A Glossary of Life Insurance and Financial Terms
A contract which provides an income for a specified period of time, such as a certain
number of years or for life. An annuity is like a life insurance policy in reverse. The purchaser gives the life insurance
company a lump sum of money and the life insurance company pays the purchaser a regular income, usually monthly.
Income that has been earned but not yet received. For instance, if you have a non-registered
Guaranteed Investment Certificate (GIC), Mutual Fund or Segregated Equity Fund, growth accrues annually or semi-annually and
is taxable annually even though the gain is only paid at maturity of your investment.
This is the person during whose life an annuity is payable.
A signed statement of facts made by a person applying for life insurance and then
used by the insurance company to decide whether or not to issue a policy. The application becomes part of the insurance contract
when the policy is issued.
This is the legal transfer on one person's interest in an insurance policy to another
person or entity, such as to a bank to qualify for a loan
Legislation under which interest, dividends, or capital gains earned on assets you
transfer to your spouse will be treated as your own for tax purposes. Interest or dividends relating to property transferred
to children under 18 also will be attributed back to you. The exception to this rule is that capital gains relating to property
transferred to children under 18 will not be attributed back to you.
A procedure for making the effective date of a policy earlier than the application
date. Backdating is often used to make the age of the consumer at policy issue lower than it actually was in order to get
a lower premium.
Back To Back Annuity:
This term refers to the simultaneous issue of a life annuity with a non-guaranteed
period and a guaranteed life insurance policy [usually whole life or term to 100]. The face value of the life insurance would
be the same amount that was used to purchase the annuity. This combination of life annuity providing the highest payout of
all types of annuities, along with a guaranteed life insurance policy allowed an uninsurable person to convert his/her RRSP
into the best choice of annuity and guarantee that upon his/her death, the full value of the annuity would be paid tax free
through the life insurance policy to his family members. However, in the early 1990's, the Federal tax authorities put a stop
to the issuing of standard life rates to rated or uninsurable applicants. Insuring a life annuity in this manner is still
an excellent way to provide guaranteed tax free funds to family members but the application for the annuity and the application
for the life insurance are separate transactions and today, most likely conducted through two different insurance companies
so that there is no suspicion of preferential treatment given to the life insurance application.
This is the person who benefits from the terms of a trust, a will, an RRSP, a RRIF,
a LIF, an annuity or a life insurance policy. In relation to RRSP's, RRIF's, LIF's, Annuities and of course life insurance,
if the beneficiary is a spouse, parent, offspring or grand-child, they are considered to be a preferred beneficiary. If the
insured has named a preferred beneficiary, the death benefit is invariably protected from creditors. There have been some
court challenges of this right of protection but so far they have been unsuccessful. See "Creditor Protection" below. A beneficiary
under the age of 18 must be represented by an individual guardian over the age of 18 or a public official who represents minors
generally. A policy owner may, in the designation of a beneficiary, appoint someone to act as trustee for a minor. Death benefits
are not subject to income taxes. If you make your beneficiary your estate, the death benefit will be included in your assets
for probate. Probate filing fees are currently $14 per thousand of estate value in British Columbia and $15 per thousand of
estate value in Ontario.
Another way to avoid probate fees or creditor claims against life insurance proceeds
is for the insured person to designate and register with his/her insurance company's head office an irrevocable beneficiary.
By making such a designation, the insured gives up the right to make any changes to his/her policy without the consent of
the irrevocable beneficiary. Because of the seriousness of the implications, an irrevocable designation should only be made
for good reason and where the insured fully understands the consequences.
Note: A successful challenge of the rules relating to beneficiaries was concluded
in an Ontario court in 1996. The Insurance Act says its provisions relating to beneficiaries are made "notwithstanding the
Succession Law Reform Act." There are two relevent provisions of the Succession Law Reform Act. One section of the act gives
a judge the power to make any order concerning an estate if the deceased person has failed to provide for a dependant. Another
section says money from a life insurance policy can be considered part of the estate if an order is made to support a dependant.
In the case in question, the deceased had attempted to deceive his lawful dependents by making his common-law-spouse the beneficiary
of an insurance policy which by court order was supposed to name his ex-spouse and children as beneficiaries.
This is an agreement entered into by the owners of a business to define the conditions
under which the interests of each shareholder will be bought and sold. The agreement sets the value of each shareholders interest
and stipulates what happens when one of the owners wishes to dispose of his/her interest during his/her lifetime as well as
disposal of interest upon death or disability. Life insurance, critical illness coverage and disability insurance are major
considerations to help fund this type of agreement.
Cash Surrender Value:
This is the amount available to the owner of a life insurance policy upon voluntary
termination of the policy before it becomes payable by the death of the life insured. This does not apply to term insurance
but only to those policies which have reduced paid up values and cash surrender values. A cash surrender in lieu of death
benefit usually has tax implications.
Canadian Life and Health Insurance Compensation
Better known as CompCorp, this is a group of Canadian Life and Health Insurance
Companies which have formed a pool insuring all policy holders who are canadian residents against financial failure of any
of the members of the pool. CompCorp's press release says "In the event a member company is declared insolvent, CompCorp will
guarantee payment under covered policies up to certain specified limits for policyholders of that company. This means annuity
and disability income payments continue, claims under life and health insurance policies will be paid, and requests for cash
surrender will be honoured. Policy holders receiving income from annuities and disability insurance with no option of a lump
sum cash withdrawal are guaranteed payments up to $2,000 per month. Death claims under covered life insurance policies are
protected up to $200,000. Health insurance benefits other than disability income annuities are guaranteed up to $60,000 in
total payments. For money accumulation products, CompCorp's limits are similar to those of the Canada Deposit Insurance Corporation
(CDIC). Plans registered under the Tax Act, such as RRSP's and RRIF's, are protected up to $60,000 per person. In addition,
non-registered plans, and the cash surrender value in life insurance policies are protected up to $60,000 per person." A consumer
brochure is available by contacting the Canadian Life and Health Insurance Association Info Centre at 1-800-268-8099.
Canadian Deposit Insurance Corporation:
Better known as CDIC, this is an organization which insures qualifying deposits
and GICs at savings institutions, mainly banks and trust companys, which belong to the CDIC for amounts up to $60,000 and
for terms of up to five years. Many types of deposits are not insured, such as mortgage-backed deposits, annuities
of duration of more than five years, and mutual funds.
