LIFE INSURANCE 1 Flashcards Preview

CFP EXAM > LIFE INSURANCE 1 > Flashcards

Flashcards in LIFE INSURANCE 1 Deck (46):
1

USING LIFE INSURANCE

To calculate the amount of capital required to meet a client's financial needs, you would:

[List 3]

[1] First, prepare an asset inventory, detailing the value of the assets that would form the individual's estate at death.



[2] Second, determine the estate's obligations at death, based on the immediate cash needs at death.



[3] Third, calculate the ongoing income needs of the survivors.

2

NOTES / INSURANCE CONTRACTS

Insurance contracts, unlike other business contracts, are not subject to negotiation and redrafting. The purchaser—the person who makes a contract with an insurer—must accept the entire contract, with all of its terms and conditions. Thus, insurance contracts are considered contracts of adhesion and any ambiguities or uncertainties are normally interpreted by the courts in favour of the purchaser.

NOTES / INSURANCE CONTRACTS

Insurance contracts, unlike other business contracts, are not subject to negotiation and redrafting. The purchaser—the person who makes a contract with an insurer—must accept the entire contract, with all of its terms and conditions. Thus, insurance contracts are considered contracts of adhesion and any ambiguities or uncertainties are normally interpreted by the courts in favour of the purchaser.

3

USING LIFE INSURANCE

A _ _ _ _ is used to estimate the amount of insurance a client will require to meet the immediate and future financial needs of surviving dependants.

A capital needs analysis is used to estimate the amount of insurance a client will require to meet the immediate and future financial needs of surviving dependants.

4

USING LIFE INSURANCE

What financial needs should be considered when estimating replacement income?

[List 6]

[1] Final Expenses
[2] Mortgage
[3] Education Funds
[4] Emergency Funds
[5] Income for Survivors
[6] Special Bequests

5

USING LIFE INSURANCE

The most common use of life insurance is to replace the income stream lost to a family if a member dies. However, life insurance has several other business and personal applications, which include:

[List 4]

[1] Buy-sell agreements

[2] Key person insurance

[3] Income taxes on RRSPs/RRIFs at death

[4] Income taxes on the family cottage

6

NOTES / BUY-SELL AGREEMENT

[1] Buy-sell agreements are useful if two or more individuals share the ownership of a private corporation.

[2] The buy-sell agreement provides for the orderly transfer of shares from one shareholder to another, in the event of premature death, disability, retirement, or disagreement among shareholders.

[3] If a buy-sell agreement is set up and one shareholder dies, the surviving shareholder(s) purchases all the shares of the deceased at a specified price.

NOTES / BUY-SELL AGREEMENT

[1] Buy-sell agreements are useful if two or more individuals share the ownership of a private corporation.

[2] The buy-sell agreement provides for the orderly transfer of shares from one shareholder to another, in the event of premature death, disability, retirement, or disagreement among shareholders.

[3] If a buy-sell agreement is set up and one shareholder dies, the surviving shareholder(s) purchases all the shares of the deceased at a specified price.

7

USING LIFE INSURANCE

An arrangement should be made for funding the share purchase. Life insurance is usually the most cost-effective way to ensure that the funds are available when needed. A _ _ _ _ _ownership approach is frequently used.

USING LIFE INSURANCE

An arrangement should be made for funding the share purchase. Life insurance is usually the most cost-effective way to ensure that the funds are available when needed. A CRISS-CROSS ownership approach is frequently used.

8

NOTES / INSURING AGREEMENT

Insuring agreement - describes the covered perils, or risks assumed, or nature of coverage, or makes some reference to the contractual agreement between insurer and insured. It summarizes the major promises of the insurance company, as well as stating what is covered.

NOTES / INSURING AGREEMENT

Insuring agreement - describes the covered perils, or risks assumed, or nature of coverage, or makes some reference to the contractual agreement between insurer and insured. It summarizes the major promises of the insurance company, as well as stating what is covered.

9

USING LIFE INSURANCE

Key person insurance is a life insurance policy taken out by a business on the life of _ _ _ _

USING LIFE INSURANCE


Key person insurance is a life insurance policy taken out by a business on the life of the KEY EMPLOYEE

10

NOTES / How can life insurance be used to pay income taxes on RRSPs/RRIFs at death?



