Fundamentals of Canadian Life Insurance Fundamentals of Canadian Life Insurance 163 Life Insurance Terms in THE ESSENTIAL REFERENCE OF LIFE INSURANCE TERMS IN PLAIN ENGLISH Fundamentals of Canadian Life Insurance Fundamentals of Canadian Life Insurance The Essential Reference of Life Insurance Terms in Plain English 2 Fundamentals of Canadian Life Insurance Fundamentals of Canadian Life Insurance Copyright 2012 The Financial Literacy Company All rights reserved. Any reproduction of parts or all of this book and its contents by any means electronic or mechanical is prohibited. The Fundamentals of Canadian Life Insurance is a collection of terms common to the Canadian life insurance industry and relevant to all those who work in the financial services industry or in association with life insurers. The definitions of the terms are “pure,” that is, they do not reflect the practices or policies of any insurance company. Thus, there may be some minor discrepancies between these definitions and how an insurer uses this terminology or interprets and applies these terms. The information in this book is provided for educational purposes only; it should not be construed or interpreted as providing advice. Agents and advisors should always seek guidance from their principals and compliance experts in regards to informing themselves and others about details of the products they sell and other considerations of their business. We welcome all feedback and suggestions for additions to the book. Please send your comments to [email protected]. ISBN: 0-9879002-0-5 CLIFE INC. 1595 Sixteenth Avenue Suite 301 Richmond Hill, ON L4B 3N9 www.clifece.ca The Fundamentals of Canadian Life Insurance is also available for continuing education credits for life agents and accident and sickness agents. Please see the website for details or email [email protected]. 3 Fundamentals of Canadian Life Insurance Fundamentals of Canadian Life Insurance Table of Contents Accident and Sickness 6 Ethics 47 Accidental Death Benefit/Accidental Exclusions 48 Death and Dismemberment Insurance 6 Adjusted Cost Basis 7 Face Page 49 Annuities 8 Fiduciary Duty 50 Application 9 Fixed-income Investments 50 ASO Plans 10 Fraud 51 Assignment 11 Assuris 12 Grace Period 52 Authority 13 Grandfathered Policies 53 Automatic Premium Loan 14 Group Disability Insurance 54 Group Health Insurance 55 Beneficiary 14 Group Insurance 55 Business Disability Insurance 15 Group Life Insurance 56 Business Life Insurance 16 Guaranteed Minimum Withdrawal Benefit Business Overhead 17 Plans 57 Guarantees 58 Canada Deposit Insurance Corporation 18 Canada Pension Plan 19 Holding Out 59 Canada Life and Health Insurance Association Income Splitting 60 20 Income Tax 61 Capital Gains 21 Incontestability 61 Cash Surrender Value 22 Index-linked Annuity 62 Certified Financial Planner 23 Inflation 62 Chartered Life Underwriter 23 Information Folder 63 Churning and Twisting 23 Insurable Interest 64 Claims 24 Insured 65 Co-insurance 25 Insured Annuity 66 Compliance 26 Interest 66 Conflict of Interest 27 Irrevocable Beneficiary 67 Continuing Expenses 27 Joint and Last Survivor Annuity 68 Contract 28 Co-ordination of Benefits 29 Last Expenses 69 Corporation 29 Law of Agency 70 Cost Illustrations 30 Leveraging 70 Creditor Protection 31 Life Annuities 71 Criminal Law 32 Life Income Funds 72 Critical Illness Insurance 33 Locked-in Plans 73 LLQP 74 Death Benefit 34 Locked-in Retirement Accounts 75 Death Benefit Guarantee 35 Long-term Care Insurance 76 Deductible 36 Long-term Disability 77 Defined Benefit Plan 37 Defined Contribution Plan 38 Marginal Tax Rate 78 Definitions of Disability 39 Maturity Guarantee 79 Deposit-based Guarantee 40 Maximum Tax Actuarial Reserve 80 Disability Income Insurance 41 Misrepresentation 81 Disclosure 42 Mistake 81 Disposition 42 Money Laundering 82 Morbidity 82 Earned Income 43 Mortality 83 Effective Date 44 Mortgage Insurance 84 Equity 44 Mutual Funds 84 Errors and Omissions Insurance 45 Estate 46 Needs-based Sales Approach 86 4 Fundamentals of Canadian Life Insurance Net Cost of Pure Insurance 86 Residual and Partial Disability Benefits 113 Non-forfeiture Options 87 Riders 114 Notional Units 88 Risk Tolerance 115 Rule of 72 116 Occupational Classification 89 Offset 90 Sales Charge 117 Old Age Security 90 Segregated Funds 118 Self-directed RRSP 119 Participating Whole Life Insurance 91 Settlement Options 120 Permanent Life Insurance 92 Short-term Disability 120 Personal Contract 93 Sole Proprietorship 121 Policy-based Guarantee 94 Spousal Plan 122 Policy Dividends 95 Spousal Rollover 122 Policy Loan 95 Stocks 123 Pooled Registered Pension Plans 96 Subrogation 124 Pre-existing Condition 97 Suicide Exclusion Clause 124 Premium 98 Prescribed Annuity 99 Tax-free Savings Account 125 Prescribed Retirement Income Funds 99 Taxation of Life Insurance 126 Present Value of Money 100 Temporary Insurance Agreement 127 Privacy and Confidentiality 101 Term Annuity 127 Probate 102 Term Life Insurance 128 Term-to-100 Life Insurance 129 Rated