A licensed insurance agent who sells insurance for only one company.
In medical insurance, the insured person and the insurer sometimes share the cost
of services under a policy in a specified ratio, for example 80% by the insurer and 20% by the insured. By this means, the
cost of coverage to the insured is reduced.
Interest earned on an investment at periodic intervals and added to principal and
previous interest earned. Each time new interest earned is calculated it is on a combined total of principal and previous
interest earned. Essentially, interest is paid on top of interest.
This is the person designated to receive the death benefit of a life insurance policy
if the primary beneficiary dies before the life insured. This is a consideration when husband and wife make each other the
beneficiary of their coverage. Should they both die in the same car accident or plane crash, the death benefits would go to
each others estate and creditor claims could be made against them. Particularly if minor children could be survivors, then
a trustee contingent beneficiary should be named.
This is the person designated to become the new owner of a life insurance policy
if the original owner dies before the life insured.
Term life insurance products are offered as non-convertible or convertible to a
certain time in the future. The coversion right has a time limit, usually to the policy holder's age 60 or possibly even age
70. This right means that the policy holder has the right to convert their existing policy to another specific different plan
of permanent insurance within the specified time period, without providing evidence of insurability. There is a slightly higher
cost for a term policy with the conversion priviledge but it is a valuable feature should a policy holder's health change
for the worst and continued insurance coverage becomes a necessity.
Most often this right is also granted to individuals covered under employee group
benefit policies where individuals leaving the employee group have a limited amount of time, usually anywhere from 30 to 90
days, to convert to a specific permanent individual policy without evidence of insurability.
Creditor Proof Protection:
The creditor proof status of such things as life insurance, non-registered life
insurance investments, life insurance RRSPs and life insurance RRIFs make these attractive products for high net worth individuals,
professionals and business owners who may have creditor concerns. Under most circumstances the creditor proof rules of the
different provincial insurance acts take priority over the federal bankruptcy rules.
The provincial insurance acts protect life insurance products which have a family
class beneficiary. Family class beneficiaries include the spouse, parent, child or grandchild of the life insured, except
in Quebec, where creditor protection rules apply to spouse, ascendants and descendants of the insured. Investments sold by
other financial institutions do not offer the same security should the holder go bankrupt. There are also circumstances under
which the creditor proof protections do not hold for life insurance products. Federal bankruptcy law disallows the protection
for any transfers made within one year of bankruptcy. In addition, should it be found that a person shifted money to an insurance
company fund in bad faith for the specific purpose of avoiding creditors, these funds will not be creditor proof.
Dead Peasants Insurance:
Also known as "Dead Janitors Insurance", this is the practice, where allowed, in
several U.S. states, of numerous well known large American Corporations taking out corporate owned life insurance policies
on millions of their regular employees, often without the knowledge or consent of those employees. Corporations profiting
from the deaths of their employees [and sometimes ex-employees] have attracted adverse publicity because ultimate death benefits
are seldom, even partially passed down to surviving families.
An annuity providing for income payments to commence at a specified future time.
Under certain circumstances, taxation rules assume that a transfer of property has
occurred, even though there has not been an actual purchase or sale. This could happen upon death or transfer of ownership.
Insurance that pays you an ongoing income if you become disabled and are unable
to pursue employment or business activities. There are limits to how much you can receive based on your pre-disability earnings.
Rates will vary based on occupational duties and length of time in a particular industry. This kind of coverage has a waiting
period before you can begin collecting benefits, usually 30, 60 or 90 days. The benefit paying period also varies from 2 years
to age 65. A short waiting period will cost more that a longer waiting period. As well, a long benefit paying period will
cost more than a short benefit paying period.
Investing so that all your eggs are not in the same basket. By spreading your investments
over different kinds of investments, you cushion your portfolio against sudden swings in any one area. Segregated equity funds
have become a popular and secure way for average investors to get the benefits of greater diversification.
As the term dividend relates to a corporation's earnings, a dividend is an amount
paid per share from a corporation's after tax profits. Depending on the type of share, it may or may not have the right to
earn any dividends and corporations may reduce or even suspend dividend payments if they are not doing well. Some dividends
are paid in the form of additional shares of the corporation. Dividends paid by Canadian corporations qualify for the dividend
tax credit and are taxed at lower rates than other income.
As the term dividend relates to a life insurance policy, it means that if that policy
is "participating", the policy owner is entitled to participate in an equitable distribution of the surplus earnings of the
insurance company which issued the policy. Surpluses arise primarily from three sources: (1) the difference between anticipated
and actual operating expenses, (2) the difference between anticipated and actual claims experience, and (3) interest earned
on investments over and above the rate required to maintain policy reserves. Having regard to the source of the surplus, the
"dividend" so paid can be considered, in part at least, as a refund of part of the premium paid by the policy owner.
Life insurance policy owners of participating policies usually have four and sometimes
five dividend options from which to choose:
(1) take the dividend in cash,
(2) apply the dividend to reduce current premiums,
(3) leave the dividends on deposit with the insurance company to accumulate at interest
like a savings plan,
(4) use the dividends to purchase paid-up whole life insurance to mature at the
same time as the original policy,
(5) use the dividends to purchase one year term insurance equal to the guaranteed
cash value at the end of the policy year, with any portion of the dividend not required for this purpose being applied under
one of the other dividend options.
NOTE: It is suggested here that if you have a participating whole life policy and
at the time of purchase received a "dividend projection" of incredible future savings, ask for a current projection. Life
insurance company's surpluses are not what they used to be.
Dollar Cost Averaging:
A way of smoothing out your investment deposits by investing regularly. Instead
of making one large deposit a year into your RRSP, you make smaller regular monthly deposits. If you are buying units in a
mutual fund or segregated equity fund, you would end up buying more units in the month that values were low and less units
in the month that values were higher. By spreading out your purchases, you don't have to worry about buying at the right time.
Life insurance payable to the policyholder, if living on the maturity date stated
in the policy, or to a beneficiary if the insured dies before that date. For example, some Term to age 100 policies offer
the option of taking the face amount of the policy as a cash payout at age 100 if the policyholder is still alive and paying
all required income taxes on the amount received or leaving the policy to pay out upon death whereupon the payout is tax free.