[1] Large amounts of tax may be payable on the funds within an RRSP/RRIF when a surviving spouse dies. 



[2] When the first spouse dies, the deceased's RRSPs/RRIFs can be transferred to the RRSP/ RRIF of the surviving spouse with no tax consequences (as long as the surviving spouse is the named beneficiary). 



[3] However, when the surviving spouse dies, the total value of these plans is considered income in the year of death and can result in a large amount of tax payable.



[4] One option is to take out an estate-protector type of life insurance policy. It can be designed so that when the first spouse dies, further premiums are waived. 



[5] The policy pays a death benefit equal to the approximate amount of taxes due at the death of the surviving spouse. The death benefit from the life insurance policy can be used to pay the final income taxes, and the full balance in RRSPs/RRIFs can pass on to the heirs.

NOTES / How can life insurance be used to pay income taxes on RRSPs/RRIFs at death?



[1] Large amounts of tax may be payable on the funds within an RRSP/RRIF when a surviving spouse dies. 



[2] When the first spouse dies, the deceased's RRSPs/RRIFs can be transferred to the RRSP/ RRIF of the surviving spouse with no tax consequences (as long as the surviving spouse is the named beneficiary). 



[3] However, when the surviving spouse dies, the total value of these plans is considered income in the year of death and can result in a large amount of tax payable.



[4] One option is to take out an estate-protector type of life insurance policy. It can be designed so that when the first spouse dies, further premiums are waived. 



[5] The policy pays a death benefit equal to the approximate amount of taxes due at the death of the surviving spouse. The death benefit from the life insurance policy can be used to pay the final income taxes, and the full balance in RRSPs/RRIFs can pass on to the heirs.

11

INSURANCE CONTRACTS

In the common-law provinces the contents of a life insurance policy are specified in the _ _ _ _ Act.

INSURANCE CONTRACTS


In the common-law provinces the contents of a life insurance policy are specified in the Uniform Life Insurance Act.​

12

INSURANCE CONTRACTS

TRUE OR FALSE?

Insurance contracts, unlike other business contracts, are not subject to negotiation and redrafting.

ANSWER: True

13

INSURANCE CONTRACTS

Insurance contracts are considered contracts of _ _ _ and any ambiguities or uncertainties are normally interpreted by the courts in favour of the purchaser.

INSURANCE CONTRACTS

Insurance contracts are considered contracts of adhesion and any ambiguities or uncertainties are normally interpreted by the courts in favour of the purchaser.

14

INSURANCE CONTRACTS

What are the five elements of a valid life insurance contract?

INSURANCE CONTRACTS

[1] Valid offer and acceptance
[2] Legally competent parties
[3] Consideration
[4] Genuine intention
[5] Lawful object

15

INSURANCE CONTRACTS

What types of life insurance contracts are there?

[1] Two Party
[2] Third Party
[3] Group Insurance

16

INSURANCE CONTRACTS

Who are the parties involved in a third party life insurance contract?

The three parties are the:

[1] Owner (purchaser)
[2] Person whose life is insured
[3] Insurer

17

INSURANCE CONTRACTS

Who are the parties involved in a group insurance contract?

In a group insurance contract the parties are the:

[1] Company/Organization
[2] Individuals who are insured
[3] Insurer

18

INSURANCE CONTRACTS

What documents are included in every life insurance policy contract?

The insurance contract is made up of the following documents:

[1] A copy of the signed application
[2] The declarations page
[3] The insuring agreement
[4] Documents attached at policy issue for any riders and benefits
[5] Revisions to the contract agreed upon in writing after the policy is issued

19

INSURANCE CONTRACTS

What items constitute a contract?

The following items should be included in every policy contract:

[1] The identity of the parties to the contract
[2] The policy period
[3] Face or benefit amount
[4] Conditions under which the face or benefit amount becomes payable
[5] Amount and frequency of premiums payable
[6] Period of grace for payment of premium
[7] Whether the policy participates in a distribution of surplus
[8] How the contract is reinstated if the policy holder lets it lapse

Options, if applicable, of: 

[1] surrendering the policy
[2] obtaining a policy loan
[3] obtaining paid-up or extended insurance

INSURANCE CONTRACTS

What items constitute a contract?

