know these cold

Know These COLD

Welcome to Know These COLD!

Know These COLD was designed to be a list on all of the key concepts in the LLQP course.

These are the topics that are tested most often on the exams. To you, the student, this means

these are the topics you need to know COLD.

Use Know These COLD as a checklist after you have finished reading a chapter in the LLQP

Coursebook to ensure that you understand all of the concepts in that chapter.

Insurance Section Chapter 1: An Overview of the Canadian Life Insurance Industry

o KTC: Click here for KTC topics in Chapter 1

Chapter 2: How are you Qualified to Sell Insurance?


Chapter 3: Why do I need Insurance?


Chapter 4: What Type of Insurance Should I Have?


Chapter 5: Do I need Business Insurance?


Chapter 6: What about Group Insurance?


Chapter 7: What about Government Insurance?


Chapter 8: How much Insurance should I Have?


Chapter 9: Which Insurance Company is best for me?


Chapter 10: How do I apply?


Chapter 11: How do I get my Money?


Investment Section

Chapter 14: Why should I Invest?


Chapter 15: Why should I buy investments from a life agent?


Chapter 16: How much should I invest?


Chapter 17: What are the different types of investments?


Chapter 18: What are the risks?


Retirement Section

Chapter 21: When Can I Retire?


Chapter 22: Where will my Money come from?


Chapter 23: How can I keep more of my retirement income?


Know These COLD

INSURANCE SECTION

Chapter 1: An Overview of the Canadian Life Insurance Industry

The basics of insurance

Know the following definitions:

o Insurance contract (a unilateral contract)

o Policy owner (the insured can also be the life insured)

o Policy premiums

o Claim

o Face amount

o Life insured

o Beneficiary

o Coverage

o Underwriting

Other concepts

o Disability income insurance

o Health insurance

o Agents and agency contract

o Brokers and insurers

Other sales channels

o Fraternal organizations

o Benefit consultants

Regulatory bodies

o CLHIA

o Courts

o Governments

o OSFI

Acts

o Uniform life insurance act

o Uniform accident and sickness act

Chapter 2: How Are You Qualified to Sell Insurance?

Agent requirements

What is the difference between actual authority and apparent authority?

What are the rights and obligations in an agency relationship?

What are the four principles of ethical conduct

Due diligence

Fiduciary responsibility

What are the 5 situations that allow personal information to be provided to others?

Holding out

Commission

Replacement

Surrender

Cash surrender value

Tied selling

Misrepresentation

Commission splitting

Churning

Twisting

Lapse

Contract provisions

Conflicts of interest

What are 3 unfair trade practices?

What are the 7 areas that Errors and Omission insurance protects agents and carriers?

Chapter 3: Why Do I Need Insurance?

What are 3 predictable risks?

What are the 2 measures of risk?

o Risk: Click here if you want to see additional examples (other than in the text).

Estate/Estate planning

Retirement planning

Final expenses

Continuing expenses

Dependency period

What are the 3 risk management strategies?

The difference between term and permanent insurance

Reinsurance

What is a risk not managed by insurance?

What are the different approaches to risk comparison?

Chapter 4: What Type of Insurance Should I Have?

Effective date

Face page/Face amount

Settlement option

Level term, increasing term, decreasing term, renewable term insurance

o Term Insurance: Click here if you want to see additional examples (other than

in the text).

Mortality risk

Attained age

Renewable and convertible option (R&C)

Incontestability

Suicide clause

What is the difference between whole life and limited payment life?

o Limited payment insurance: Click here if you want to see additional examples

(other than in the text).

Dividends (par and non-par policies)

Policy reserve

What are the 3 non-forfeiture options?

o Non-forfeiture options: Click here if you want to see additional examples


Grace period (when does coverage end?)

How are dividends used to purchase more life insurance? (3 ways)

How are dividends used to reduce premiums?

What are 4 needs answered by whole life insurance?

How does adjustable premium whole life insurance work?

What is an advantage of term-to-100 insurance?

What is unique about Universal life insurance?

o Universal Life: Click here if you want to see additional examples (other than in

the text).

How is unbundling a benefit to a policy owner?

What is the difference between yearly renewable term (YRT) and level cost of insurance

(LCOI)?

Disposed

Compounding

What are the 3 features of universal life that are similar to whole life?

What are the 2 unique features of universal life?

What are the 8 riders that can be attached to a life insurance policy?

What are the 5 ways disability insurance is provided through?

o Disability insurance: Click here if you want to see additional examples (other

than in the text).

What are the 3 types of disability income policies?

What are the 4 definitions of disability?

What is the difference between residual disability and partial disability?

o Residual and partial disability: Click here if you want to see additional

examples (other than in the text).

What are the 3 periods for disability benefit payments and how are premiums affected?

What are the 4 most common riders on a personal disability income policy?

