Flashcards in Study four Deck (21):
List the steps in risk management.
1) identification of the exposures of loss
- risks associated with the financial loss due to premature death or disability
- effects it has on members of the family or business client is associated with
2) examine alternative techniques to risk
i) risk control
ii) risk financing
3) select best techniques
- relates to cost and effectiveness
- includes quantification which has three fundamental purposes:
i) identifies risks too minor to consider for active management
ii) prioritize remaining risks
iii) calculate size of solution required to manage the risk
4) implement the chosen techniques
- choose best and most convenient techniques and implement them
5) monitor and review program
- review periodically and be aware for changes (such as kids)
List the risk control techniques.
1) exposure avoidance
- by not participating in activities which might give rise to the risk of loss (remove peril)
2) loss prevention
- reduce the frequency of losses
ex) quit smoking
or business might take steps to prevent loss by ensuring employees take part in a health + fitness program
3) loss reduction
- reducing severity of loss
ex) make deposits into RRSP tp reduce impact of terminated wages at retirement
4) segregation of loss exposures
- reduce a loss when single event takes place
ex) dividing various functions of a manufacturing process
ex) purchasing several different types of investments adds measure of protection
ex) company might operate 2 identical warehouses
5)contractual transfers (not insurance)
- transferring hazards activities to third party
ex) heart attack prone person gets someone else to shovel
List the risk financing techniques.
- buy insurance
- transferring risk to third party
2) risk retention
- client retains a portion of the cost themselves
ex) co-pay for meds, create a fund like RRSP
What steps must be taken when planning to determine needs?
- relates to risk management process
fact finding process and analysis (steps 1-3)
1) explore financial needs by identifying responsibilites
2) gather sufficient info
3) determining goals from identified needs
- implementation stage (steps 4-5)
4) determine how life insurance can fulfill needs and how much is required
5) financial products necessary to complete risk management plan
- monitoring process
6) periodically review clients situation
When should review of life insurance policy take place?
- every 2 years (not longer than 5)
- or when changes occur
What does documentation include and why is it important?
2) premium notices
3) sales illustrations presented to client
5) any other form
- is important for follow up and to protect agent against disputes
What are important components regarding effective communication with a potential client?
1) integrity builds trust
2) be observant - listening and observing
3) identify value systems
4) touching an emotional level
- once emotional level is reached client is likely to disclose information about things that really matter like their families wellbeing
What does a review of a financial position include?
2) security for retirement
What are the personal needs for life insurance?
Estate planning needs
1) Last expenses
- burial and funeral expenses, medical expenses before death, lawyer fees
2) repayment of loans + credit card balances
- small consumer loans such as car, boat, or homo renos
3) housing - mortgage, rent, lease
4) funding tax liabiities
- income taxes on death can be in the form of unpaid taxes or taxes payable on the estate
- if capital gains are used for payment of income tax ,50% must be included in the calculation of the deceaseds taxable income for the year which death occurs
5) estate equalization
- look for ways to allocate assets fairly
- if estate cannot be split equally, it may require a need for cash at the time of death
6) charitable giving
- satisfaction of giving and offsets tax liabilities
7) educational funding
- for children
8) support payment obligation
- continue child support for ex-spouse
- can name child as beneficiary but may need to set up a trust
What is a probate fee?
- provincial courts supervise settlement of estate
- base fees on the value of deceased assets passing through the estate (percentage or rate per thousand)
- if beneficiary or charity has been named on life policy they are not subject to probate fees
Define capital gains.
- the profits generated when specific types of assets such as stocks, bonds, or real estate are sold for more than the assets original purchase price.
Define charitable organization.
- a canadian body that has been registered as a charitable organization, private foundation, or public foundation, as defined in the income tax act.
Describe monitoring portfolios.
- needs fluctuate over time
there are permanent needs such as:
- last or final expenses
- estate preservation to address things like taxation
( property of high value, RRSP/RRIF, cottage)
- bequests and charitable goals
there are temporary needs such as:
- childrens education
- mortgage balance
- income replacement until retirement
- debts such as credit cards and loans
Business falls into what 3 general categories?
1) sole proprietorship
- not incorporated and owned by a single person
- owner has unlimited liability for debts of business
- not incorporated and owned by 2 or more people
- owners have unlimited liability for debts of business
- if one partner dies or become incapacitated, the law considers partnership to be terminated
- is a separate legal entity
- ownership is represented by shares (publicly or closely held by a limited number of people)
- owners are not responsible for debts or liabilities
Define key person.
- is an individual who is essential to an organization and upon whose performance the success of the organization depends
What issues should be considered regarding a key person?
1) estimated financial loss to business
2) would the loss terminate credit privileges
3) creditors may demand immediate payment
4) those who owe money to company may delay payment
5) employees and customers may lose confidence in company
6) competitors may seize opportunity to entice customers to switch over
How does life insurance affect business continuation?
- life insurance is used to fund buy-sell agreements upon death
- this is typically used in 2 situations:
2) when shares are involved
What benefits does a buy-sell agreement offer?
1) control of the business is retained by surviving owners
2) sets out terms/conditions of sale that are mutually agreeable to current owner and future purchaser
3) estate has a purchaser for deceaseds ownership interest
4) assures employees, creditors, and customers that the business will continue
5) provides readily available cash to pay off owners liabilities and cash flow
- something of value, for example, stocks, real estate, or cash value in a life insurance policy, that a borrower offers to a lender as security for a loan
- lender may liquidate collateral to recover outstanding balance on loan
What are the 3 uses of life insurance relating to business?
1) key person
2) business continuation
3) life insurance as collateral