The following items should be included in every policy contract:

[1] The identity of the parties to the contract
[2] The policy period
[3] Face or benefit amount
[4] Conditions under which the face or benefit amount becomes payable
[5] Amount and frequency of premiums payable
[6] Period of grace for payment of premium
[7] Whether the policy participates in a distribution of surplus
[8] How the contract is reinstated if the policy holder lets it lapse

Options, if applicable, of: 

[1] surrendering the policy
[2] obtaining a policy loan
[3] obtaining paid-up or extended insurance

20

INSURANCE CONTRACTS

Why is a life insurance policy a valued contract?

A life insurance policy is a valued contract because the amount of the benefit is 
specified in advance when the contract is signed.

21

INSURANCE CONTRACTS

The _ _ _ summarizes the major promises entered into by the insurer under the contract. It states what the insurer promises to do and under what conditions it will fulfil those promises.

The insuring agreement summarizes the major promises entered into by the insurer under the contract. It states what the insurer promises to do and under what conditions it will fulfil those promises.

22

INSURANCE CONTRACTS

The insured gives two forms of consideration:

1. Money, in the form of a premium
2. A promise to abide by the provisions and stipulations in the contract

23

INSURANCE CONTRACTS

In exchange, the insurer's consideration is a contingent promise to pay the insured if a specified event occurs. This is known as an _ __ _ contract in that the values exchanged are not equal.

In exchange, the insurer's consideration is a contingent promise to pay the insured if a specified event occurs. This is known as an aleatory contract in that the values exchanged are not equal.

24

INSURANCE CONTRACTS

Why are life insurance contracts unilateral contracts?

Most life insurance contracts are unilateral contracts. This means that only the insurer makes an enforceable promise. The insured can walk away from the contract at any time. 
 


For example, once a life insurer has accepted the risk and issued a policy, it is compelled to honour its terms, regardless of any changes in health of the insured. However, the insured can cancel the contract and stop premium payments at any time.

25

INSURANCE CONTRACTS

What is meant by the principle of indemnity?

One of the basic principles of insurance law is the principle of indemnity. 

The principle of indemnity states that the insured should be restored to approximately the same 
financial position as existed before the loss and should not profit from the loss.

26

INSURANCE CONTRACTS

This reduces people's temptation to intentionally cause a loss in order to collect money that exceeds the amount of the loss.

The Principal of Indemnity

27

How do you define an insurable interest?

An insurable interest means that the applicant would suffer a loss if the person whose life is insured died.

A person is said to have an insurable interest in:

[1] Their own life
[2] The life of their spouse, child, grandchild
[3] The life of any person upon whom the insured depends for support
[4] Any person in whose life the insured has a pecuniary (relating to money) interest, such as an employee or business partner

28

NOTES / INSURABLE INTERESTS 

The insurer must be satisfied that a non-family relationship constitutes an insurable interest before it will issue a policy.

The concept of insurable interest is only of concern at the time of application/issue of the policy. An insurable interest does not have to exist throughout the duration of the policy. For example, if Rita and Sheila are business partners and buy life insurance policies on one another's lives, these policies will remain valid even if Rita and Sheila's business relationship ends and they go their separate ways.

NOTES / INSURABLE INTERESTS 

The insurer must be satisfied that a non-family relationship constitutes an insurable interest before it will issue a policy.

The concept of insurable interest is only of concern at the time of application/issue of the policy. An insurable interest does not have to exist throughout the duration of the policy. For example, if Rita and Sheila are business partners and buy life insurance policies on one another's lives, these policies will remain valid even if Rita and Sheila's business relationship ends and they go their separate ways.

29

Can a policy can still be issued if there is no insurable interest?

Yes, the individual to be insured must consent to this in writing and the insurer must be willing to issue the policy.

30

An agent is a person _ _ _.

An agent is a person authorized to act for another person.

31

An agency contract stipulates_ _ _.

An agency contract stipulates the rights and duties between an agent or Advisor and the insurer.

32

_ _ _ _ provide the client with a 10-day "free-look" period, commencing on the date of policy delivery, to review and consider the contract.

Rescission rights provide the client with a 10-day "free-look" period, commencing on the date of policy delivery, to review and consider the contract.