What are the 6 other common riders on a personal disability income policy?

What are the 5 types of personal accident and sickness insurance?

What is unique about critical illness insurance (CII)?

What are the benefits of long-term care insurance?

Rescission period

Chapter 5: Do I Need Business Insurance?

What are the 3 business structures and what are the risks faces in each structure?

What is the difference between partnership interest and partnership property?

What are 2 more business risks and what are the ways to deal with them?

What is the difference between a buy-sell agreement and a cross-purchase agreement?

Key person insurance

What are 3 advantages of life insurance for business?

What are 3 uses for disability insurance in business?

Chapter 6: What about Group Insurance?

What are the 6 ways group life is available?

What is the difference between short-term disability (STD) and long-term disability (LTD)?

What 5 things does group extended health care (major medical) cover?

What 4 things do group dental plans cover?

What does vision care cover?

Accidental death and dismemberment (AD&D)

Chapter 7: What about Government Insurance?

What are the 3 benefits that CPP/QPP provides?

What are the 3 government-provided disability insurance plans?

Pensionable earnings

Severe and prolonged disability

What 4 things does EI provide benefits for?

Percentage of average earned earnings

What are the 5 ways the EI benefit will be reduced by?

Workers Compensation

What are the 6 basic medical services covered by Provincial health insurance?

What are 5 medical services not covered by Provincial health insurance?

Chapter 8: How Much Insurance should I Have?

Emergency fund

Re-adjustment period/last expenses

Dependency period/ongoing expenses

o Re-adjustment and dependency period: Click here if you want to see

additional examples (other than in the text).

Survivor life income needs/future needs

What is the difference between qualitative goals and quantitative goals?

Capital

What is the difference between nominal and real interest rates?

What is the formula for the Capitalization of income approach (Human life value

approach)?

o Capitalization of income approach: Click here if you want to see additional


What are the steps in the Capital retention approach (Capital needs approach)?

o Capital retention approach: Click here if you want to see additional examples


How is disability insurance coverage determined?

How is A&S insurance coverage determined?

How do you insure against the risk of estate inadequacy?

Principal residence

Marginal tax rate (MTR)

Capital gains in business

How does life insurance manage the need to supplement income?

Chapter 9: Which Insurance Company is best for me?

How are clients protected in their choice of insurance company (3 ways)?

What is the difference between criminal law and tort law?

What is Assuris guaranteed coverage for:

o Term insurance

o Universal life

o Whole life

o Annuities, disability, and long-term care

o Critical illness, travel, extended health, major medical

o Non-registered accumulation policies

o Segregated funds

Chapter 10: How do I Apply?

Material misrepresentation

Innocent/negligent misrepresentation

Fraud, forgery and theft

Constructive notice

Rated premiums

Exclusion rider

Medical Insurance Bureau (MIB)

What are the sources of information for a two-party and three-party contract and who

supplies them?

What are the 5 details addressed in the application for life insurance?

What are the 7 persons that can be an insurable interest?

Personal contract

Joint first-to-die and joint last-to-die

Name the 6 possible beneficiaries

Revocable and irrevocable

What are the 4 settlement options?

What are the 4 options for a Universal Life Death Benefit?

Deductibles and co-insurance (co-pay)

What is the difference between an individual and family deductible?

Master contract

Group insured

Certificate of insurance

Standard group

Contributory plan and Non-contributory plan

Non-discriminatory benefits schedule

What are the 4 eligibility criteria for joining a group plan?

What are the 3 essential duties of an agent when completing a contract?

Temporary insurance agreement (TIA)

Mortality rates (gender and smoking status)

What are the 2 ways a rated policy can increase premiums?

What is the difference between net premium and gross premium?

What is the difference between a tax deduction and a tax credit?

What are the 4 criteria that must be met for a policy to be used as collateral life

insurance?

Absolute assignment

Registered policies

What are the 4 criteria that establish morbidity rates?

What are the 3 other factors that affect a disability income replacement policy?

What are the 3 ratings that determine the premiums for group policies?

What are the 2 accounting methods used for fully-insured group plans?

Self-insured plans

Administrative Services Only (ASO) contract

Tax deductibility of group premiums

Contract of adhesion

What are the 5 basic components covered when a policy is issued?

What are the 6 elements that the Uniform Life Insurance Act states every policy must

clearly indicate?

What are the 7 provisions in a contract that define the rights of the policy owner?

What are the 5 non-standard elements of a contract?

What is the difference between an absolute assignment and a collateral assignment?

What are the 6 provisions that must be in a disability income policy?

What are the 7 exclusions that may be in a disability policy?

What are the 8 provisions that must be in a health insurance policy?

What are the 4 duties of an agent when delivering an A&S policy?

Chapter 11: How Do I Get My Money?

What 4 things does a claims examiner confirm before the benefit is paid?

What is the formula to calculate the net death benefit?

