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LIFE INSURANCE STUDY NOTE, by ALI NOORAFSHAN

There are two ways of looking at the Risk of Death: Life expectancy and the probability of death.
Life expectancy is the years that a person of a certain age can expect to live.
Probability of death is the probability that a person of a certain age will die before reaching his next birthday.

An individual's probability of death starts low and increases very slowly until around age 40. After age 40, it begins to grow more
dramatically. A Female's risk of death is lower than a male's risk of death at the same age.

Impacts of death: Tax, Loss of caregivers, Creditor’s claim, loss of income, …

Tax: When a person dies, he is usually supposed to have sold all his property based on the market value the day before. It triggers a
taxable capital gain. When a person dies, his registered assets (RRSP, RRIF) will also be deregistered (unless a rollover applies).
Deregistered means the full amount will be taxed at his marginal tax rate after death. An RRSP or RRIF is taxable upon death, even if it has
a beneficiary.

Four general strategies to deal with the risks: Risk avoidance (Avoid the risk totally), Risk reduction (Reduce the severity of that risk),
Risk-retention (The person accepts the consequences of potential risk), Risk transfer (Finding someone else to take the results of the
risk). Risk-retention is the most appropriate for low severity risks. Risk transfer is the most suitable for high severity risks.

Life Insurance can be joint or single (one person). Joint life insurance means a single amount of coverage is placed on two lives insured.
Joint First-To-Die Life Insurance is appropriate when two people share a debt obligation. Joint Last-To-Die Life Insurance is appropriate
when the risk does not arise until the last person's death, such as tax liability.
Deductible debts are debts a company can subtract from its income before it is subject to taxation. Non-deductible debts are simply the
ones that can't be subtracted. Life insurance can be used to pay off the non-deductible debts.

Level Term (the death benefit equals the initial face amount) is appropriate when the client's need is not expected to change throughout
the contract, such as charity donation.

Decreasing Term (the death benefit is less than the initial face amount). It means the amount the death benefit decreases over the
period, while the premium remains level. It is appropriate when the amount at risk declines over time, such as payment of a mortgage.

Increasing Term (the death benefit increases and premium over the period) is relevant when the amount at risk is expected to increase
over time (EX. inflation, investment returns, or salary increases).

How insurance company calculate the price of premium for a term insurance: Mortality Cost + Expenses
Mortality Cost = Face Amount × Probability of Death.

Recommendation for having term insurance: In the case of term insurance recommendations, clients should purchase it sooner rather
than later; the longer-term is more attractive for younger clients.

Renewable Term Insurance Policy: the policyholder can renew the policy at the end of the term without proof of insurability. Renewable
policies are more expensive than non-renewable policies.

Re-Entry Term with Adjustable Rates: the insurance company will reassess the life insured's health at the time of renewal. The initial
premium is lower than renewable, with guaranteed rates. Re-entry policies are a good deal if coverage is only required for a limited
period; the life insured expects good health.

With Convertible Term insurance, a client does not require proof of insurability. There is no incontestability limitation or suicide
exclusion period after converting the term to permanent insurance. It is appropriate for people who have experienced a decline in their
health. The conversion must take place within the first five or ten years. A convertible term policy is suited for decreasing risks (such as
mortgages) and limited cash flow conditions. Convertible term is suitable for those who cannot afford a life insurance now but in future
they can.
Is tax charged on insurance premiums? Yes, Tax charges on the buying an insurance are incorporated in the insurance premiums.

Permanent insurances include Whole life, Universal life and T-100.

Whole life Insurance:
Whole life insurance guarantees level premiums, death benefit and cash surrender values (CSV). Premium payment for whole life is
annually if a person wants to pay monthly, they should pay an interest based on the formula:
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Monthly premium = (annual premium × modal factor), modal factor leads to a higher fee (interest fee) for the client.

Whole life can be participating or non-participating.