Errors and Omissions Insurance:
Insurance coverage purchased by the agent/broker which provides protection against
loss incurred by a client because of some negligent act, error, oversight, or omission by the agent/broker.
Fiat Money is paper currency made legal tender by law or fiat. It is not backed
by gold or silver and is not necessarily redeemable in coin. This practice has had widespread use for about the last 70 years.
If governments produce too much of it, there is a loss of confidence. Even so, governments print it routinely when they need
it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada's currency
falls into this category.
First To Die Coverage:
This means that there are two or more life insured on the same policy but the death
benefit is paid out on the first death only. If two or more persons at the same address are purchasing life insurance at the
same time, it is wise to compare the cost of this kind of coverage with individual policies having a multiple policy discount.
A specific period of time after a premium payment is due during which the policy
owner may make a payment, and during which, the protection of the policy continues. The grace period usually ends in 30 days.
Group Life Insurance:
This is a very common form of life insurance which is found in employee benefit
plans and bank mortgage insurance. In employee benefit plans the form of this insurance is usually one year renewable term
insurance. The cost of this coverage is based on the average age of everyone in the group. Therefore a group of young people
would have inexpensive rates and an older group would have more expensive rates.
Some people rely on this kind of insurance as their primary coverage forgetting
that group life insurance is a condition of employment with their employer. The coverage is not portable and cannot be taken
with you if you change jobs. If you have a change in health, you may not qualify for new coverage at your new place of employment.
Bank mortgage insurance is also usually group insurance and you can tell this by
virtue of the fact that you only receive a certificate of insurance, and not a complete policy. The only form in which bank
mortgage insurance is sold is reducing term insurance, matching the declining mortgage balance. The only beneficiary that
can be chosen for this kind of insurance is the bank. In both cases, employee benefit plan group insurance and bank mortgage
insurance, the coverage is not guaranteed. This means that coverage can be cancelled by the insurance company underwriting
that particular plan, if they are experiencing excessive claims.
This clause in regular life insurance policy provides for voiding the contract of
insurance for up to two years from the date of issue of the coverage if the life insured has failed to disclose important
information or if there has been a misrepresentation of a material fact which would have prevented the coverage from being
issued in the first place. After the end of two years from issue, a misrepresentation of smoking habits or age can still void
or change the policy.
This is a tax planning strategy of arranging for income to be transferred to family
members who are in lower tax brackets than the one earning the income, thus reducing taxes. Even though attribution rules
limit income splitting, there are still a number of legitimate ways to do so, such as through the use of spousal RRSPs.
This is a provincial government licensed independent businessperson who usually
represents five or more life insurance companies in a sales and service capacity and who is paid a commission by those life
insurance companies for sales and service of life insurance products. We for example, have been in business for 12 years and
regularly place new business with over twenty different life insurance companies.
In England in the 1700's it was popular to bet on the date of death of certain prominent
public figures. Anyone could buy life insurance on another's life, even without their consent. Unfortunately, some died before
it was their time, dispatched prematurely in order that the life insurance proceeds could be collected. In 1774, English Parliament
passed a law which restricted the right to be a beneficiary on a life insurance contract to those who would suffer an economic
loss when the life insured died. The law also provided that a person has an unlimited insurable interest in his own life.
It is still a legal stipulation that an insurance contract is not valid unless insurable interest exists at the time the policy
is issued. Life Insurance companies will not, however, issue unlimited amounts of coverage to an individual. The amount of
life insurance which will be approved has to approximate the loss caused by the death of the individual and must not result
in a windfall for the beneficiary.
This is a telephone interview of the person applying for life insurance conducted
by someone from the underwriting department of the insurance company. Some insurance companies only sporadically contact applicants
and some contact every applicant. On average the interview lasts between 15 to 30 minutes. The questions asked relate to personal
habits (like smoking and alcohol consumption) and finances, including income and net worth, confirmation of employment, duties
and the nature of the applicant's business. In addition, there are questions about driving, sports, aviation and currently
held insurance. All information obtained is strictly confidential and is submitted solely to the underwriter for review.
This is the person covered by the life insurance policy. Upon this person's death,
a tax free benefit will be paid to that person's estate or a named beneficiary.
An insured mortgage protects only the mortgage lender in case you do not make your
mortgage payments. This coverage is provided by CMHC [Canada Mortgage and Housing Corporation] and is required if a person
has a high-ratio mortgage. [A mortgage is high-ratio if the amount borrowed is more than 75% of the purchase price or appraised
value, whichever is less.]
Insured Retirement Plan:
This is a recently coined phrase describing the concept of using Universal Life
Insurance to tax shelter earnings which can be used to generate tax-free income in retirement. The concept has been described
by some as "the most effective tax-neutralization strategy that exists in Canada today."
In addition to life insurance, a Universal Life Policy includes a tax-sheltered
cash value fund that cannot exceed the policy's face value. Deposits made into the policy are partially used to fund the life
insurance and partially grow tax sheltered inside the policy. It should be pointed out that in order for this to work, you
must make deposits into this kind of policy well in excess of the cost of the underlying insurance. Investment of the cash
value inside the policy are commonly mutual fund type investments. Upon retirement, the policy owner can draw on the accumulated
capital in his/her policy by using the policy as collateral for a series of demand loans at the bank. The loans are structured
so the sum of money borrowed plus interest never exceeds 75% of the accumulated investment account. The loans are only repaid
with the tax free death benefit at the death of the policy holder. Any remaining funds are paid out tax free to named beneficiaries.
Recognizing the value to policy holders of this use of Universal Life Insurance,
insurance companies are reworking features of their products to allow the policy holder to ask to have the relationship of
insurance to investment growth tracked so that investment growth inside the policy may be maximized. The only potential downside
of this strategy is the possibility of the government changing the tax rules to prohibit using a life insurance product in
This means dying without a will, in which case the provincial laws of the province
in which the death occurred apply to the manner in which assets will be distributed. In other words, if you don't write your
own will, the government will do it for you after your death and it may not be as you would have wished.