Last acquired

Annuitized

What is the formula to determine the adjusted cost base (ACB) of insurance?

Maximum tax actuarial reserve

What is the formula to determine the taxable gain for non-participating policies?

What is the formula to determine the taxable gain for participating policies?

Permanent disability

What is the formula to determine the claim for a residual disability benefit?

What is the formula to determine the claim for a partial disability benefit?

o Common insurance formulas: Click here if you want to see additional


Presumptive disability benefit

Recurring disability benefit

All sources maximum of LTD

Claims for waiver of premium (difference between disability and life policies)

Claims for A&S policies

Know the difference between who the primary carrier is and who the secondary carrier is

for the priority of payment for benefits when there is a coordination of benefits (COB)

o Co-ordination of benefits: Click here if you want to see additional examples


CPP offset

Subrogation

Employee Assistance Programs (EAP)

INVESTMENTS SECTION

Chapter 14: Why should I Invest?

Difference between saving and investing

Compounding and the rule of 72

What are the two ways to invest and save tax?

What the rules for RESPs including the rules for CESGs and the Canada Learning Bond?

o Investments for education: Click here if you want to see additional examples


Registered disability savings plan

o Disability savings plan: Click here if you want to see additional examples


Tax-free savings accounts

Chapter 15: Why should I buy investments from a life agent?

What are the 7 areas of knowledge for knowing your client?

What are the 5 areas of fiduciary responsibility?

What are the 4 pillars of our financial system?

What is the difference between mutual insurance and stock insurance companies?

Chapter 16: How much should I invest?

Know the difference between quantitative and qualitative data

What are the 4 personal factors that affect savings?

What are the 3 investment returns?

What is the difference between net and gross returns?

Know the investment risk-return chart

Know the formula for real rate of return and real rate of return after taxes

Fiscal policy vs. monetary policy

Chapter 17: What are the different types of investments?

What are the 5 categories of investments and give examples of each category?

What are the 3 different types of provincial savings bonds?

What is the difference between a par dividend and a stock dividend?

Futures/Options/Warrants/Forwards

How is the NAV of a mutual fund calculated?

Right of withdrawal or redemption

Taxation of mutual funds

Know the chart on Characteristics of Mutual Funds

Know all aspects of segregated funds, especially maturity guarantees, death benefit

guarantees, policy-based guarantees and deposit-based guarantees

Know the difference between a contract annuitant and a contract beneficiary

Know the difference of how value grows in seg fund as opposed to a mutual fund

Know the difference between the linear reduction method and the proportional reduction

method

Know the seg fund investor profile

Know the taxation of seg fund allocations

Know the different types of annuities

Know the chart comparing life annuities

What are 2 ways market value adjustment is calculated?

What is a structured settlement annuity?

Chapter 18: What are the risks?

Know the fund risk-return chart

What are the 3 risks of not investing?

What are the 9 types of financial risks?

Describe the 4 providers of investment risk

RETIREMENT SECTION

Chapter 21: When can I Retire?

What are the 6 things the planner and client must assess?

Name the 4 things involved in the implementation of the retirement planning process

Chapter 22: Where will my money come from?

What are the 4 broad sources of retirement income and give examples of each?

Know the 4 investments that do not qualify for a self-directed RRSP

Know the chart for calculating RRSP contributions

o Calculating RRSP contributions: Click here if you want to see additional


What happens to a RRSP upon death?

Know the rules regarding the Home Buyers Plan

Know the rules regarding the Lifelong Learning Plan

Know the 6 transfer options for locked-in RRSP funds

Know all the rules regarding RRIFs

Know all the rules regarding Locked-in Retirement accounts (LIRAs) and unlocking

o Locked in funds: Click here if you want to see additional examples (other than

in the text).

What are the 3 forms an employer-sponsored RPP can take?

What are the differences between a defined benefit plan (DBP) and a defined contribution

plan (DCP/MPP)?

What are the 3 plans an insurance company offers to manage pension plans?

What are the 6 areas that provincial legislation covers to protect pension benefits?

Know the rules for DPSPs

o DPSPs: Click here if you want to see additional examples (other than in the

text).

Know the rules for Group RRSPs

Know the summary chart of RPPs

o Pension adjustments: Click here if you want to see additional examples (other

than in the text).

Know all the rules for the 4 types of Government Retirement Pensions

What is the formula for determining the CPP retirement pension?

Know the formula for determining early or late CPP retirement options

Know the summary chart of the CPP Retirement Pension

Chapter 23: How can I keep more of my retirement income?

Pension sharing

What are 5 ways to accomplish income splitting?

Key Concepts about Risk

There are three predictable risks:

1. death

2. disability

3. old age

There are two measures of risk:

1. severity

i.e. how bad is the risk

For example: death only happens once

2. frequency

i.e. how often is it likely to happen

For example: the flu causing loss of work can happen more than once

How does insurance address risk? How is risk transferred to insurance companies?