Participating Policies Whole Life pays dividends (policy dividends) to the policyholders. A dividend ($) is the distribution of a company's
earnings to its shareholders. Dividends are not guaranteed. Dividends from an insurance policy can be used for PUA, automatic premium
loans (APL), premium reduction, offsetting the annual premium and accumulation of the dividends in an investment account. Automatic
premium loans allow the insurer to automatically deduct the premium amount overdue from the policy CSV whenever the policyholder
is unable to pay the premium.
Paid-up additions (PUA) are the most popular dividend payment option. With PUA, the dividend is used as a single premium to buy
additional whole life coverage. The additional insurance will have its death benefit and cash surrender value (CSV). No new medical
evidence of insurability is required for PUA. The paid-up additions & accumulation option may increase both the CSV and the death
benefit.
Dividend illustrations help policyholders understand how participating policy works, but the graph's values are not guaranteed.
Non-Forfeiture Benefits of Whole Life. A nonforfeiture benefit is an insurance clause allowing an insured to receive full or
partial benefits if a policy lapses. Whole life insurance offers benefits that will not be lost (forfeit) even if they stop paying the premiums
because of accumulation. Non-forfeiture benefits are: • Cash surrender value (CSV) • Automatic premium loans (APL) • Reduced paid-up
insurance • Extended term insurance. Non-Forfeiture Benefits are dependent on the buildup of the CSV and withdrawal of CSV will
reduce the non-forfeiture benefits.
CSV is the accumulated portion of a permanent life insurance policy's cash value that is available to the policyholder upon surrender of
the policy.
Automatic premium loan (APL) allows the insurer to deduct the amount of a premium from the CSV when the premium is due.
Reduced paid-up insurance: It allows you to stop paying life insurance premiums in exchange for a reduced death benefit. In other words,
the policy owner receives a new policy with a lower amount of fully paid whole life insurance based on the CSV amount.
Extended-term insurance uses CSV to purchase a term insurance equal to the existing amount of life insurance without reducing the
death benefit.
Whole life insurance is more suitable than term insurance for addressing risks of unknown or long duration such as taxes upon death,
Future insurability and Increasing coverage.

Term-100 (T-100) life insurance:

It matures at age 100 (It means premiums payment ceases at age 100). T-100 benefit is paid when the life insured reaches age 100 or
dies. T-100 premiums remain level that is called the level cost of insurance. T-100 policies do not accumulate a CSV and do not provide
non-forfeiture benefits. T-100 will be lapsed if the clients does not pay the premium after the period is called “Grace Period”. Grace
period of 30 days, then the policy will lapse. • Reactivate lapsed policies is possible within two years plus payment of the missed
premiums.
The cost of a premium for various policies are as follows: Term < T-100 < Whole Life.
Suitability. T-100 is suitable for: 1. donation upon the client's death, or when the policyholder has a need that will not be increased prior
to death. • 2. The policyholder will never want to surrender the policy, • 3. The policyholder has no need of the investment opportunities.

Universal Life (UL) Insurance:

Pricing factors (mortality costs, expenses, investment return) are bundled together In Term and Whole Life while they are unbundled in
Universal life (UL).
Net amount at risk (NAAR)= Death Benefit – CSV.
NAAR is used for setting the premium by insurance company. Considering NAAR, premium can be paid in 2 ways: 1. Yearly renewable
term (YRT) The premium is increased every year. 2. Level cost of insurance (LCOI)= Premiums remains level through the time. (It is like T-
100). Level cost of insurance spreads the cost of the coverage evenly over the life of the policy, you pay the same amount each year. YRT
is lower initially and increases over time to equal the actual cost of insuring you. The annual YRT premium for a specific year. (It is like
term insurance, but it increases every year). YRT can be converted to LCOI.
UL premium can be paid YRT (suitable for a Short-term policy) or Level Cost of Insurance (suitable for a Long-term policy).

Mortality costing, or cost of insurance (COI) is usually expressed as a dollar amount per $1,000 of NAAR. EXAMPLE: Suppose death
benefit= $500,000, CSV= $100,000, the policy had a COI of $20 per $1000, then mortality deduction= COI x (Death Benefit - CSV) ÷ 1000=
20 × (500,000 - 100,000) ÷ 1000.

The modal factor for UL policy= 1 ÷ number of payments per year. Example: monthly payment modal factor= 1÷12
Any increase in the face amount will require evidence of insurability unless the policy has a rider for a guaranteed insurability benefit.
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Death benefits in UL policy:

Level Death Benefit pays the face amount as the death benefit without paying CSV and it is the least expensive of the death benefit
options.
Level Death Benefit Plus Account Value (CSV= accumulated money in the insurance): It pays the face amount as the death benefit plus
CSV. It is suitable for those who deposit large premiums more than the amount required to fund the policy minimally.
Level Death Benefit Plus Cumulative Premiums It pays the face amount as the death benefit, plus CSV, plus all the paid premiums. It is
the most expensive option because the beneficiary receives the original face amount, CSV, plus the gross amount of each premium.
Indexed Death Benefit increases the face amount (death benefits) based on inflation. It is indexed for inflation. It is appropriate to cover
an end-of-life risk that is expected to increase over time, such as the tax liability on assets.

