 2. At death: - Non-registered - same treatment as at maturity. - Registered - not taxable at deposit, but included on T4RSP and estate/spouse are taxed when withdrawn.

Question 32

What are Guaranteed Minimum Withdrawal Benefits (GMWB)?

Answer 32

1. Provides steady stream of retirement income each year, regardless of market condition. 2. Has maximum annual withdrawals limits until initial deposit recouped over minimum 20-year period. 3. (e.g. $100,000 annuity with 5% GMWB rider. If markets decline and annuity is now valued at $75,000, you can still count on withdrawing $5,000 (5% of $100,000, not $75,000).

Question 33

What is the maximum amount that can be withdrawn from the cash value as a policy loan?

Answer 33

1. 90% of the cash value.

Question 34

What is the tax implication of a parent transferring ownership of a life insurance policy to their child (who is the life insured)?

Answer 34

1. Not taxable, transferred at ACB.

Question 35

What are 4 risk management issues that business owners can potentially face?

Answer 35

1. Key persons that are vitally to operation of business dying/leaving. 2. Minimum insurance to cover business assets/liabilities in case of potential losses. 3. Bull-sell agreement in place in case of death of owner/partner. 4. Use of segregated funds to invest while offering creditor protection.

Question 36

What are 4 health-related risk management issues that individuals can pursue?

Answer 36

1. Medical insurance/coverage if not available via employer. 2. LTC insurance 3. Life insurance (term/permanent). 4. CI insurance.

Question 37

When is the bank loan interest tax deductible from an insurance policy?

Answer 37

1. Only when the loan was used to earn investment/business income.

Question 38

When is it appropriate to obtain a Business Overhead Disability insurance policy?

Answer 38

1. To cover for potential staff payroll and office expenses that a business owner might incur.