33

NOTES / RESCISSION RIGHTS

If the applicant returns the contract to the insurer within the 10-day period (10 calendar days), the insurer will cancel the policy and refund any premium paid to date. Applicants do not have to provide a statement explaining why they are returning the contract.

NOTES / RESCISSION RIGHTS

If the applicant returns the contract to the insurer within the 10-day period (10 calendar days), the insurer will cancel the policy and refund any premium paid to date. Applicants do not have to provide a statement explaining why they are returning the contract.

34

Life and health insurance contracts provide a _____ of 30 or 31 days after the premium due date for the policyholder (or insured) to pay the premium.

Life and health insurance contracts provide a grace period of 30 or 31 days after the premium due date for the policyholder (or insured) to pay the premium.

35

What happens if the life insured dies during the grace period?

If the life insured dies during the grace period, the insurer would pay the full face amount of the policy, less any outstanding premiums.

36

DEFINITION OF 'NONFORFEITURE CLAUSE'

A clause in an insurance policy that allows for the insured to receive all or a portion of the benefits or a partial refund on the premiums paid if the insured misses premium payments, causing the policy to lapse. The nonforfeiture clause may only be in effect for a limited period of time, and may only kick in after the policy has been active for several years.

DEFINITION OF 'NONFORFEITURE CLAUSE'

A clause in an insurance policy that allows for the insured to receive all or a portion of the benefits or a partial refund on the premiums paid if the insured misses premium payments, causing the policy to lapse. The nonforfeiture clause may only be in effect for a limited period of time, and may only kick in after the policy has been active for several years.

37

List the 4 non-forfeiture options?

[1] Automatic premium loan
[2] Cash surrender
[3] Reduced paid-up insurance
[4] Extended term insurance

38

Describe an automatic premium loan?

If a premium is not paid within the grace period, the insurer will issue a loan against the policy's cash value for the amount of the premium and keep the policy in force.

39

The _ _ _ _ _ option allows the policyholder to exchange the policy's cash value for a fully paid-up policy with a reduced coverage amount. Paid-up means that the policy is fully paid for and no further premium payments are required.​

The reduced paid-up option allows the policyholder to exchange the policy's cash value for a fully paid-up policy with a reduced coverage amount.

 

Paid-up means that the policy is fully paid for and no further premium payments are required.​

40

The _ _ _ _ option provides the opportunity to exchange the policy's cash value for a term insurance policy with the same amount of coverage.

The extended term insurance option provides
the opportunity to exchange the policy's cash value for a term insurance policy with the same amount of coverage.

41

TRUE OR FALSE?

With the extended term insurance no further premiums are payable.

ANSWER: True

42

NOTES / EXTENDED TERM INSURANCE
 


The extended term insurance option provides
the opportunity to exchange the policy's cash value for a term insurance policy with the same amount of coverage. No further premiums are payable. The duration of the extended term insurance coverage is based on the cash value of the policy and the age and sex of the insured. It will be less than the original policy; for example, the duration could be two years and four months.

NOTES / EXTENDED TERM INSURANCE

The extended term insurance option provides
the opportunity to exchange the policy's cash value for a term insurance policy with the same amount of coverage. No further premiums are payable. The duration of the extended term insurance coverage is based on the cash value of the policy and the age and sex of the insured. It will be less than the original policy; for example, the duration could be two years and four months.

43

What is reinstatement?

If a policy lapses due to a non-payment of premiums, the policyholder has an opportunity to reinstate the policy if certain conditions stated in the policy are met.

44

If a policy lapses due to a non-payment of premiums, the policyholder has an opportunity to reinstate the policy if certain conditions stated in the policy are met. The conditions include:

[List 3]

[1] Providing satisfactory evidence of insurability
[2] Paying all premiums in default, with interest
[3] Repaying any loans that are outstanding, including interest

45

Typically, a policyholder has ___ years from the lapse date to reinstate the policy.

Typically, a policyholder has two years from the lapse date to reinstate the policy.

46

What is a suicide clause?

[1] If death by suicide occurs within two years of the policy issue date, the contract is considered void and the insurer is not required to pay the death benefit. 

[2] Instead, the insurer returns the total amount of premiums paid to the beneficiary. 


[3] Some insurers use a one-year rather than a two-year suicide period.

[4] If death by suicide occurs more than two years from the policy date, the full amount of the death benefi t is paid.