UL Investments:
Net Premium of UL is the amount of premium which is invested within the investment account of a UL. UL is a tax-sheltered environment
and Exemption Test determines whether a policy is exempted from tax payment or not. The test is a way to invest in a tax-sheltered UL
environment up to a limit. If premium payments exceed the limit, the extra amount will be transferred to a taxable account called shuttle
account.
UL investment in Daily Interest Accounts offers an Interest Rate based on the Government of Canada Treasury Bill.
UL investment in Guaranteed Investment Accounts (GIA) offers a fixed interest rate for a term based on 90% of the Government of
Canada Bonds yield.
UL Index fund Investments offers an interest based on the performance of the chosen index.

UL Loans:
A client can take a loan up to 90% of the cash value based on the UL Policy Loans and UL Collateral Loans. A policy loan is a taxable
income, while a collateral loan is not a taxable income.

By UL Policy Leveraging, a policyholder obtains a bank loan, where the cash surrender value and death benefit are used as collateral. The
principal and interest are not repaid upon the death of the life insured. Leveraging loans are not taxable.

UL policy is appropriate for these people: those who are investment-savvy policyholder, have long-term insurance needs, maxed out
their TFSA and RRSP, especially if they have a high marginal tax rate, they do not have debts, have disposable income, they are looking for
tax-advantaged investment opportunities. For tax efficiency in UL policy, they should pay off their loans if they have nondeductible loans.
Leveraging a UL policy can provide a tax-free source of retirement income. In leveraging a client takes a loan from a bank and the CSV is
used as a collateral to secure the loan. If the loan is not paid back before the insured person's death, the loan amount plus any interest
owed is subtracted from the amount the beneficiaries are set to receive from the death benefit.

Life insurance policies such as universal life and whole life insurance that have a cash value component are the most suitable for
collateralized loans. Most lenders won't accept term life policies as loan collateral because they don't accumulate cash value.

Reinstatement: If the policyholder does allow the policy to lapse, most life insurance contracts allow him to reinstate that policy within
two years of that lapse, as long as he can provide proof of insurability and he pays all missed premiums, plus accrued interest. The
premiums on the reinstated policy will be based on the age of the life insured when the policy was first issued or last renewed, while
premiums for a new policy would be based on his age at the time the new policy is issued. Incontestability period and suicide exclusion
will apply from the date of reinstatement.

What Are the Riders & Supplementary Benefits for Life Insurance?
Riders & Supp. Benefits can be added to the original policy. They are designed to meet the clients’ needs. Usually, RIDERS provide
additional benefits upon death, while SUPPLEMENTARY BENEFITS provide benefits before the death of the life insured.
Common types of Riders
PUA rider increases death benefit, Cash Surrender Value (CSV), and no need for additional insurability evidence.
Term insurance riders (such as family or child coverage riders) can be added to Term or Permanent life insurances.
Child Coverage Rider, every child in the family is automatically covered once they reach 15 days of age without increasing the premium.
Converting Child or Family Coverage Riders is possible without evidence of insurability.
Accidental Death (AD) rider. The most common death benefit of Accidental Death (AD) rider. If AD rider is added to the life insurance, in
case of death due to accident, then two death benefit (double indemnity) would be paid. In other words, it provides that if the insured
dies as the direct result of an accident, the insurance company will pay the benefit for AD rider on top of the benefit for life insurance.
Guaranteed Insurability Benefit (GIB) rider, an individual can increase the coverage in future. The premiums will be based on the
attained age (current age) and previous health status (it assumes that his health remains the same).
A GIB rider is suitable for those who have not a large insurance need and cannot currently afford a large amount of insurance but will
increase their coverage in the future.
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The common Supplementary Benefits includes "Accelerated death benefits", "Accidental dismemberment benefit", "Waiver of premium
for a total disability benefit" & "Parent/payor waiver benefit".

Accelerated Death Benefits: a portion of death benefits are paid in Terminal Illness benefit and Critical Illness benefit.
Accidental dismemberment benefit: In case of dismemberment a benefit will be paid.
Waiver of premium for a total disability benefit: If the life insured become disable the premium can be waived.
Parent Waiver Benefit: the policyholder is a parent & the life insured is the policyholder's child. In case of death or disability of the
parent, it allows that premiums will be waived until that child reaches a specified age.

Group Life Insurance:

A group plan has an actively-at-work requirement, and if the employee is away from work due to illness or vacation, his coverage will not
begin until he returns to work.
The premiums for group life insurance are based on the group's makeup (average group age, gender, status) and not everyone's specifics.
Suppose an employer pays some or all the premiums for a group life insurance plan. In that case, it can deduct those premiums as a
business expense, and the deducted portion of the premium is a taxable benefit for the employee.