1. Life insurance replaces the loss of income and provides for assistance in paying debts,

obligations, and ensuring a fair distribution of a persons estate.

2. Disability insurance replaces loss of income during periods of unemployment due to

injury or sickness.

3. Travel insurance takes care of medical expenses while travelling.

4. Long-Term Care (LTC) insurance takes care of the costs of medical expenses and the

other needs of seniors (e.g. nursing home or live-in home care).

5. Critical Illness (CI) insurance takes care of unexpected expenses caused by dreaded

diseases such as cancer, heart disease, and strokes.

Old Age and Risk

Inadequate retirement planning has a risk of outliving a persons financial resources and

having a much lower standard of living during old age.

Using insurance products such as segregated funds and universal life insurance can

provide adequate investment returns to solve these risks.

Key Concepts about Term Insurance

It is very important to understand the concept of Term Insurance. There are four different

premium plans for term insurance. The key points for each plan are below.

1. Level Term Insurance (this is the most common type)

The premiums stay the same (level) over the term.

The insured (the policy owner) knows:

o Exactly how much the premium will cost

o The face amount that will stay the same (level) over the term

o Who will receive the benefit when the life insured dies

o When the insurance expires

2. Increasing Term Insurance

The premiums will increase over the term, as will the face amount.

This type of policy covers a life that is increasing in economic value.

3. Decreasing Term Insurance

The premiums will stay the same (level) over the term (e.g. 20 years or to age

65) but the face amount will decrease each year.

This type of policy covers a life that has decreasing financial obligations, like a

mortgage.

This type of policy is hardly ever used anymore.

4. Renewable Term Insurance

This policy is guaranteed to be renewed at various renewal periods (e.g. 1, 5, 10,

or 20 years or a particular age) regardless of the health of the life insured.

The face amount remains the same but the premiums increase at each renewal

date, which reflects the mortality risk.

Any premium change is guaranteed to the owner at the time the policy is taken

out.

Limited Payment Insurance

What is limited payment life insurance?

Limited payment life insurance limits the number of payments to a specific time period or to

a specified age.

Limited payment life insurance is not available on term policies.

For example: Cameron, the insured (owner of the policy), has taken a whole life policy out

on his wife, Heather (the life insured). Cameron has limited payment life insurance. He will

only pay premiums until he reaches his retirement age of 65. However, the coverage is

permanent and will remain in place as long as Heather is alive.

Remember: If the policy is not limited payment insurance, then the premium is paid as long

as the life insured is alive.

The Three Non-forfeiture Options

What does non-forfeiture mean?

The insured (the owner of the policy) has not surrendered (or forfeited) the policy, but

has kept the insurance coverage in place by using the Cash Surrender Value (CSV) of

the policy.

There are three non-forfeiture options.

1. Automatic Premium Loan (APL)

If a policy owner (the insured) forgets to pay the premium or is short of money

when the premium is due, the policy remains in force by using the policy

premium loan.

APL automatically charges premiums as a policy loan against the CSV.

The APL can be used until the owner recommences premium payments or the

amount of the loan plus interest equals the CSV of the policy.

Coverage ends when the grace period (either 30 or 31 days) ends. If the life

insured dies during the grace period, the death benefit will be paid.

2. Extended Term Insurance (ETI)

This option allows the owner to stop paying premiums but keeps some insurance

coverage in place by using the CSV to purchase term insurance.

The face value of the term insurance remains the same but the term is based on

the attained age of the life insured when this option is selected.

Riders and other benefits of the original whole life policy are cancelled.

3. Reduced Paid-Up insurance (RPU)

The owner uses the CSV to purchase a whole life policy with a lesser amount of

coverage.

There are no more premiums to be paid.

The new face amount is determined by the attained age and the CSV when this

option is selected.

When this option is selected, dividends are not received and other benefits are

cancelled.

Key Concepts about Universal Life Insurance

Universal Life is a more complex product than Term Insurance. It is important that you

understand the features of Universal Life Insurance for the LLQP exam.

Uniqueness

Universal Life Insurance combines insurance and investment.

The investment part of the account (the policy) can build a reserve similar to a policy

reserve of a whole life policy. Universal life policies are usually non-participating (i.e.

they do not receive policy dividends).

The management of the investment account (i.e. the investment decisions) is the

responsibility of the policy owner (the insured).

The owner chooses how premiums are structured and has options concerning the death

benefits in order to meet the owners specific needs.

Flexibility

The face amount of the policy can be increased or decreased by the owner. Any change

will need satisfactory evidence of insurability.

The owner can add more lives to be insured and substitute one life insured for another.

There is flexibility in the amount and duration of the premiums.

How the savings portion is invested is also flexible, as long the policy is in force.