This refers to the termination of an insurance policy due to the owner of the policy
failing to pay the premium within the grace period [Usually within 30 days after the last regular premium was required and
not paid]. It is possible to re-instate the coverage with the same premium and benefits intact but the life insured will have
to qualify for this coverage all over again and bring up to date all unpaid premiums.
This refers to the practice of some life insurance companies to offer policies which
are lower in price because they have assumed a high probability that the policies will be cashed in by their owners for one
reason or another before the death benefit becomes available. It is a bold and risky offer by the insurance company because
sometimes the purchasers of these policies simply don't lapse them.
Last To Die Coverage:
This means that there are two or more life insured on the same policy but the death
benefit is paid out on the last person to die. The cost of this type of coverage is much less than a first to die policy and
it is generally used to protect estate value for children where there might be substantial capital gains taxes due upon the
death of the last parent. This kind of policy is also valuable when one of two people covered has health problems which would
prohibit obtaining individual coverage.
Level Premium Life Insurance:
This is a type of insurance for which the cost is distributed evenly over the premium
payment period. The premium remains the same from year to year and is more than actual cost of protection in the earlier years
of the policy and less than the actual cost of protection in the later years. The excess paid in the early years builds up
a reserve to cover the higher cost in the later years.
The average number of years of life remaining for a group of people of a given age
and gender according to a particular mortality table.
Life Income Fund:
Commonly known as a LIF, this is one of the options available to locked in Registered
Pension Plan (RPP) holders for income payout as opposed to Registered Retirement Savings Plan (RRSP) holders choice of payout
through Registered Retirement Income Funds (RRIF). A LIF must be converted to a unisex annuity by the time the holder reaches
Some insurance companies include this benefit at no cost to their policy holders.
The insurer considers on a case to case basis, the need for insurance funds before death. If the insured can demonstrate a
shortened life of less than two years and with some insurers one year, the insurer will consider releasing up to 50% or a
maximum of $100,000 of the life insurance coverage held by the insured. Not all insurers offer this benefit for free. The
need has resulted in specific stand alone living benefit/critical illness policies coming into existence. Look under "Different
types of Life Insurance" for further information. You might have heard of "Viatical Settlements", the practice of seriously
ill people selling the rights to their life insurance policies to third parties. This practice is common in the United States
but has not caught on in Canada.
This is a will which specifically expresses the testator's desire not to be kept
alive on life support machines, should the occasion arise.
This is the process by which "dirty money" generated by criminal activities is converted
through legitimate businesses into assets that cannot be easily traced back to their illegal origins.
This is a statistical table used by life insurance companies showing the probability
of death of male and females at all ages.
These are statistical tables used by life insurance companies showing the probability
of disease of male and females at all ages.
Medical Information Bureau:
This organization was established in 1902. The Medical Information Bureau (M.I.B.)
is a non-profit association of life insurance companies. Its purpose is to detect and deter fraud by providing warnings called,
alerts, to member companies. For example, if an insurance applicant advised one insurance company of a heart attack and then
applied to another insurance company omitting this history, codes, reported by the first insurance company, indicating a heart
attack would alert the second insurance company to the undisclosed history. It is a rarity, however, that the alert is the
only notice of a specific medical impairement as most applicants completely disclose their history.
Commonly sold in the form of reducing term life insurance by lending institutions,
this is life insurance with a death benefit reducing to zero over a specific period of time, usually 20 to 25 years. In most
instances, the cost of coverage remains level, while the death benefit continues to decline. Restated, the cost of this kind
of insurance is actually increasing because less death benefit is paid as the outstanding mortgage balance decreases and the
cost remains the same. While lending institutions are the most popular sources for this kind of coverage, it can also be purchased
directly from life insurance companies, accompanied with lower cost and flexibility. Another issue to be considered with reducing
term insurance, no matter where it is purchased, is the fact that coverage reduces over a set period of years. Most people
are up-sizing their residences, not down-sizing, so it is likely that more coverage is required, rather than less coverage,
as years pass.
The cost of mortgage lender's insurance group coverage is bases on a blended
smoker rate, not giving any advantage to either male or female. Mortgage lender's group insurance specifies that it is the
sole beneficiary entitled to receive the death benefit. Mortgage lender's group insurance is not portable and is not guaranteed.
Generally speaking, your coverage is void if you do not occupy the house for a period of time, rent the home, fall into arrears
on the mortgage, and there are a few others which vary by institution. If, for example, you sell your home and buy another,
your current mortgage insurance coverage ends and you will have to qualify for new coverage when you purchase your next home.
Maybe you won't be able to qualify. Not being guaranteed means that it is possible for the lending institution's group insurance
carrier to cancel all policy holder's coverage if they are experiencing too many death benefit claims.
Mortgage insurance purchased from a life insurance company, is priced, based
on gender, smoking status, health and lifestyle of the purchaser. Once obtained, it is a unilateral contract in your favour,
which cannot be cancelled by the insurance company unless you say so or unless you stop paying for it. It pays upon the death
of the life insured to any "named beneficiary" you choose, tax free. If, instead of reducing term life insurance, you have
purchased enough level or increasing life insurance coverage based on your projection of future need, you can buy as many
new homes in the future as you want and you won't have to worry about coverage you might loose by renewing or increasing your
It is worth mentioning mortgage creditor protection insurance since it is
many times mistakenly referred to simply as mortgage insurance. If a home buyer has a limited amount of down payment towards
a substantial home purchase price, he/she may qualify for a high ratio mortgage on the home if a lump sum fee is paid for
mortgage creditor protection insurance. The only Canadian mortgage lenders currently known to offer this option through the
distribution system of banks and trust companies, are General Electric Capital [GE Capital] and Central Mortgage and Housing
Corporation [CMHC]. The lump sum fee is mandatory when the mortgage is more than 75% of the value of the property being purchased.
The lump sum fee is usually added onto the mortgage. It's important to realize that the only beneficiary of this type of coverage
is the morgage lender, which is the bank or trust company through which the buyer arranged their mortgage. If the buyer for
some reason defaults on this kind of high ratio mortgage and the value of the property has dropped since being purchased,
the mortgage creditor protection insurance makes certain that the bank or trust company gets paid. However, this is not the
end of the story, because whatever the difference is, between the disposition value of the property and whatever sum of unpaid
mortgage money is outstanding to either GE Capital or CMHC will be the subject of collection procedures against the defaulting
home buyer. Therefore, one should conclude that this kind of insurance offers protection only to the bank or trust company
and absolutely no protection to the home buyer.