How employers set the coverage for their employees:

Earnings Multiple Schedules provide insurance coverage equal to a multiple of the member's base salary. Flat Rate Schedule provides
every group member with the same dollar amount of life insurance coverage. Length of Service Schedule offers coverage based on the
length of service to the employer.

G1 Policy: issued prior to 1982. Group 2 (G2) policies are those that were acquired after 1982 but before 2017. ▪ Group 3 (G3) policies
are those that were issued after 2016. The calculation of the ACB of G1 policies is simply the cumulative premiums paid to date, less the
cumulative dividends paid out. A G1 policy will lose its status and become a G2 policy if ownership is transferred to another policyholder
or if coverage is modified. Because G1 policies provide some significant tax advantages, agents should be careful about changing this
status.

Riders & Benefits in Group Life Insurance:

Survivor income benefit: Benefits of survivor income benefit are payable to the beneficiaries including the spouse until they reach age
65, children until age 21 and the children who are attending school full-time.
Converting. A group member can convert his group coverage to individual coverage without providing proof of insurability for himself, his
spouse, or dependents.

Death Benefit from a Life Insurance Policy, regardless of the time, premiums, or type of policy (Term, permanent, group, mortgage, etc.)
is tax-free (exempt from tax).
Disposition means selling. In case of disposition, it may or may not be tax-free based on the recipient of the policy.
Actual Disposition occurs when the policyholder sells or surrenders an insurance policy, and it is taxable.
Deemed Disposition occurs when a person is considered to have disposed of a property, even though a sale did not take place. Example:
The tax treatment of capital property that a deceased person owned at the date of death involves the concept of deemed disposition.
Actual or Deemed Disposition occurs if policyholder surrenders all or a part of the policy, withdraws cash, takes out a policy loan,
receives the dividends, his policy becomes non-exempt.

Tax is based on the policy gain but how calculate policy gain:
Policy gain= CSV – ACB (Adjusted Cost Base)
ACB for an insurance policy is the sum of all premium paid.
Policy gains for dividends = Dividends – premium – ACB

If a client reduces the policy death benefit (insurance coverage) or withdraw some cash from CSV, this is considered a policy gain;
however, the gain should be adjusted or prorated. Tax should be paid based on the adjusted gain. But for calculation of the policy gain
the first step is to calculate the rate, and the second step is to multiply the rate by the CSV and ACB.

Policy gains for Reduction of the coverage= Prorated CSV – Prorated ACB
Rate for reduction of the coverage = (Initial coverage – New coverage) ÷ Initial coverage
Prorated CSV for Reduction of the coverage= Rate for reduction of the coverage × CSV
Prorated ACB for Reduction of the coverage= Rate for reduction of the coverage × ACB
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Policy gains for Partial withdrawal of the fund= amount withdrawn – prorated ACB
Rate for Partial withdrawal of the fund = Amount withdrawn ÷ CSV
Prorated ACB for Partial withdrawal of the fund = Rate for partial withdrawal of the fund × ACB

If the policy loan is greater than the ACB, there is again: Policy gain for a loan = Loan – ACB. The ACB of a policy will be reduced to zero.
If the policy loan is less than the ACB, there is no policy gain and the ACB will be reduced by the amount of loan.

Anti-Dump-In Rule or the 250% Rule prevents the policyholder from making large lump-sum deposits to the policy after its 7th
anniversary. You cannot continue to make deposits of any size and let them grow on a tax-advantage basis. The limit is the 250% rule:
the account value in any particular year must not exceed 250% (2.5 times) of its value from 3 years prior. If it does exceed that value, the
policy loses its tax-exempt status. Formula: (Cash value on the anniversary / Cash value on the three years before) x 100 ≤ 250%

An absolute assignment's tax consequences depend on who receives ownership (arm-length party or non-arm length party).
Assigning to arm-length party (foreigners like charities) & a sibling: The policyholder has a policy gain = CSV – ACB, and it is taxable. The
sibling will acquire the policy with a new ACB that equals the initial CSV.

Assigning a policy to a spouse or child (non-arm-length party) is a tax-free rollover. The spouse or child will acquire the policy with a new
ACB that equals the previous ACB.

Income Attribution Rule says that if a person transfers a property (or a life insurance policy) to his spouse or their child, the income will
be taxable to the transferor person even if it is earned and legally belongs to the recipient spouse. Income attribution rules prevent tax
evasion.
If a dad assigns a policy to his child and the child disposes of the policy, the gain is taxable. The CHILD should pay the tax if he is > 18 years
old. Dad will pay the tax if the child is under 18.