The policy owner can choose to receive the cash value of the policy in addition to the

sum insured on death of the life insured. This is different than a whole life policy where

the owner can receive the CSV upon surrender of the policy or the face amount upon

the death of the life insured.

Unbundling

There are three separate parts (insurance, investment, and expenses) to a universal policy. We

go into detail on each part on the next page.

1. The insurance part where the owner sees the cost of insurance (the mortality charge).

The mortality charge is based on:

o the age of the life insured

o risk classification depends on the life insureds gender, smoking status,

health factors, etc.

o the policys face amount

o the cost of insurance based on the net amount at risk (NAAR)

There are two options for premium payments:

1. Yearly renewable term (YRT). This is where the premium increases

annually. They are low initially but increase as the age of the life insured

increases.

2. Level cost of insurance (LCOI). The rates are based on term-to 100

rates.

The policy owner can have the premiums increased or decreased depending on

the minimum and maximums allowed.

Premiums can also be stopped and restarted, if the account value can pay the

monthly costs of insurance and expenses.

2. The investment part that shows the interest rate applied to the value of this section.

Thus, the owner can see the rate of growth of the investments.

3. The expenses charge to this type of policy (administration, other expenses, and sales

charges).

Key Concepts in Disability Policies

For insurance, disability occurs when an insured cannot work because of injury/illness.

Disability exists when:

The accident or illness (the condition) has occurred while the policy is in force. This

excludes pre-existing conditions, which are health conditions that the insured already

has. Pre-existing conditions could increase the premiums charged or even prevent the

issuance of a policy.

The condition must require medical attention.

The insured is under the care of a doctor.

The insured is not able to perform the essential duties of his or her occupation.

There are three types of disability income policies:

1. Cancellable Policy (also called a Commercial Policy)

Issued on a class basis. A class is formed when people are grouped together

by age, gender, occupation, or type of plan. When the claims for the class are

higher than anticipated, this type of policy can be cancelled, the premiums can

be increased, the benefits reduced, or restrictions imposed by the insurer.

2. Guaranteed Renewable Policy

This policy is guaranteed to be renewed until age 55 and usually until age 65.

Premiums can be increased when renewed if there is a higher claims experience

for the class but terms and conditions remain the same.

3. Non-cancellable and Guaranteed Renewable Policy

This has the highest premiums because it offers the greatest level of protection.

It is guaranteed to be renewed until the insured reaches age 65. The insurer

cannot cancel the policy, increase the premiums, add restrictive riders, or reduce

benefits. It can be converted to a guaranteed renewable policy, at age 65, if the

insured is still working.

How to Calculate Residual and Partial Disability

Residual disability

Residual disability is a rider on a disability policy that will pay a benefit when the insured

is able to earn between 20% and 80% of his or her pre-disability salary by working.

The formula for how much of the disability benefit will be paid is: (pre-disability income income while working) (pre-disability income) x 100 = % of benefit to be received.

For example:

Claire was earning $8,000 a month before becoming disabled. Her disability benefit was set at

65% of her salary. After becoming disabled, she was able to earn $4,000 a month by working

part-time (50% of the time). What amount would Claire receive from her disability insurer?

What was her total income during this time?

Step 1: her disability benefit would be $8,000 x 65% (.65) = $5,200

Step 2: the percentage of the benefit while working part-time would be

($8,000 $4,000 = $4,000) $8,000 = .5 x 100 = 50% or $2,600/month (50% of $5,200)

Step 3: her total monthly income would be $4,000 + $2,600 = $6,600

Partial disability

Partial disability occurs when a straight percentage of the disability benefit is paid

depending on the amount of time the disabled person can work. It is paid to a maximum

number of months.

The formula for how much of the disability benefit will be paid is: Total hours (100%) % of hours worked = % of benefit

For example:

Joan was earning $3,000 a month for working 35 hours per week and had a disability policy that

would pay her 60% of her earnings if she became disabled. After becoming disabled, Joan was

able to work 14 hours per week or 40% (14 35 x 100) of her previous schedule. What amount

would she receive as a partial disability?

Step 1: her disability benefit is $3,000 x 60% (.6) = $1,800

Step 2: total hours 100% hours worked 40% = disability benefit of 60%

Step 3: 60% x $1,800 = $1,080 partial disability

The Re-adjustment and the Dependency Period

It is very important to remember the difference between the re-adjustment period and the

dependency period.

The Re-adjustment Period

The re-adjustment period takes into account the last expenses that are needed to be

paid just after the death of the life insured.

These include funeral costs, probate fees, taxes, as well as the total of loans, credit

cards, and mortgage repayments.

It is also important to have at least three months of income available in case of

emergency for the survivors.

The Dependency Period

The dependency period takes into account the ongoing expenses of the daily costs of

living for items such as food, clothing, holidays, and saving for post-secondary

education.