In October 1996 it was announced in the international news that scientists
had finally located the link between cigarette smoking and lung cancer. In the early 1980's, some Canadian Life Insurance
Companies had already started recognizing that non-smokers had a better life expectancy than smokers so commenced offering
premium discounts for life insurance to new applicants who have been non-smokers for at least 12 months before applying for
coverage. Today, most life insurance companies offer these discounts.
Savings to non-smokers can be up to 50% of regular premium depending on age
and insurance company. Most life insurance companies offering non-smoker rates insist that the person applying for coverage
have abstained from any form of tobacco or marijuana for at least twelve months, some companies insist on longer periods,
up to 15 years.
Tobacco use is generally considered to be cigarettes, cigarillos, cigars,
pipes, chewing tobacco, nicorette gum, snuff, marijuana and nicotine patches. In addition to these, if anyone tests positive
to cotinine, a by-product of nicotine, they are also considered a smoker. There are some insurance companies which allow moderate
or occasional use of cigars, cigarillos or pipes as acceptable for non-smoker status. Experienced brokers are aware of how
to locate these insurance companies and save you money.
Special care should be taken by applicants for coverage who qualify for non-smoker
rates by virtue of having ceased a smoking habit for the required period before application, but for some reason, fall back
into the smoking habit some time after obtaining coverage. While contractually, the insurance company is still bound to a
non-smoking rate, the facts of the applicant's smoking hiatus may become vague over the subsequent years of the resumed habit
and at time of death claim, the insurance company may decide to contest the original non-smoking declaration. The consequence
is not simply a need to back pay the difference between non-smoker and smoker rates but in reality the possibility of denial
of death claim. It is therefore, important to advise the servicing broker as well as the insurance company of the change in
smoking habits to make certain that sufficient evidence is documented to track the non-smoking period.
This is the maximum value of a policy that an insurance company will issue
without the applicant taking a medical examination, although medical questions are invariably asked during the application
process. When a non-medical issue is made through group insurance, in most cases, medical data is not requested at all.
This is the person who owns the insurance policy. It is usually the same person
as the insured but it could be someone else who has the permission of the insured to be the owner, like a spouse, a common-law-spouse,
an offspring, a parent, a corporation with insurable interest or a business partner with insurable interest. In order for
someone else to be an owner of your policy, they have to have a legitimate insurable interest in you.
As non-smoking rates caused a major reduction in the cost of life insurance in the
early 1980's, the emergence of preferred non-smoker rates in 1998 has caused another noteworthy reduction in rates. A growing
number of insurance companies are offering better rates which go beyond simply looking at gender or smoking habits. Other
health related factors such as physical build, lifestyle, avocation and personal and family health history indicating longer
life expectancy can add up to significant cost savings to new life insurance applicants. Make certain to ask about these new
This is your payment for the cost of insurance. You may pay annually, semi-annually,
quarterly or monthly. The least expensive method is annually. Using any of the other payment modes will cost you more money.
For example, paying monthly will cost about 17% more. If you pay annually and terminate your coverage part way through the
year, you may not receive a refund for the remaining months to the annual renewal date.
The cost of life insurance varies by age, sex, health, lifestyle, avocation and
occupation. Generally speaking, the following is true at the time of applying for coverage; the older you are, the more will
be the cost; of a male and female of the same age, the female will be considered 4 years younger; health problems will increase
the cost of insurance and may result in rejection altogether; dangerous hobbies such as SCUBA diving, private flying, bungi
jumping, parachuting, etc. may increase the cost of insurance and may result in rejection altogether; abuse of alcohol or
drugs or a poor driving record will make getting coverage difficult.
This is an administrative fee which is part of most life insurance policies. It
ranges from about $40 to as much as $100 per year per policy. It is not a separate fee. It is incorporated in the regular
monthly, quarterly, semi-annual or annual payment that you make for your policy. Knowing about this hidden fee is important
because some insurance companies offer a policy fee discount on additional policies purchased under certain conditions. Sometimes
they reduce the policy fee or waive it altogether on one or more additional policies purchased at the same time and billed
to the same address. The rules are slightly different depending on the insurance company. There could be enormous savings
if several people in the same family or business were intending to purchase coverage at the same time.
This is the person who owns a life insurance policy. This is usually the insured
person, but it may also be a relative of the insured, a partnership or a corporation. There are instances in marriage breakup
(or relationship breakup with dependent children) where appropriate life insurance on the support provider, owned and paid
for by the ex-spouse receiving the support is an acceptable method of ensuring future security.
Letters probate represent judicial certification of the validity of a Will and judicial
confirmation ofthe authority of the personal representative who is to administer the Will. Essentially, probate fees are a
tax on a person's estate and except for the provinces of Quebec and Alberta, there is no limit to this tax.
Registered Pension Plan:
Commonly referred to as an RPP this is a tax sheltered employee group plan approved
by Federal and Provincial governments allowing employees to have deductions made directly from their wages by their employer
with a resulting reduction of income taxes at source. These plans are easy to implement but difficult to dissolve should the
group have a change of heart. Employer contributions are usually a percentage of the employee's salary, typically from 3%
to 5%, with a maximum of the lessor of 20% or $3,500 per annum. The employee has the same right of contribution. Vesting is
generally set at 2 years, which means that the employee has right of ownership of both his/her and his/her employers contributions
to the plan after 2 years. It also means that all contributions are locked in after 2 years and cannot be cashed in for use
by the employee in a low income year. Should the employee change jobs, these funds can only be transferred to the RPP of a
new employer or the funds can be transferred to an individual RRSP (or any number of RRSPs) but in either scenario, the funds
are locked in and cannot be accessed until at least age 60. The only choices available to access locked in RPP funds after
age 60 are the conversion to a Life Income Fund or a Unisex Annuity.
To further define an RPP, Registered Pension Plans take two forms; Defined Benefit
or Defined Contribution (also known as money purchase plans). The Defined Benefit plan establishes the amount of money in
advance that is to be paid out at retirement based usually on number of years of employee service and various formulae involving
percentages of average employee earnings. The Defined Benefit plan is subject to constant government scrutiny to make certain
that sufficient contributions are being made to provide for the predetermined pension payout. On the other hand, the Defined
Contribution plan is considerably easier to manage. The employer simply determines the percentage to be contributed within
the prescribed limits. Whatever amount has grown in the employee's reserve by retirement determines how much the pension payout
will be by virtue of the amount of LIF or Annuity payout it will purchase.
The most simple group RRSP plan is a group billed RRSP. This means that each employee
has his own RRSP plan and the employer deducts the contributions directly from the employee's wages and sends them directly
to the RRSP plan administrator. Regular RRSP rules apply in that maximum contribution in the current year is the lessor of
18% or $13,500. Generally, to encourage this kind of plan, the employer also agrees to make a regular contribution to the
employee's plans, knowing full well that any contributions made immediately belong to the employee. Should the employee change
jobs, he/she can take their plan with them and continue making contributions or cash it in and pay tax in the year in which
the money is taken into income.
Registered Retirement Savings Plan:
Commonly referred to as an RRSP, this is a tax sheltered and tax deferred savings
plan recognized by the Federal and Provincial tax authorities, whereby deposits are fully tax deductable in the year of deposit
and fully taxable in the year of receipt. The ability to defer taxes on RRSP earnings allows one to save much faster than
is ordinarily possible. The new rules which apply to RRSP's are that the holder of such a plan must convert it into income
by the end of the year in which the holder turns age 69. The choices for conversion are to simply cash it in an pay full tax
in the year of receipt, convert it to a RRIF and take a varying stream of income, paying tax on the amount received annually
until the income is exhausted, or converting it into an annuity with guaranteed payments for a chosen number of years, again
paying tax each year on moneys received.
If you are currently 69 years of age, you may still contribute to your own RRSP
until December 31st of this year and realize a tax deduction on this year's income. You must also, however, make provisions
before December 31st of the year for converting your RRSP into either a RRIF or an annuity, otherwise, the full balance of
your RRSP becomes taxable on January 1 of the following year. If you are older than age 69, still have earned income, and
have a younger spouse, you may continue to contribute to a spousal RRSP until that spouse reaches 69 years of age. Contributions
would be based on your own contribution level and are deducted from your taxable income.
Registered Retirement Income Fund:
Commonly referred to as a RRIF, this is one of the options available to RRSP holders
to convert their tax sheltered savings into taxable income.
This is a provision in some term insurance policies that allow the insured the right
to renew the policy at a more favourable rate by providing updated evidence of insurability.
This is the restoration of a lapsed life insurance policy. The life insurance company
will require evidence of continuing good health and the payment of all past due premiums plus interest.
This subject of replacement of existing policies is covered because sometimes existing
life insurance policies are unnecessarily replaced with new coverage resulting in a loss of valuable benefits. If someone
suggests replacing your existing coverage, insist on having a comparison disclosure statement completed.
The most important policies to examine in detail are those which were issued in
Canada prior to December 2, 1982. If you have a policy of this vintage with a significant cash surrender value, you may want
to consider keeping it. It has special tax advantages over policies issued after December 2, 1982.
Basically, the difference is this. The cash surrender value of a pre December, 1982
policy can be converted to an annuity in accordance with the settlement options in the policy and as a result, the tax on
any policy gain can be spread over the duration of the annuity. Since only the interest element of the annuity payment will
be taxed, there will be less of a tax impact on the annuitant. Policies issued after December 2, 1982 which have their cash
surrender value annuitized trigger a disposition and the annuitant must pay tax on the total policy gain immediately. If you
still decide to replace existing coverage, don't cancel what you have until the new coverage has been issued.
Rule of 72:
This is a very important rule to know. The rule is that the number 72 divided by
the rate of return of your investment equals the number of years it takes for your investment to double.
- At 1% your money will double in 72 years.
- At 2% your money will double in 36 years.
- At 3% your money will double in 24 years.
- At 4% your money will double in 18 years.
- At 5% your money will double in 14.4 years.
- At 6% your money will double in 12 years.
- At 7% your money will double in 10.3 years.
- At 8% your money will double in 9 years.
- At 9% your money will double in 8 years.
- At 10% your money will double in 7.2 years.
Spousal Registered Retirement Savings Plan:
This is an RRSP owned by the spouse of the person contributing to it. The contributor
can direct up to 100% of eligible RRSP deposits into a spousal RRSP each and every year. Contributing to a spouses RRSP reduces
the amount one can contribute to one's own RRSP, however, if the spouse is a lower income earner, it is an excellent way in
which to split income for lower taxation in retirement years.
Split Dollar Life Insurance:
The split dollar concept is usually associated with cash value life insurance where
there is a death benefit and an accumulation of cash value. The basic premise is the sharing of the costs and benefits of
a life insurance policy by two or more parties. Usually one party owns and pays for the insurance protection and the other
owns and pays for the cash accumulation. There is no single way to structure a split dollar arrangement. The possible structures
are limited only by the imagination of the parties involved.
Sometimes called seg funds, segregated funds are the life insurance industry equivalent
to a mutual fund with some differences.The term "Mutual Fund" is often used generically, to cover a wide variety of funds
where the investment capital from a large number of investors is "pooled" together and invested into specific stocks, bonds,
Since Segregated Funds are actually deferred annuity contracts issued by life insurance
companies, they offer probate and creditor protection if a preferred beneficiary such as a spouse is named. Mutual Funds don't
have this protection.
Unlike mutual funds, segregated funds offer guarantees at maturity (usually 10 years
from date of issue) or death on the limit of potential losses - at times up to 100% of original deposits are guaranteed which
makes them an attractive alternative for the cautious and/or long term investor. On the other hand, with regular mutual funds,
it is possible to have little or nothing left at death or plan maturity.
Historically, damages paid out during settlement of personal physical injury cases
were distributed in the form of a lump-sum cash payment to the plaintiff. This windfall was intended to provide for a lifetime
of medical and income needs. The claimant or his/her family was then forced into the position of becoming the manager of a
large sum of money.
In an effort to create a more financially stable arrangement for the claimant, the
Structured Settlement was developed. A Structured Settlement is an alternative to a lump sum cash payment in the resolution
of personal physical injury, wrongful death, or workers’ compensation cases. The settlement usually consists of two
components: an up-front cash payment to provide for immediate needs and a series of future periodic payments which are funded
by the defendant’s purchase of one or more annuity policies. Those payors make payments directly to the claimant. In
the unfortunate event of the claimant’s death, a guaranteed portion of the settlement may be directed to a beneficiary
or his/her estate.
A Structured Settlement is a guaranteed source of funds paid to the claimant or
his/her family on a tax-free basis.
Conditional payments may be made by an insurance company to a disability insurance
claimant who has a loss of income claim against a third party who caused or contributed to their disability, however, the
insurance company has a right to seek reimbursement of any payments they made to the claimant either from the third party
or from any judgement or settlement received by the claimant from the third party.
Generally, a suicide clause in a regular life insurance policy provides for voiding
the contract of insurance if the life insured commits suicide within two years of the date of issue of the coverage.
Temporary Life Insurance:
Temporary insurance coverage is available at time of application for a life insurance
policy if certain conditions are met. Normally, temporary coverage relates to free coverage while the insurance company which
is underwriting the risk, goes through the process of deciding whether or not they will grant a contract of coverage. The
qualifications for temporary coverage vary from insurance company to insurance company but generally applicants will qualify
if they are between the ages of 18 and 65, have no knowledge or suspicions of ill health, have not been absent from work for
more than 7 days within the prior 6 months because of sickness or injury and total coverage applied for from all sources does
not exceed $500,000. Normally a cheque covering a minimum of one months premium is required to complete the conditions for
this kind of coverage. The insurance company applies this deposit towards the cost of a policy at its issue date, which may
be several weeks in the future.
Term Life Insurance:
A plan of insurance which covers the insured for only a certain period of time and
not necessarily for his or her entire life. The policy pays a death benefit only if the insured dies during the term.
A type of life insurance or annuity first introduced by Lorenzo Tonti, a Neopolitan
banker, in France in the 17th century. It consisted of a fund to which a group of persons contribute, the benefits ultimately
accruing to the last survivor or to those surviving after a specified time, in equal shares. The only insurance plans available
today which we are aware of that display characteristics of a tontine are some children's Registered Educational Savings Plans
(RESP's). These plans generally stipulate that if the child who is covered under the plan does not use the accumulated savings
to attend an accredited university, then only the principal invested is returned. All growth in the plan is held to be distributed
to other plan holders who do go on to attend university.
This could be the person (broker or agent) who helps you choose the proper type
of life insurance or disability insurance and the insurance company for your particular needs. This could also be the person
at the insurance company's head office who reviews your application for coverage to determine whether or not the insurance
company will issue a policy to you.
This term relates to participating whole life insurance and the use of the dividend
to reduce or completely eliminate the need for future premiums. In the 1980's life insurance company's profits from investment
were exceedingly high compared to historical experience. It became common for a salesperson to show new prospective clients
how quickly his or her insurance company's dividends would cover the future cost of future premiums. In some cases more emphasis
was put on the value of future dividends than on the fact that future dividends were not guaranteed and could only be projected
based on current earnings. Many life insurance buyers have since learned that the dividends they expected in the 80's no longer
exist in the 90's and they are continuing to dig into their pockets to pay insurance premiums.
A dictionary meaning for the word viatica is "the eucharist as given to a dying
person or to one in danger of death". In the context of Viatical Settlement it means the selling of one's own life insurance
policy to another in exchange for an immediate percentage of the death benefit. The person or in many cases, group of persons
buying the rights to the policy have high expectation of the imminent death of the previous owner. The sooner the death of
the previous owner, the higher the profit. Consumer knowledge about this subject is poor and little is known about the entities
that fund the companies that purchase policies. People should be very careful when considering the sale of their policy, and
they should remember a sale of their life insurance means some group of strangers now owns a contract on their life. If a
senior finds it difficult to pay for an insurance policy it might be a better choice to request that current beneficiaries
take over the burden of paying the premium. The practice selling personal life insurance policies common in the United States
and is spilling over into Canada. It would appear to have a definite conflict with Canada's historical view of 'insurable
Waiver of Premium:
This is an option available to the applicant for life insurance which sets certain
conditions under which an insurance policy will be kept in full force by the insurance company without the payment of premiums.
Very specifically, a life insured would have to become totally disabled through injury or illness for a period of six months
before the benefit kicks in. When it does, the insurance company retroactively pays premiums from the beginning of the disability
until the time the insured is able to perform some form of regular activity. 'Totally disabled' is highlited here, because
that is what is required to receive this benefit.
This is a legal document detailing how you want your assets to be distributed upon
your death. You may also stipulate how you wish to be buried or who you would like to take care of any surviving dependent
family members. In my opinion, it is very important to be quite specific about your wishes for the distribution of special
assets such as the antique grandfather clock, the classic silver tea set or the antique piano. If you think that your beneficiaries
may dispute how your things are to be distributed, consider stipulating that an auction be held in which all beneficiaries
may bid on the item which they value and all moneys collected are then shared in the same manner in which you distributed
your other liquid assets. Your might want to remember that a will is automatically revoked upon marriage unless the will specifically
states that the will is made in contemplation of marriage.
Yearly Renewable Term Insurance:
Sometimes, simply called YRT, this is a form of term life insurance that may be
renewed annually without evidence of insurability to a stated age.
About Mortgage Insurance
Life insurance is often referred to, as Mortgage Insurance when it's purpose is
perceived to protect dependent survivors against the death of a mortgage payor. Most persons buying Mortgage Insurance usually
hear this term when they have just entered into a mortgage loan agreement with a lending institution and the lending institution
strongly recommends that Mortgage Insurance be purchased. What is offered for sale by the lending institution is almost exclusively
reducing term life insurance with a death benefit reducing to zero over a specific period of time. For example, if the outstanding
mortgage were $200,000, payable over 20 years, the mortgage insurance would match the reducing balance of the mortgage over
20 years. You should note, however, that the cost of this coverage usually does not reduce in like manner.
Mortgage reducing term insurance is sold by lending institutions in the form of
group insurance, using life insurance companies to underwrite the risk. After answering minimal qualifying medical questions
about yourself, a decision is rendered as to whether or not you qualify for coverage. There is some suggestion that more strict
scrutiny of your initial application will take place at time of death claim so the onus falls upon the applicant of full disclosure
of state of health at time of application. You don't receive a policy contract. You simply receive a certificate referring
to a master group insurance contract, which outlines your specific benefits and cost. It also means that coverage is not guaranteed
and all policyholders can be cancelled by the insurance company or the lending institution at any time if the risk to them
becomes too great. If you want reducing term insurance, you would be better advised to purchase guaranteed reducing term insurance
directly from an insurance company and be certain that it cannot be cancelled by anyone but you.
Mortgage insurance purchased through a lending institution by an applicant who consumes
tobacco products appears to be a better deal than if that person tried to obtain independent coverage directly through an
insurance company. This is because the lending institution's group insurance cost of coverage is a blended smoker/non-smoker
rate and is the same cost to everyone, whether a person smokes or not. A non-tobacco using person will inevitably find a less
expensive rate by using the services of a life insurance broker.
Mortgage insurance purchased through the lending institution is not portable. If
you sell your home and buy another or if you simply re-negotiate your mortgage for a new term, you will have to qualify for
new mortgage insurance. Maybe you won't be able to qualify because your health has changed. Most homebuyers today are not
living in the same house for the rest of their lives. You might end up buying two or three or more homes in your lifetime.
The likelihood is that subsequent purchases will be more expensive than the first and therefore additional insurance protection
will be required. It is therefore in your best interests to purchase a level or increasing death benefit during your earning
When you purchase mortgage insurance coverage from a lending institution, the only
choice of beneficiary is the lending institution. It may not make sense to automatically have the lending institution pay
off a low interest rate mortgage with their mortgage insurance. In fact, if the home had to be sold, it may be more saleable
with an intact low interest mortgage. When you purchase coverage from a life insurance company, the death benefit is paid
upon the death of the life insured to a named beneficiary, usually the spouse, tax free. Having the money in hand gives
the survivors the choice of whether to pay off the mortgage or invest the money, using the income to cover living expenses
and continuing the mortgage payments.
All things considered, a life insurance broker is your best choice to determine
and find the right kind of mortgage insurance for your particular needs. You will get the experienced advice of someone who
specializes in life insurance products.
The following table simplifies the differences between insurance coverage offered
by lending institutions and personally purchased coverage. It is recommended that 10 year term, 15 year term or 20 year term
be considered for mortgage insurance protection instead of reducing mortgage term insurance. You may obtain a free quote by
Level Coverage Available
Decreasing Coverage Available
Non Smoker Rate Available
Smoker Rate Available
Blended Rate Only
Choice of Beneficiary
No - Only Lending Institution
Portable to New Mortgage
Policy Contract Issued
Segregated Investment Funds
Will Rogers once said, "It's not so much the return on my money that concerns me
as much as the return of my money."
These days, investors are concerned about the low interest rates available in GICs,
treasury bills and bonds and yet many don't want to give up the guarantees on their invested capital. In the past, such fixed
income investments have been considered conservative, safe and secure. For the retired, they paid interest in regular instalments,
providing a steady income. Inflation, however, erodes the value of fixed-income investments. To continue relying on such investments
with low rates of return, the retired person risks outliving their retirement fund. The only way to protect your retirement
fund is to diversify part of your investments into equity investments which will keep growing as long as you live.
One of the most successful, and popular, investment vehicles of the past decade
has been the "Mutual Fund". With low interest rates that look like they will remain that way for the next couple if not several
years, people are looking for a higher yield on their money and are often turning to professionally managed funds to get it.
The term "Mutual Fund" is often used generically, to cover a wide variety of funds
where the investment capital from a large number of investors is "pooled" together and invested into specific stocks, bonds,
Life Insurance companies offer "Segregated Funds", the insurance companies' version
of Mutual Funds, with some important differences.
Since Segregated Funds are actually annuity contracts issued by life insurance companies,
they offer probate and creditor protection if a preferred beneficiary such as a spouse is named. Mutual Funds do not have
Unlike Mutual Funds, Segregated Funds offer guarantees at maturity (usually ten
years from date of purchase) or death on the limit of potential losses - at times up to 100% of original deposits are guaranteed
which makes them an attractive alternative for the cautious and/or long term investor. On the other hand, with regular Mutual
Funds, it is possible to have little or nothing left at death or plan maturity.
At death, proceeds of a Segregated Fund pass directly to a named beneficiary, and
are not subject to probate, lawyer's or executor's fees.
Regular monthly deposits to a Segregated Fund can be registered to qualify for your
annual tax sheltered RRSP contribution. You may also simply make your deposits to a non-registered Segregated Fund and pay
the tax on the capital gain year by year.
There are no costs or brokers fees charged to you for commencing deposits to a Segregated
Fund. Most insurance companies have reducing surrender charges on their funds which reduce to 0 after several years. There
is also a small management fee charged by the insurance company. You will find more information about this in another area
of this web site.
Even though there are varying degrees of guarantee of original capital you must
remember that Segregated Funds mirror the rise and fall of the stock markets around the world. It would be very unusual to
see a steady increase in the markets. It is more natural for the markets to rise and fall as economic conditions change. If
you are the kind of person who wants to watch your investment day by day and your breath stops along with your heart missing
a beat when the market declines, this kind of investment may not be for you. We believe in buying and holding a well managed
segregated fund for a long period of time. We are not trying to second guess the market.
Remember that the best time to invest is when you have the money to invest. The
University of Michigan examined the impact of being "out of the market" for differing lengths of time. They examined
the S & P 500 for the five year period 1982 to 1987. During this five year period, there were 1276 trading days. If you
had been "in the market" for all of these days, your annual rate of return would have been 26.3%. If you had been out of the
market for just 10 of the highest gain trading days, your annual return dropped to 18.3%. If you were out of the market for
30 of the highest gain trading days your return dropped to just 8.5%. That's a 17.8% decline just for being out of the market
30 of 1276 days or 2.35% of the time. The moral of this study is that those who stay fully invested in the stock market are
the big winners.