Strategies to have a tax-efficient policy for your client: Annuitizing CSV, Insured Retirement Strategy & Donations
Annuitizing CSV: What is an annuity? After investing in an annuity, it pays you a series of payments made at equal intervals. If you take
out the entire CSV as a lump sum, you will have to pay a significant amount of tax on that. Instead of taking out the CSV as a lump sum,
you can choose to invest it in an annuity. Converting all or a portion of the CSV into an annuity provides (annuitizing CSV) you with an
opportunity to pay less tax based on the annuity payments rather than the entire CSV.
Insured Retirement Strategy: Leveraging a life insurance policy and receiving a series of annual loans secured by the CSV. When the life
insured dies, the lender recovers the total amount from the death benefit.
Three ways for donations: 1. Assigning a life insurance policy to a charity, 2. Naming a charity as the beneficiary of a life insurance policy,
3. Donating cash to a charity. A person who makes donations to a registered charity can claim non-refundable federal and provincial
charitable donations tax credits. The federal tax credit rate is 15% for the first $200 and 29% for more than $200. The provincial tax credit
varies.

Tax Credit Limit on donation is set at 75% of net income (The maximum donation credit you can claim is 75% of your net income for the
year). The remaining credit can be moved forward one or more of the next five years.

Life Insurance for Businesses:

Types of businesses: Sole proprietorship, Partnerships & Corporations.
Sole proprietorship: The business itself cannot be bought or sold to another person upon death & it has no ACB. Partnerships &
corporations have ACBs. In Sole proprietorship & Partnerships, the people report the business's net income on their personal tax return.
In the corporations, the net income is taxed in the corporation, not on their personal tax returns.

A Canadian-Controlled Private Corporations (CCPC) is eligible for the Lifetime Capital Gains Exemption (LCGE) upon disposition. LCGE
was $866,912 in 2019. How to calculate taxable capital gain for CCPC: First calculate the (capital gain= Fair market value of the
corporation – ACB) and then apply this formula: [(Capital gain) – LCGE] x 50%.

What are the ways an agent can help businesses?

Split-dollar arrangements: Sharing the benefits (death benefit and CSV) and costs of a life insurance policy (premium) between parties
such as a key employee and the corporation.
Cross-purchase agreements: The surviving owners agree to buy the interest of the deceased owner. The total number of shares remains
the same, but each surviving shareholder now owns a greater number of shares. The survivors' ownership interests increase.

Share redemption agreement: The corporation redeems the shares of the deceased shareholder, and the total number of shares is
reduced. Each surviving shareholder now owns the same number of shares as before. The survivors' ownership interests increase.
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Criss-cross insurance: It is a funding for the buy-sell agreement. Each party buys life insurance on the other parties to the agreement, in
an amount sufficient to cover their purchase obligation upon that party's death. Disadvantages of criss-cross insurance: There are
significant differences in the premiums for the coverage required on each party, depending on their age and health. This insurance is
used to fund cross-purchase agreements.

Business-owned insurance is another option for funding the buy-sell agreement. The business buys the insurance coverage on the
business owners. The costs of insurance premium are shared equally between owners. This insurance is used to fund share redemption
plans.

If a cross-purchase agreement is funded by corporate-owned insurance, usually the corporation is named as the beneficiary of the policy.
When one of the shareholders dies, the surviving owner(s) purchase the shares from his estate, often using a promissory note. The
insurance company will pay the death benefit to the corporation, which will credit the amount to its capital dividend account. The
surviving shareholder(s) will then direct the corporation to pay them a capital dividend, which they will use to pay off the promissory
note.

Underwriting: Evaluation of Risks for Insurance Company

Underwriting is assessing the medical, financial & lifestyle criteria. Delivery is the continuation of the underwriting process because the
agent must ensure that the applicant's medical, personal, or financial situation and the life insured has not changed.
Accelerated underwriting: Accelerated underwriting is an innovative new approach that uses AI that eliminates the need for a medical
exam and a lot of the back and forth that keeps clients waiting.

What are the roles of agent in underwriting? An agent is not responsible for personally assessing the risk. But the agent helps collect the
information for risk assessment, and issuance of Temporary Insurance Agreement (TIA).

Temporary Insurance Agreement (TIA): A limited coverage before a final policy is issued. Requirements for coverage: A completed life
insurance application, at least one month's premium, and "No" answers to a shortlist of health-related questions about the life insured.
TIA age limit is between 15 days old to 70 years old. TIA coverage is limited to the lesser of a fixed amount or the amount of coverage the
applicant is requesting.