For children, the dependency period lasts until the last child reaches age 18 or 25, if

attending school full-time.

Capitalization of Income Approach

It is important to understand how to calculate the Capitalization of Income Approach.

Capitalization of Income Approach

This is also called the Human Life Value Approach.

This approach simply calculates the replacement of the income of the life insured to find

the face value of the insurance contract.

The formula = the annual income of the life insured a nominal rate of interest.

For example:

Peter earns $45,000 per year and is the primary wage-earner of the family. Using an

investment return (or nominal interest rate) of 4%, how much insurance is needed upon Peters

death using the Capitalization of Income Approach?

The calculation is:

$45,000 4% = $1,125,000

$1,125,000 invested at 4% will yield $45,000 annually

Drawbacks to using this approach include:

It does not take into account other sources of income, such as business income.

A constant income stream is calculated, yet any probable future increases (raises) are

not taken into account.

It ignores the specific financial commitments of the family.

Capital Retention Approach

The Capital Retention Approach (also called the Capital Needs Approach) is a way to figure out

how much life insurance is needed. This is one of the most time-consuming types of questions

on the LLQP exam. There are four steps. You must memorize these steps before the exam.

Steps in the Capital Retention Approach

1. Assets available at death final expenses = cash needs

If the question does not say that a RRSP will be rolled over to a spouse at death,

the full value of the RRSP is to be used as an asset available at death.

If a person already has insurance, the face value of the policy goes in this

section.

All final expenses needed are provided in the question.

Cash needs can be either a positive or negative number. If positive, they will

lower the amount of insurance needed.

2. Continuing income continuing expenses = income needs

If the surviving partner is still working, their income is included as part of the

continuing income.

Enter any business or rental income in this section.

The continuing expenses needed are provided in the question.

3. Income needs (from Step 2) interest rate = capitalized value

The interest rate will be given in the question. Always change to a decimal.

The capitalized value is the future value of a perpetual annuity (i.e. the payments

will continue indefinitely).

4. Capitalized value +/ cash needs = insurance needed

If cash needs (step 1) are a negative sum, add it to capitalized value. If they are

a positive sum, subtract them from capitalized value.

Lets do a sample question together!

Following is information on Doug and Pat Jones who have two children. Net Worth Statement

Assets Value of home $400,000 Bank account $22,000 Pats investment portfolio $75,000 Pats RRSP $200,000 Dougs RRSP $200,000 2 cars $45,000 Artwork $80,000 Total Assets $1,022,000

Liabilities Mortgage $156,000 Credit cards $11,500 Car loans $8,000 Total Liabilities $175,500

Other information Pats annual salary $82,000 Dougs annual salary $75,000 Pats life insurance $100,000 Dougs life insurance $80,000 Pats car $25,000 Dougs car $20,000 Annual education fund contribution $8,000 Funeral and burial costs for one $20,000 Pats annual contribution to investments $15,000 Taxes and legal fees upon death $14,000 Annual household expenses $45,000 Pats annual RRSP contributions $14,500 Dougs annual RRSP contributions $13,500

If Pat died, Doug would sell his car and use Pats. The artwork would not be liquidated if one died.

Both are the named beneficiaries of the others RRSP. If Pat died, Doug would not liquidate the investment portfolio but continue to invest annually

Current interest rates, 2.8%, Using the capital retention approach, what are the approximate insurance requirements of the Jones if Pat died? a) $0 b) $150,000 c) $300,000 d) $350,000

Correct answer c) Rationale for correct answer:

Assets available at death Bank account $22,000 Pats life insurance $100,000 Dougs car $20,000 Total $142,000 [A]

Final expenses Funeral $20,000 Taxes and legal fees $14,000 Total liabilities $175,500 Total $209,500 [B] Total cash needs: [A B] $67,500

Continuing income sources Dougs salary $75,000 [D]

Continuing expenses Annual education fund contribution $8,000 Annual household expenses $45,000 Dougs annual RRSP contributions $13,500 Annual contribution to investments $15,000 Total $81,500 [E]

Income needs: [D E] - $6,500 [F]

Total needs: Capitalized value of Pats life [F] ($6,500 .028) $232,143 [G] Plus cash needs [C] ($232,143 + $67,500) $299,643 [H]

Common Insurance Formulas

There are lots of insurance formulas to remember. Here are the most important ones!

1. Adjusted Cost Base (ACB) of Insurance:

ACB = Premiums paid net cost of pure insurance (NCPI) dividends

Example:

Tony has a whole life policy with a face value of $200,000. The cash surrender value

(CSV) is $85,000. Tony has paid $52,000 in premiums and received $13,500 in

dividends. The NCPI is $30,800. What is the ACB of the policy?

$52,000 $30,800 $13,500 = $7,700

2. Taxable Gain for Non-participating Policies:

Taxable Gain = CSV (premiums NCPI)

Example:

Liz has a limited payment life policy with a face value of $300,000. The CSV is $73,500.

Liz has paid $59,400 in premiums. The NCPI is $34,680. How much of the CSV must

be declared as income when Liz files her income tax return?

$73,500 ($59,400 $34,680 = $24,720) = $48,780

3. Taxable Gain for Participating Policies:

Taxable Gain = CSV (premiums NCPI dividends)

Example:

Buddy has a participating policy with a face value of $400,000. The CSV is $148,160

and Buddy has paid premiums of $79,200. The NCPI is $46,240. Buddy has received

dividends of $27,000. How much of the CSV must be declared as income when Buddy

files his income tax return?

$148,160 ($79,200 $46,240 $27,000 = $5,960) = $142,200

Co-ordination of Benefits

Determining the primary and secondary carriers for Co-ordination of Benefits (COB) is very

important when writing the LLQP exam. Memorize the chart in the Course Book on Priority of

Payment for Benefits.

Example # 1

Sam and Mary Briggs are both employed by firms with health plans. Sams plan does not

contain a COB. It has a $75 single deductible, a $150 family deductible, and an 80% co-

insurance factor. Marys plan has a $50 single deductible, a $100 family deductible, and a 90%

co-insurance factor. Sams birthday is September 15, 1965. Marys birthday is August 23,

1967. Sams first claim for the year is $363.85. How much will be received as reimbursement

from each carrier?

Sams plan is the primary carrier since it does not have a COB.

The claim is for $363.85 the $75 single deductible = $288.85

$288.85 x 80% = $231.08 benefit from Sams plan

Two calculations from Marys plan:

1. If Marys plan had been the primary carrier:

$363.85 $50 = $313.85

$313.85 x 90% = $282.46

2. 100% of all eligible expenses reduced by payments made by the primary carrier:

$363.85 $231.08 = $132.77

Since the $132.77 is the lesser of the two calculations, Marys plan will pay this amount.

Example # 2

Assume Sams plan has a COB, as does Marys plan. The first claim is for their sons

prescription drugs of $288.45. How much will be received from each carrier?

Marys plan is the primary carrier since her birthday falls earlier in the calendar year.

$288.45 $50 family deductible = $238.45

$238.45 x 90% = $214.60

Two calculations from Sams plan:

1. If Sams plan had been the primary carrier.

$288.45 $75 family deductible = $213.45

$213.45 x 80% (.8) = $170.76

2. 100% of all eligible expenses reduced by payments made by the primary carrier.

$288.45 $214.60 = $73.85

Since the $73.85 is the lesser of the two, Sams plan will pay this amount.

Other rules to remember:

A group plan that does not contain COB is always the primary carrier.

Once the family deductible has been satisfied, subsequent claims for the year are not

reduced by the deductible.

Coinsurance applies to every claim.

Investments for Education

It is important to know the key rules about investments for educational purposes.

Registered Education Savings Plans (RESPs)

Contributions to the plan are not tax deductible; however, the growth in the plan is not

taxed until withdrawn.

Usually the withdrawals are made by the student who is in a much lower tax bracket

than the contributor, so the tax paid is at a lower rate.

There is no annual contribution limit but the maximum lifetime contribution is $50,000.

The Canada Education Savings Grant (CESG)

The CESG tops up contributions from the federal government.

The CESG will only add a grant of 40% of contributions up to $2,500 saved annually.

There are different limits based on family income that change each year.

There is a maximum lifetime grant of $7,200.

The Canada Learning Bond

This is for children who receive the National Child Benefit Supplement that is given to

families of modest income.

It provides $500, plus $25 for opening a RESP, and $100 per year for the next 15 years.

Registered Disability Savings Plans

The Registered Disability Savings Plan (RDSP) is a unique type of registered plan. It

encourages savings for the long-term financial security of the severely disabled.

Key Points about RDSP

Contributions to the DPSP are eligible for the Canada Disability Savings Grant.

Contributions are also eligible for the Canada Disability Savings

Bond, which is paid to lower income families.

Contributions are not tax deductible.

There is no annual contribution limit but there is a lifetime contribution limit of $200,000.

The Canada Disability Savings Grant will contribute funds equal to 100% to 300% of the

RDSP contributions up to a maximum of $3,500, depending on the income of the

beneficiarys family.

Another $1,000 will be contributed to the Canada Disability Savings Bond depending on

family income.

Calculating an RRSP Contribution

It will help you to memorize this calculation. Try to write it out without looking. Calculating RRSP Contribution Limit 1. Taxation year _______________ Limit: (see below) $__________

2. Earned income for the PREVIOUS year: __________ x .18 = ___________

3. Lesser of 1 or 2: ___________

4. Minus the Pension Adjustment for the PREVIOUS year: ___________

5. Minus the Past Service Pension Adjustment for CURRENT year: ___________

6. Equals current years RRSP deduction limit: ___________

7. Plus any unused RRSP deduction room from all previous years: ___________

8. Total RRSP deduction limit: ___________

9. Plus $2,000 over-contribution for those 19+ (if not already claimed) ___________

10. Total RRSP Contribution Limit ___________

What is included in Earned Income?