Contract 102 Time Horizon 130 Recurring Disability 103 Time Value of Money 130 Registered Disability Savings Plan 103 Trusts 131 Registered Education Savings Plan 104 Registered Pension Plans 105 Unbundling 132 Registered Plans 106 Underwriting 132 Registered Retirement Income Funds 106 Unfair Trade Practices 133 Registered Retirement Savings Plans 107 Uniform Life Insurance Act 134 Reinstatement 108 Universal Life Insurance 134 Reinsurance 109 Renewable Term Life Insurance 110 Waiver of Premium Rider 135 Replacement 110 Whole Life Insurance 136 Rescission 112 Reset 112 Yield to Maturity 137 5 Fundamentals of Canadian Life Insurance Accident and Sickness Insurance (A&S) Accident and sickness insurance is a broad category of insurance also known as health insurance. A&S is available for both personal use and for groups. All Canadians enjoy basic health insurance from their provincial health plans. A&S policies step in to provide: - Extended health care. Pays for semi-private or private hospital rooms, prescription drugs, medical appliances (such as a knee brace), and other services. - Travel assistance. Pays the cost of health care needed outside Canada above the amount provincial plans cover. Will also cover costs such as those incurred by a traveling companion, and the return of a body to Canada. - Prescription drugs. - Dental services. - Accidental Death and Dismemberment. - Critical Illness Insurance. Pays a lump sum when the insured is diagnosed with a critical illness covered by the policy and remains alive 30 days after diagnosis. - Long-term Care Insurance. Pays for care of those who are no longer able to care for themselves. Advisor Resource: CLHIA guideline on travel insurance: http://www.clhia.ca/domino/html/clhia/CLHIA_LP4W_LND_Webstation.nsf/resources/Guidelines/$fi le/Guideline_G5.pdf Related Terms: Group Health Insurance. Critical Illness Insurance. Long-term Care Insurance. Accidental Death Benefit (ADB) Accidental Death and Dismemberment Insurance (AD+D) The accidental death benefit is a rider for life insurance policies that increases the death benefit paid to the beneficiary if the life insured dies because of an accident. The types of accidents that are covered are described in the policy, and death must occur within 365 days. 6 Fundamentals of Canadian Life Insurance When the accidental death benefit rider provides an additional sum when there is a loss of a body part (eye, arm, leg, etc.), it is called an accidental death and dismemberment (AD&D) rider. This rider is available on both personal policies and group policies. Accidental death and dismemberment (AD&D) is also available as a form of accident and sickness insurance. It is a policy (not a rider) when it is offered this way. Accidental death and dismemberment (AD&D) provides a death benefit to a beneficiary if the insured dies, or a benefit to the insured if dismemberment occurs. If the insured suffers from more than one dismemberment (for example, both legs) a greater sum is paid than for a single dismemberment (one leg). Advisor Remarks: 1. A schedule accompanies the (AD&D) policy and rider that specifies the amount paid per loss (such as loss of leg). 2. The key word in these policies is accident. Death must be the result of an accident for the benefit to be paid. Adjusted Cost Basis Adjusted cost basis (ACB) is a dollar amount that represents the net cost of the life insurance policy to the policy owner. It is made up of the gross cost of the policy (in other words, how much has been paid --- mostly, premiums) plus or minus other contributions that add to, or are subtracted from, that value. ACB increases by costs incurred by policy owner and decreases by benefits received by the policy owner. ACB is used to determine the taxable gain on a policy loan and the taxable portion of a withdrawal. Costs that increase the ACB include: - Premiums. - A policy loan repayment. The ACB is decreased by: - Life insurance coverage, called the net cost of pure insurance (NCPI). - Dividends. - A policy loan. 7 Fundamentals of Canadian Life Insurance - A withdrawal. The ACB calculation for a “plain vanilla” policy is: ACB = premiums – NCPI The ACB calculation for a par whole life policy with a policy loan is: ACB = premiums – NCPI – dividends – policy loan When a life insured dies, the policy beneficiary receives the death benefit of the policy. The death benefit is not affected by the ACB. Advisor Remarks: 1. As of Dec. 2, 1982, the method for calculating the ACB changed. Policies issued prior to this date are called grandfathered. These policies have preferential tax treatment compared to those issued after that date. 2. ACB is a difficult concept. It is best thought of as how much the person is “out of pocket” in terms of expense for the product. 3. For non-insurance purposes, the ACB is the adjusted cost base. Only in insurance is “basis” used. Related Terms: Net Cost of Pure Insurance. Grandfathered Policies. Annuities An annuity is an investment contract, usually made with a life insurance company.