Insurable Interest. A policyholder has an insurable interest in a life insured when the loss of the life insured would cause a financial loss.
When an insurable interest exists, it means the applicant (policyholder) must expect to suffer a financial loss if the life insured dies. If an
insurable interest does not exist, the contract is cancelled at the time of policy issue. If the relationship between the policyholder and the
life insured changes, an insurable interest no longer exists, but the contract is still considered valid. A person has an insurable interest in
any financially dependent person including his own life, his child or grandchild, spouse, or employee.

Three parties to an insurance policy. 1. Applicant or policyholder apply for insurance & pays the premium. 2. Beneficiary of a life
insurance receives death benefit if life insured dies. 3. Life-insured is the person(s) whose life is covered in the insurance contract. An
individual can be two of the three parties.

Lifestyle Criteria of the life insured:

Avocations: Hobbies such as participation in extreme sports, adventure travel or dangerous hobbies.
There are three main situations involving the application that can lead to problems, including: Mistake, Fraudulent misrepresentation,
Incomplete information.
Material Facts: A fact is a material fact if it affects the policy's underwriting, risk of death, and premium.

What the insurance company can do if fraudulent misrepresentation happens?

Smoking status is the most common type of fraudulent misrepresentation. In case of fraudulent misrepresentation If the person is alive,
the insurance company can: 1. Cancel the policy or 2. adjust either the premiums or the amount of the death benefit to reflect the true
smoking status. If the person is dead, the insurance company can deny the claim.

Underwriting guidelines

The insurance company pays any fees for Attending Physician's Statement or Medical Tests.

A bad Motor Vehicle Record leads to a rated risk and higher premium. An Inspection Report usually focuses on non-medical issues such
as habits, finances, income, estimated net worth, occupation, driving record & avocation.

Medical Information Bureau (MIB): The MIB facilitates an exchange of medical information about applicants between member
insurance companies.MIB report will alert the underwriter to possible errors, omissions, and misrepresentations. The underwriter cannot
use the MIB report itself as a basis for declining or rating an application.
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Financial underwriting: Assessing the applicant’s financial situation and the reason for obtaining life insurance. It determines whether
the amount of coverage is reasonable based on his need, and he can afford the premiums.
How much insurance coverage does a client need? A rule of thumb: Coverage is 10 times earned income of the client (without
considering tax). Example: If a client earns $50,000 annually, they will aim for $500,000 in insurance coverage. It does not take into
account taxes or inflation. However, you may consider 20 (considering tax) or 30 times (considering tax and inflation) earned income of
the client.
Life Insurance for non-citizens
Permanent Residents require confirmation of permanent resident status, some bloodwork & a medical exam for having life insurance.
When a person is awaiting permanent residency, obtaining life insurance depends on the insurance company's guidelines and the
applicant's skill levels.
International students are not eligible to purchase life insurance in Canada. (However, it depends on the company).

Insurability and non-insurability

Standard Insurability: Life insured is insurable, and the premiums will be set at the standard rate.
Preferred Insurability For people who present an exceptionally low risk. They are eligible for preferred lower rates.
Rated Insurability: A rated risk class, it means that he represents an above-average risk, but it is still acceptable. Premiums in a rated
class will be higher than standard rates.
The issued policy for Frequent Travelers may have a substandard risk rating (which would result in higher premiums), or it may specify an
exclusion for travel to selected countries.

Non-Insurable risks will lead to denial of obtaining insurance.

Premiums for insurance at the time of issue increase as the age of the applicant at issue increases. The increase is exponential. Premiums
for a male are generally higher than for a female of the same age. Hazardous lifestyle or occupation leads to an exclusion in the policy for
that activity or a rating of the policy.

The premium rate also depends on the mortality cost, expenses, and investment options. If the mortality costs increase (Ex. death of
people due to a disaster), insurance company will charge a higher the premiums on new policies not the existing policies.

Reinsurance: An insurance company may still accept life insurance applications for coverage amounts exceeding its retention limit if it
can transfer some of that risk to one or more reinsurance companies. Reinsurance is a contract between the primary insurance company
and another insurer to share the risk and provide coverage for high amounts. Retention limit refers to the maximum amount of risk
retained by an insurance company per insured individual.

Delivery: The underwriting process does not stop with the issuing of the policy. It continues right up until delivery and acceptance of the
policy.