Employment income (less Union and Professional Dues)

Royalties

Supplementary Employment Insurance (not EI benefits)

Net Rental Income

Taxable alimony or maintenance payments

Disability payments from CPP/QPP (not from private plans)

Net Research Grants

Net income from self-employment

What is NOT included in Earned Income?

Investment Income

Capital Gains

Maximum Limits

In 2009, the maximum limit will be $21,000 (2010: $22,000).

Pension Adjustments

You will need to know the difference between a Pension Adjustment (PA) and a Past Service

Pension Adjustment (PSPA) when writing the LLQP exam.

Why do they affect a RRSP contribution?

Taxpayers who are self-employed have only one retirement vehicle that allows for tax

deductions based on contributions. It is a RRSP.

Tax payers who are members of a Registered Pension Plan (RPP) or a Deferred Profit

Savings Plan (DPSP) have retirement income in addition to their RRSP.

In order to make the retirement contributions and the potential for retirement earnings

fair, RRSP rules state that contributions to RPPs and DPSPs must reduce the allowable

contributions to personal RRSPs.

What is a pension adjustment (PA)?

It is simply the amount of total contribution made to a companys RPP or DPSP.

Much like the current years RRSP contribution is based on your previous years earned

income, your allowable RRSP contribution is reduced by your previous years PA.

What is a past service pension adjustment (PSPA)?

There are two situations where a PSPA occurs (these are only for defined benefit plans):

1. You joined a company that did not have a RPP. Five years later, they introduced a RPP.

The company is allowed to deposit five years worth of contributions to your plan. They

do not have to do it all in one year. Each years contribution of previous service reduces

your allowable RRSP contribution. A key difference to the PA is that it is the current

years PSPA that is used for your current years RRSP contribution, not the previous

years, as is the case for the PA.

2. Your company had a RPP when you joined five years ago. This year they improved the

benefits formula. For example, benefits might have increased from 1.5% to 2%. The

company is allowed to deposit five years worth of additional benefits to your plan. Once

again, they do not have to do it all in one year and it is the current years PSPA that

reduces your current years RRSP contribution.

Remember this chart. It will help you to understand in which years earned income, PA,

and PSPA is used to determine the current years RRSP allowable contribution.

Previous Year Current Year

Earned income

Pension Adjustment (PA)

Past Service Pension

Adjustment (PSPA)

Locked-In Funds

There are different types of locked-in funds.

Why are registered pension funds (RPPs) locked-in?

Pension legislation prohibits people from receiving pension benefits until the retirement

date of the RPP is reached.

Locked-in funds can remain with the employer if the employee changes jobs and the

employers RPP allows it.

Some provinces have different rules regarding the transfer of locked-in funds.

Locked-in funds can be transferred to one of the following:

Locked-in RRSP, also known as a Locked-in Retirement Account (LIRA)

Life Income Fund (LIF) in all provinces except Saskatchewan

Locked-in Retirement Income Fund (LRIF), only in Newfoundland and Manitoba

Prescribed Registered Retirement Income Fund (PRIF), only in Saskatchewan and

Manitoba

Deferred Life Annuity, the annuity payments would begin at the allowed retirement age

Another RPP if the RPP permits

Remember, locked-in RRSPs may hold the same investments as regular RRSPs and can be

managed or self-directed.

Key Concepts about DPSPs

Unique features of Deferred Profit Sharing Plans (DPSPs)

Members (employees) of the plan are called the beneficiaries.

A beneficiary cannot be related to a shareholder who owns more than 10% of the voting

shares of the company.

Only the employer makes contributions to the plan on behalf of the employees (i.e. there

is no employee contribution).

The DPSP must clearly state the following:

The retirement age

Death and termination benefits

o The employer must pay all vested amounts to an employee (or his or her estate)

within 90 days after death or the employees termination.

o If an employees 71st birthday comes before the 90 days, it will take precedent.

o Partial withdrawals can be allowed.

How payments can be made

o Options include a lump sum cash and/or stock, periodic periods for no more than

a 10-year period, or a life annuity.

How the plan can be amended or terminated

Other things to know about DPSPs

Eligible investments of the plan are similar to RRSPs, except the plan is not allowed to

purchase the employers debt. However, the plan can purchase the companys treasury

shares.

The allowable contribution amounts are the lesser of 18% of an employees earnings or

50% of the allowable defined contribution pension plan (DCP/MPP) limits for any

particular year (for example, $11,000 for 2009).

Contributions can be made up to 120 days after the companys fiscal year-end.

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