The agent must not complete the delivery if there are any changes in the applicant's condition. Instead, he must return the documents to
the underwriter. The agent should not mail or give the policy to anyone other than the applicant. By having a face-to-face meeting with
the applicant, the agent can ensure that nothing important has changed.

Acceptance is the final step in the policy's activation and is completed when the policyholder signs and dates an acknowledgment.

Underwriting for a group: For group life insurance, the underwriter looks at the group's demographics, including the mix of ages,
genders, and occupations. This is not an individual underwriting. These same rates will apply to every person in the group or class,
regardless of that person’s age, gender, smoking status, or health status.

Underwriting for a group member when he wants additional coverage. A group member who wishes to buy the additional coverage is
required to provide evidence of insurability and individual underwriting.

Underwriting for creditor life insurance: Creditors are the banks. Creditor insurance is designed to pay off the balance of your loan or
mortgage in the event of your death. The insurance company will do a post-claim underwriting. Post claim underwriting involves
assessment after a claim is made. The drawback of creditor insurance is that a claim may be denied because of post-claim underwriting.

Insurance Needs Analysis: Assessing the client’s situation is required before making any recommendation. Two types of questions are
required to have a clear picture of the client situation: Quantitative & Qualitative questions. Moreover, when doing any type of
insurance needs analysis, it is important to assess the probability, severity, and duration of the risk, and ensure that the client
understands what this means for them.

Quantitative questions reveal client financial criteria: Cash Flow & Net Worth
Cash flow= Net Income – Expense. Net Income Coming In= income after taxes and deductions. Cash Going Out = expenses.
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Net worth= Assets – liabilities. Assets are classified into fixed assets, liquid assets, investment assets. Liabilities are mortgage, tax, debt,
line of credit, credit card, etc. Fixed assets examples: cars, jewels, real state. Liquid asset example: Chequing account & Cash.
Investment assets example: Shares, bonds, rented out apartment.
Qualitative questions regarding the client's priorities in death include Family lifestyle, Final expenses & Future plans (3Fs). Final expenses
mean funeral arrangements.

Government benefits
While the government benefits upon death are not usually sufficient to address all of an individual’s insurance needs, they are still worth
noting.
Canada Pension Plan (CPP) survivor benefits: If a person who has contributed to the CPP dies, CPP survivor benefits a death benefit, a
survivor’s pension, and a children’s benefit.
CPP Death Benefit: This is a one-time lump-sum benefit of $2,500 payable to his estate or beneficiaries.
CPP Survivor Benefits: If the survivor spouse doesn’t receive any other CPP benefits and is under 65, she will receive a flat rate
component and 37.5% of the contributor's retirement pension. If the survivor spouse is over 65, under the same conditions, you will
receive 60% as a Survivor's Pension.
CPP Children Benefit: Dependent children of a deceased CPP contributor can receive a flat-rate monthly benefit of $265.
When a partner passes away the deceased's OAS benefits are lost entirely.
Recommendations for your clients:
If there is a risk of illness or disability (morbidity). In that case, the agent can recommend adding disability coverage, adding a waiver of
premium benefit, adding dread disease rider to his life insurance policy.
If there is a risk of unemployment or if the client's income fluctuates from year to year, the client may benefit from a universal life (UL)
policy that provides some flexibility in the policy's deposits.
If the client has maxed out his TFSAs and RRSP and is looking for additional tax deferral opportunities or an opportunity to transfer
wealth to the next generation. In that case, whole life or universal life insurance policy may be a reasonable option.
If income is expected to increase in the future, that client can include a Conversion Option to the term insurance. If cash flow is generally
adequate but fluctuates from time to time, a universal life policy may be a good option.

Recommendation For Naming a Beneficiaries in Life Insurance:

If the funds are to be used to pay income taxes due upon death, the estate may be an appropriate beneficiary.
If the funds are to be used to provide a replacement source of income to the surviving family, then the spouse may be an appropriate
beneficiary.
If the funds are to be used to support minor children, then a trustee should be named to manage the funds until the children reach the
age of majority.
If multiple primary beneficiaries are listed without additional instructions, then the death benefit will be divided equally among them.
Beneficiary designations are automatically revocable unless the application specifies otherwise.
If the policyholder designates his spouse as the beneficiary in Quebec, it is automatically irrevocable unless the policyholder specifies that
it is revocable.
If the estate is named the beneficiary or the estate becomes the beneficiary because the specified beneficiaries died, the death benefit
will be subject to probate. Example: An RRSP with named beneficiary bypass the probate. The probate fees are still only in the order of
1.5%. Example: A life insurance death benefit or an investment portfolio without named beneficiary goes to estates and they are subject
to probate payment. When an estate is subject to probate, the contents of the estate and the terms of the "will" become public
knowledge (something that people know because it has been reported in the news).

Updating and amending a policy:

The following changes do not require additional underwriting: Changing legal name of the policyholder, life insured or beneficiaries,
without changing the parties to the contract (e.g., changing the last name because of marriage or divorce), Mailing address, Beneficiary
designations, Premium amount (for universal life (UL) policies), Payment frequency, Fund choices.
The following substantial changes require additional underwriting: Adding a life insured, adding a rider or supplementary benefit,
increasing coverage, changing smoking status, changing health status or lifestyle category, Changing the dividend option on a PAR policy,
changing paid-up additions, Changing the type of death benefit (e.g., from the level death benefit to level death benefit plus account
value).

Life Insurance Replacement Declaration (LIRD) must be accompanied by a written explanation that specifies: Why the policy is being
replaced; How the new policy benefits the policyholder; Any situations where benefits under the new policy may not be paid. In Québec,
LIRD form is called Notice of Replacement of Insurance.
Surrendering a whole life or universal life insurance policy cancels the contract, and the previous person has no rights under the contract
and receives no death benefit.
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Absolute Policy Assignment is to transfer the contract's legal title & all rights and obligations to the assignee or recipient.
Collateral Assignment to a lender is a partial assignment. In Collateral Assignment the collateral is your life insurance policy's CSV. The
lender (bank) does not become the owner of the policy, and the policyholder still owns the policy. The lender can prevent the
policyholder from undertaking any action that would diminish the lender's security (withdrawal or failure to pay premiums). The lender
has first rights on the death benefit, up to the amount of the loan outstanding.
The agent should be careful not to give the claimant the impression that he is the one who decides whether the claim will be paid or that
payment is guaranteed.

Receiving the death benefits:

The Claims Examiner will confirm that the policy was in force at the time of death.
There is no actual time requirement for filing a life insurance claim. Sometimes life insurance policies are not discovered for years after
the death of the life insured. Once the claim investigation has been completed and all the supporting documents have been received, the
insurance company must pay the insured amount within 30 days.
The death benefit is tax free to beneficiaries. The death benefits paid on life insurance policies can be subject to an estate tax if the
amount of the death benefit is included in the estate (no beneficiary was named).

Tax credits and income tax deductions are not the same. Deductions reduce an individual’s total income, while the tax credits reduce
taxes payable. Example: A mother can claim the cost of her kids’ hockey and karate classes, as they qualify for the children’s fitness
amount, which is a tax credit. She can also claim the public transit amount as a tax credit. However, childcare expenses cannot be used as
tax credits because they are income deductions.
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Three ways to determine the amount of insurance coverage (death benefit) for a client
1. Income replacement approach
2. Capital needs approach
3. Capital shortfall
1. Income replacement approach (Without or with adjustment for tax or inflations)
Under the income replacement approach, the insurance need is determined by calculating the amount of capital that would have to be
invested to generate the lost income -this is After tax Income, as follows:

A. Income Replacement approach: (Without any adjustment for tax or inflations) Capitalized value = Annual income ÷ rate
of return.
B. Income Replacement First, calculate Then,
approach, Adjusted for After tax return = rate of return x (1- tax rate). Capitalized value= Annual income ÷ After
Income Tax: tax return.
C. Income Replacement First, calculate Then,
approach, Adjusted for Inflation-adjusted rate of return Capitalized value= Annual income ÷
Inflation: inflation-adjusted rate of return.

D. Income Replacement First, calculate Then,

approach, income taxes After-tax, after-inflation rate of return Capitalized value= Annual income ÷ After-
and Inflation tax, after-inflation rate of return
simultaneously

2. Capital needs approach by two methods of Capital retention method and Capital drawdown method
The capital needs approach identifies how much capital is needed.
First step for both methods: List the sources of income All the Income earned by the surviving
Calculate income shortfall List the expenses family should be considered. Example:
Income Shortfall = Income – Expenses employment income, pension, investment
income, government benefits
A. Capital retention First, calculate the annual shortfall Then,
method Capitalized value= Annual shortfall ÷
Investment return
B. Capital drawdown First, calculate the annual shortfall Then,
method Capitalized value= Annual shortfall x
number of years (the shortfall must be
covered).
3. Capital shortfall for covering the expenses arises upon death

Capital shortfall Frist

Identify total the capital needs
Identify all available assets upon death
Identify all existing insurance

Then calculate Capital Shortfall as follows: