Fundamentals of Canadian Life Insurance...

Fundamentals of Canadian Life Insurance

163 Life Insurance Terms in

THE ESSENTIAL REFERENCE

OF LIFE INSURANCE TERMS

IN PLAIN ENGLISH


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Fundamentalsof

Canadian Life Insurance

The Essential Reference of Life Insurance Terms in Plain English


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Copyright 2012 The Financial Literacy Company

All rights reserved. Any reproduction of parts or all of this book and its contents by

any means electronic or mechanical is prohibited.

The Fundamentals of Canadian Life Insurance is a collection of terms common to

the Canadian life insurance industry and relevant to all those who work in the

financial services industry or in association with life insurers. The definitions of

the terms are “pure,” that is, they do not reflect the practices or policies of any

insurance company. Thus, there may be some minor discrepancies between

these definitions and how an insurer uses this terminology or interprets and

applies these terms.

The information in this book is provided for educational purposes only; it should

not be construed or interpreted as providing advice. Agents and advisors should

always seek guidance from their principals and compliance experts in regards to

informing themselves and others about details of the products they sell and other

considerations of their business.

We welcome all feedback and suggestions for additions to the book. Please send

your comments to [email protected].

ISBN: 0-9879002-0-5CLIFE INC.1595 Sixteenth AvenueSuite 301Richmond Hill, ONL4B 3N9www.clifece.ca

The Fundamentals of Canadian Life Insurance is also available for continuing education credits for life agents and accident and sickness agents. Please see the website for details or email [email protected].


mailto:[email protected]


http://www.clifece.ca


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Table of Contents

Accident and Sickness! ! ! 6Accidental Death Benefit/Accidental Death and Dismemberment Insurance! 6Adjusted Cost Basis! ! ! 7Annuities ! ! ! ! 8Application! ! ! ! 9ASO Plans ! ! ! ! 10Assignment ! ! ! ! 11Assuris! ! ! ! ! 12Authority!! ! ! ! 13Automatic Premium Loan! ! ! 14

Beneficiary! ! ! ! 14Business Disability Insurance ! ! 15Business Life Insurance! ! ! 16Business Overhead! ! ! 17

Canada Deposit Insurance Corporation! 18Canada Pension Plan! ! ! 19Canada Life and Health Insurance Association! ! ! ! !20Capital Gains ! ! ! ! 21Cash Surrender Value! ! ! 22Certified Financial Planner!! ! 23Chartered Life Underwriter!! ! 23Churning and Twisting! ! ! 23Claims! ! ! ! ! 24Co-insurance! ! ! ! 25Compliance! ! ! ! 26Conflict of Interest! ! ! 27Continuing Expenses ! ! ! 27Contract !! ! ! ! 28Co-ordination of Benefits ! ! ! 29Corporation! ! ! ! 29Cost Illustrations! ! ! ! 30Creditor Protection! ! ! 31Criminal Law ! ! ! ! 32Critical Illness Insurance! ! ! 33

Death Benefit! ! ! ! 34Death Benefit Guarantee! ! ! 35Deductible! ! ! ! 36Defined Benefit Plan! ! ! 37Defined Contribution Plan! ! ! 38Definitions of Disability! ! ! 39Deposit-based Guarantee! ! ! 40Disability Income Insurance! ! 41Disclosure! ! ! ! 42Disposition! ! ! ! 42

Earned Income! ! ! ! 43Effective Date! ! ! ! 44

Equity ! ! ! ! ! 44Errors and Omissions Insurance! ! 45Estate! ! ! ! ! 46Ethics! ! ! ! ! 47Exclusions ! ! ! ! 48

Face Page! ! ! ! 49Fiduciary Duty! ! ! ! 50Fixed-income Investments !! ! 50Fraud! ! ! ! ! 51

Grace Period! ! ! ! 52Grandfathered Policies! ! ! 53Group Disability Insurance!! ! 54Group Health Insurance! ! ! 55Group Insurance! ! ! ! 55Group Life Insurance! ! ! 56Guaranteed Minimum Withdrawal Benefit Plans!! ! ! ! 57Guarantees ! ! ! ! 58

Holding Out! ! ! ! 59Income Splitting! ! ! ! 60Income Tax! ! ! ! 61Incontestability! ! ! ! 61Index-linked Annuity! ! ! 62Inflation! ! ! ! ! 62Information Folder! ! ! 63Insurable Interest!! ! ! 64Insured! ! ! ! ! 65Insured Annuity ! ! ! ! 66Interest ! ! ! ! ! 66Irrevocable Beneficiary! ! ! 67Joint and Last Survivor Annuity! ! 68

Last Expenses ! ! ! ! 69Law of Agency! ! ! ! 70Leveraging! ! ! ! 70Life Annuities! ! ! ! 71Life Income Funds ! ! ! 72Locked-in Plans ! ! ! ! 73LLQP! ! ! ! ! 74Locked-in Retirement Accounts! ! 75Long-term Care Insurance!! ! 76Long-term Disability! ! ! 77

Marginal Tax Rate! ! ! 78Maturity Guarantee! ! ! 79Maximum Tax Actuarial Reserve! ! 80Misrepresentation!! ! ! 81Mistake! ! ! ! ! 81Money Laundering! ! ! 82Morbidity! ! ! ! 82


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Mortality !! ! ! ! 83Mortgage Insurance! ! ! 84Mutual Funds! ! ! ! 84

Needs-based Sales Approach! ! 86Net Cost of Pure Insurance! ! 86Non-forfeiture Options! ! ! 87Notional Units ! ! ! ! 88

Occupational Classification! ! ! 89Offset! ! ! ! ! 90Old Age Security ! ! ! ! 90

Participating Whole Life Insurance! ! 91Permanent Life Insurance! ! ! 92Personal Contract !! ! ! 93Policy-based Guarantee! ! ! 94Policy Dividends ! ! ! ! 95Policy Loan! ! ! ! 95Pooled Registered Pension Plans ! ! 96Pre-existing Condition! ! ! 97Premium ! ! ! ! !98Prescribed Annuity ! ! ! 99Prescribed Retirement Income Funds ! 99Present Value of Money! ! ! 100Privacy and Confidentiality !! ! 101Probate! ! ! ! ! 102

Rated Contract! ! ! ! 102Recurring Disability! ! ! 103Registered Disability Savings Plan! ! 103Registered Education Savings Plan!! 104Registered Pension Plans! ! ! 105Registered Plans!! ! ! 106Registered Retirement Income Funds! 106Registered Retirement Savings Plans! 107Reinstatement ! ! ! ! 108Reinsurance! ! ! ! 109

Renewable Term Life Insurance! ! 110Replacement ! ! ! ! 110Rescission! ! ! ! 112Reset! ! ! ! ! 112Residual and Partial Disability Benefits ! 113Riders ! ! ! ! ! 114Risk Tolerance! ! ! ! 115Rule of 72! ! ! ! 116

Sales Charge! ! ! ! 117Segregated Funds ! ! ! 118Self-directed RRSP! ! ! 119Settlement Options! ! ! 120Short-term Disability ! ! ! 120Sole Proprietorship ! ! ! 121Spousal Plan! ! ! ! 122Spousal Rollover! ! ! ! 122Stocks ! ! ! ! ! 123Subrogation! ! ! ! 124Suicide Exclusion Clause! ! ! 124

Tax-free Savings Account! ! ! 125Taxation of Life Insurance! ! ! 126Temporary Insurance Agreement! ! 127Term Annuity ! ! ! ! 127Term Life Insurance! ! ! 128Term-to-100 Life Insurance!! 129Time Horizon! ! ! ! 130Time Value of Money ! ! ! 130Trusts! ! ! ! ! 131

Unbundling! ! ! ! 132Underwriting! ! ! ! 132Unfair Trade Practices ! ! ! 133Uniform Life Insurance Act!! ! 134Universal Life Insurance! ! ! 134

Waiver of Premium Rider! ! ! 135Whole Life Insurance! ! ! 136

Yield to Maturity ! ! ! ! 137


Accident and Sickness Insurance (A&S)Accident and sickness insurance is a broad category of insurance also known as health

insurance.

A&S is available for both personal use and for groups.

All Canadians enjoy basic health insurance from their provincial health plans. A&S policies step in

to provide:

- Extended health care. Pays for semi-private or private hospital rooms, prescription

drugs, medical appliances (such as a knee brace), and other services.

- Travel assistance. Pays the cost of health care needed outside Canada above the

amount provincial plans cover. Will also cover costs such as those incurred by a traveling

companion, and the return of a body to Canada.

- Prescription drugs.

- Dental services.

- Accidental Death and Dismemberment.- Critical Illness Insurance. Pays a lump sum when the insured is diagnosed with a

critical illness covered by the policy and remains alive 30 days after diagnosis.

- Long-term Care Insurance. Pays for care of those who are no longer able to care for

themselves.

Advisor Resource:

CLHIA guideline on travel insurance:

http://www.clhia.ca/domino/html/clhia/CLHIA_LP4W_LND_Webstation.nsf/resources/Guidelines/

$file/Guideline_G5.pdf

Related Terms: Group Health Insurance. Critical Illness Insurance. Long-term Care Insurance.

Accidental Death Benefit (ADB) Accidental Death and Dismemberment Insurance (AD+D)The accidental death benefit is a rider for life insurance policies that increases the death benefit

paid to the beneficiary if the life insured dies because of an accident. The types of accidents that

are covered are described in the policy, and death must occur within 365 days.


http://www.clhia.ca/domino/html/clhia/CLHIA_LP4W_LND_Webstation.nsf/resources/Guidelines/$file/Guideline_G5.pdf




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When the accidental death benefit rider provides an additional sum when there is a loss of a body

part (eye, arm, leg, etc.), it is called an accidental death and dismemberment (AD&D) rider.

This rider is available on both personal policies and group policies.

Accidental death and dismemberment (AD&D) is also available as a form of accident and

sickness insurance. It is a policy (not a rider) when it is offered this way.

Accidental death and dismemberment (AD&D) provides a death benefit to a beneficiary if the

insured dies, or a benefit to the insured if dismemberment occurs. If the insured suffers from more

than one dismemberment (for example, both legs) a greater sum is paid than for a single

dismemberment (one leg).

Advisor Remarks:

1. A schedule accompanies the (AD&D) policy and rider that specifies the amount paid per loss (such as loss

of leg).

2. The key word in these policies is accident. Death must be the result of an accident for the benefit to be

paid.

Adjusted Cost BasisAdjusted cost basis (ACB) is a dollar amount that represents the net cost of the life insurance

policy to the policy owner. It is made up of the gross cost of the policy (in other words, how much

has been paid --- mostly, premiums) plus or minus other contributions that add to, or are

subtracted from, that value.

ACB increases by costs incurred by policy owner and decreases by benefits received by the

policy owner. ACB is used to determine the taxable gain on a policy loan and the taxable portion

of a withdrawal.

Costs that increase the ACB include:

- Premiums.

- A policy loan repayment.

The ACB is decreased by:

- ! Life insurance coverage, called the net cost of pure insurance (NCPI).

- ! Dividends.

- ! A policy loan.


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- ! A withdrawal.

The ACB calculation for a “plain vanilla” policy is:

ACB = premiums – NCPI

The ACB calculation for a par whole life policy with a policy loan is:

ACB = premiums – NCPI – dividends – policy loan

When a life insured dies, the policy beneficiary receives the death benefit of the policy. The death

benefit is not affected by the ACB.

Advisor Remarks:

1. As of Dec. 2, 1982, the method for calculating the ACB changed. Policies issued prior to this date are

called grandfathered. These policies have preferential tax treatment compared to those issued after that

date.

2. ACB is a difficult concept. It is best thought of as how much the person is “out of pocket” in terms of

expense for the product.

3. For non-insurance purposes, the ACB is the adjusted cost base. Only in insurance is “basis” used.

Related Terms: Net Cost of Pure Insurance. Grandfathered Policies.

AnnuitiesAn annuity is an investment contract, usually made with a life insurance company. A single lump-

sum deposit or a series of deposits funds the annuity. The deposits are called the capital.

The capital grows due to the interest provided by the insurer, for instance at 3%. This means 3%

interest is applied to the capital. The interest rate is fixed.

Annuities are a guaranteed investment because the contract owner is guaranteed to receive his

capital plus interest. The exception to this is if the contract owner has chosen to deposit his

capital into a variable annuity. Instead of receiving a guaranteed interest rate, he will receive

annuity payments based on performance of the stock market. The amount of benefit from a

variable annuity is not guaranteed.

Annuities pay a regular income, called the annuity benefit to the contract owner, who is called the

annuitant. The contract owner can choose to receive the benefit monthly, quarterly, semi-annually,

or annually.


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If an annuity is funded with a single deposit, the annuitant can begin to receive a benefit on the

first annuity period he has selected. This is called an immediate annuity.

Alternatively, if a series of deposits are made to the contract, the benefit will begin at a date in the

future. An annuitant may also choose to make a single deposit but begin to receive benefits at a

future date. This is called a deferred annuity.

Annuities are available for a specified term, such as 10 years or to age 80, or for life.

Advisor Remarks:

1. The annuity benefit paid to the annuitant is determined by a number of factors. They include the rates

offered by the insurer (there are differences between companies), the total amount of capital, how often the

benefit is paid, and the age, gender and health of the annuitant.

2. All provinces define annuities as a form of life insurance. This gives them creditor protection.

3. Annuity benefits are paid monthly, every three months (quarterly), twice a year (semi-annually) or

annually. The contract owner makes this decision on the application.

4. Withdrawals or surrender of the annuity contract is to be avoided since the annuitant will be financially

penalized.

Related Terms: Life Annuities. Term Annuity. Prescribed Annuity.

ApplicationAfter the life insurance agent has presented insurance options to the client, and calculated the

correct amount of insurance required in a fact-finding interview, the client may then proceed to

apply for the insurance policy.

Completing the application form correctly is a key job for the agent because its details, together

with other information, form the basis for underwriting the policy.

- The concept of constructive notice applies to the agent during the application process.

This means the insurance agent must disclose all information about the proposed policy

owner and proposed life insured to the insurance company.

- A power of attorney may complete an application for a physically or mentally disabled

person. (A power of attorney is appointed in a legal document as a person who assumes

decisions for another.)


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- After the application is completed, it must be reviewed with the proposed insureds, and

signed by the proposed policy owner and agent. The agent must not sign on behalf of the

client; this is forgery.

- If the agent believes that the standard premium rate will apply, he or she will ask for a

cheque in the amount of the first premium to accompany the application.

- The agent must promptly deliver the application to the insurance company, and be

prepared to acquire more information if requested by the underwriters.

- All details of an application are highly confidential and must never be shared with another

person without the consent of the proposed insureds.

- When the application is approved, the policy is issued.

- The application together with the policy forms the entire contract between the policy

owner and the life insurance company.

Advisor Remarks:

1. The policy owner provides information about his or her income and finances on the application to prove

that premiums can be paid.

2. The underwriting of the policy determines premiums. This will include medical information from the

Medical Insurance Bureau (MIB).

3. If the agent thinks that the life insured presents a higher risk than is covered by the standard premium,

the agent should not ask for payment to accompany the application.

4. The agent may be required to complete an Inspection Report, Drug and Alcohol Questionnaire, or

Hazardous Sports and Occupations Questionnaire to go along with the application.

Related Terms: Cost Illustrations. Underwriting. Contract. Temporary Insurance Agreement.

ASO Plans (Administrative Services Only) When a company has group insurance, the company either pays a premium to the insurer and

the insurer pays the claims made by company plan members, or the company pays the claims.

A company that chooses to pay claims itself is called self-insured. Such a company will often take

out an administrative services only (ASO) contract so that it does not have responsibility for

administration of the contract.

ASO sees the company pay an administration fee to an insurer or third-party provider. The group

members do not experience any difference in coverage. An ASO contract can save a company


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considerable expense because the company is paying actual claims instead of a premium

charged (and that must be paid) whether there are claims or not.

The company limits its risk in terms of how much it will pay for claims by taking stop-loss

insurance. The stop-loss insurance is used if a claim exceeds an agreed-upon limit that would

arise from a catastrophic event. This is specific stop-loss insurance. If the insurance pays once a

general threshold is reached for claims, it is called aggregate stop-loss insurance.

Advisor Remarks:

1. The alternative to a self-insured plan is a fully-insured plan.

2. In a fully-insured plan, the company pays the premium to the insurer. Such a plan may be structured on

a refund or non-refund basis.

3. A fully-insured plan that provides a refund, if premiums exceed claims plus expenses, is called a

retrospective rating arrangement or refund accounting method of funding.

4. A fully-insured plan that does not provide a refund is called a retention method of funding.

Related Term: Group Insurance.

AssignmentWhen a life insurance policy is assigned, it is turned over to another person, company, or

organization. In effect, ownership changes hands and the original policy owner loses his or her

rights to the benefits of the policy.

- An absolute assignment sees a policy switched from its owner to another owner. It

could be used if a business held a key person life insurance policy on a senior executive

in which the business was named as the beneficiary, and that executive leaves the

company. Part of a compensation package could include transfer of the policy so that the

executive assumes the obligation for premium payments but is able to name a

beneficiary for the life insurance coverage. This is a permanent change.

- A collateral assignment sees a policy switched from its owner to a financial institution.

This would occur if a person was taking a loan for business purposes. Collateral (or

security) for taking the loan is provided to the lender by the policy. If the borrower dies

with the loan unpaid, the death benefit of the policy goes first to the lender and the

balance to the beneficiary of the policy owner. The collateral assignment could be

terminated when the loan is repaid.


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- A charitable assignment sees a policy switched from its owner to a charitable

organization. When the charity becomes the beneficiary, the policy owner receives the

tax benefit that applies to a charitable gift. If a policy owner assigns the policy and

continues to pay premiums, each premium is a charitable gift for the year and receives a

non-refundable tax credit.

Advisor Remarks:

1. Some or all of the premiums paid for a life insurance policy used as collateral may be an allowable tax

deduction.

2. Tax specialists should be consulted when assignment is contemplated.

Assuris Assuris is a life insurance organization that ensures coverage for policy owners will continue if a

Canadian insurance company goes bankrupt or cannot meet its financial obligations.

The amount Assuris guarantees is based on the type of policy:

- up to $200,000 of a term life insurance policy or term-to-100 life insurance policy is

covered in full. If the face amount is greater than $200,000, then the policy owner will

receive the greater of 85% of the death benefit or $200,000.

- universal life insurance policy owners receive the same guarantee as term life but the

investment account of the policy owner receives additional coverage: the greater of 85%

of the account or $60,000.

- whole life insurance policy owners receive the same guarantee as universal life except

the additional coverage is based on the cash value of the policy. Dividends will continue

but may be reduced in value.

- disability insurance policy owners receive the greater of $2,000 per month or 85% of their

benefit.

- health insurance policy owners receive the greater of $60,000 or 85% of their benefit.

- segregated fund contract owners receive the greater of $60,000 or 85% of their maturity

or death benefit guarantees.


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- annuitants receive the same amount as disability income insurance owners; but if the

annuity has a guaranteed interest rate, then 100% of the value of the annuity up to

$100,000 is received.

Advisor Remarks:

1. In 2012, Union of Canada Life Insurance Company was liquidated due to insufficient capital reserves.

Its 22,000 policy owners did not completely lose the money invested in their policies, or lose their insurance

coverage, thanks to Assuris.

2. Assuris does not settle policy disputes; it steps in to salvage corporate obligations if an insurance company

becomes unable to meet those obligations.

Advisor Resource: http://www.assuris.ca

Related Term: Canada Deposit Insurance Corporation.

AuthorityA person has authority when he or she has the right to take certain actions. The agency contract

gives the agent authority. Authority comes in four forms:

1. Express authority. When a written or verbal contract specifies the actions that can be

pursued by the agent on behalf of the insurer.

2. Implied authority. The actions taken by an agent on behalf of the insurer based on what

would normally be expected.

3. Actual authority. When an agent is authorized to act on behalf of an insurer, and clients are

informed of this, then actual authority exists. It includes express authority and implied authority.

For instance, an agent has actual authority to assist in the completion of a life insurance

application.

4. Apparent authority. Clients expect an agent to have the authority to take certain actions

based on industry practices, representations by the insurer, past dealings, and other similar

information. When an agent appears to have been authorized to act on behalf of an insurer, and

clients believe that the agent has received the authority of the insurer to do so, then apparent

authority exists. Actions taken by the agent with apparent authority are just as binding on the


http://www.assuris.ca

http://www.assuris.ca

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insurer as those taken with actual authority. The insurer, however, can take legal action against

an agent who has overstepped his or her apparent authority.

Advisor Remarks:

1. Apparent authority is the source of problems between clients, insurers, and agents.

Related Term: Law of Agency.

Automatic Premium Loan (APL)

An automatic premium loan (APL) is one non-forfeiture option for policy owners with whole life

insurance.

A policy owner can stop paying premiums and the automatic premium loan (APL) will continue

premium payments on his behalf. The APL uses the cash surrender value of the policy to pay

premiums.

Once the cash surrender value (CSV) is used for the final premium and it is exhausted, there is a

30 or 31-day grace period.

If the life insured dies during the grace period, the death benefit (minus amount taken from the

CSV and interest) will be paid to the beneficiary. But, if the premium is not paid during the grace

period, the policy is finished and the whole life policy owner receives no money because no CSV

exists.

Advisor Remark:

1. The other non-forfeiture options are the extended term insurance option and the reduced paid-up

insurance option.

Related Terms: Non-forfeiture Options. Whole Life Insurance. Grace Period.

BeneficiaryThe policy owner (also called the insured) names the beneficiary on the application for life

insurance.


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The beneficiary can be a person, group of people, the estate of the policy owner, a business, a

trustee, or a charity who receives the death benefit of a life insurance policy. The death of the life

insured triggers the payment to the beneficiary.

A policy owner may name a primary beneficiary and a contingent beneficiary. The contingent

beneficiary receives the death benefit if the primary beneficiary has died.

The beneficiary may be revocable or irrevocable. The policy owner may change a revocable

beneficiary at any time.

It is appropriate for an agent to regularly review the beneficiary named in his or her client’s

insurance policy.

An irrevocable beneficiary must give his or her written consent to be replaced as beneficiary.

Also, the irrevocable beneficiary controls how the policy owner can deal with the policy. His or her

permission is needed if the policy owner wants to receive the cash surrender value of the policy,

to take a loan against the policy, or to assign the policy.

The beneficiary of the policy receives the death benefit tax-free.

Advisor Remarks:

1. A minor can be a beneficiary.

2. A business will be named as a beneficiary when life insurance is used to fund the transfer of a business to

a new owner after the first owner dies or for key person life insurance.

Related Term: Irrevocable Beneficiary.

Business Disability InsuranceBusinesses need disability insurance to accomplish these objectives:

1. Business protection if the key person becomes disabled. The key person, or key

employee, is an employee who is essential to a business, and whose disability would

have a financial impact on the company. Key person disability insurance pays the

disability benefit to the business to use as it chooses.


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2. An orderly sale of the business if an owner is disabled. A buy/sell agreement must be

in place between an owner of a company and a potential buyer. The disability buy-out

insurance buys out the disabled owner according to the terms of the buy/sell agreement.

3. Business protection if the owner is disabled. A business overhead insurance policy

will begin paying the overhead expenses of a business when the business owner is

disabled, after an elimination period. Overhead expenses include employee wages, rent,

and hydro and telephone bills. They do not include inventory or a payment of the salary

to the business owner. The policy benefit will be paid for up to three years.

Advisor Remarks:

1. The buy-sell agreement is essential because it establishes the price to be paid for the company, and other

terms of payment.

2. Overhead insurance is available for professionals in private practice, such as lawyers and doctors, and

self-employed business people with a good track record.

Related Terms: Business Life Insurance. Business Overhead Insurance.

Business Life InsuranceBusinesses need life insurance to accomplish these objectives:

1. Business protection if the key person dies. The key person, or key employee, is an

employee who is essential to a business, and whose death is likely to have a financial

impact on the company. Key person life insurance names the business as the beneficiary

of the policy and the key person as the life insured.

If the key person dies, the business receives the death benefit. The money can

be used for the cost of hiring a replacement employee, or to bridge the financial transition

between the key employee’s death and the contribution of the “new” key employee.

2. An orderly sale of the business if an owner dies. A major part of the estate of a

business owner can be the value of the business he or she owns. Surviving family

members need to have a way to receive that value, without resorting to a sale of the

company.

To do so, a buy/sell agreement must be established between an owner of a

company and a potential buyer. It can be structured as:


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- A cross-purchase agreement. A life insurance policy is then acquired that names the

buyer as beneficiary. The buyer uses the money from the policy to pay survivors.

- A criss-cross agreement. A life insurance policy is acquired that names all partners as

beneficiaries.

- A cross-purchase, tax-free dividend agreement. The business is named beneficiary of a

life policy. Shares of the business are transferred to the estate of the deceased owner

and surviving shareowners use a promissory note to buy the shares. The company then

issues a dividend in the amount of the promissory note.

Advisor Remarks:

1. The buy-sell agreement is essential because it establishes the price to be paid for the company, and other

terms of payment.

2. A cross-purchase, tax-free dividend agreement can only be used by an incorporated company since only

incorporated companies can issue dividends.

3. A variation on key person insurance is split dollar life insurance. Such insurance sees the business receive

the death benefit of a policy if a key person dies, and the key person contributing to the cash value of a

policy. The cash value may be accessed during life, or upon death, may be received by a surviving spouse.

Related Terms: Business Disability Insurance. Capital Gains. Business Overhead Insurance.

Business Overhead InsuranceBusiness Overhead Insurance is a form of disability insurance for a business owner. The

insurance does not pay a benefit to the owner, instead, the benefit is used to pay ongoing fixed

expenses of the business. In this way, an owner who generates revenue for the business is able

to protect his business if disability should occur. The owner will protect himself or herself with a

personal disability policy.

Benefits begin after the elimination or waiting period is over. They are paid monthly. Payments

are limited to actual expenses incurred for costs such as:

- rent

- utilities

- employee salaries (this does not include a salary for the disabled owner)

There will be a maximum to the number of benefit payments received.

Advisor Remarks:


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1.Key to the use of this insurance is that the owner must produce income for the company, or business.

Therefore, it is very useful for professionals such as lawyers, doctors, accountants, and engineers.

2.Premiums may be tax deductible as a business expense.

Related Term: Business Disability Insurance.

Canada Deposit Insurance Corporation (CDIC)Canada Deposit Insurance Corporation (CDIC) is a Crown Corporation that provides protection

on balances up to $100,000 in Canadian currency that are held with its member financial

institutions. Those institutions include banks, Canadian trust and loan companies, and deposit-

taking associations governed by the Cooperative Credit Associations Act.

CDIC does not cover credit unions and caisses populaires, Canadian branches of foreign banks,

and some Canadian chartered banks.

CDIC reimburses account owners for losses up to the $100,000 limit on eligible deposits if the

financial institution, such as a bank, becomes bankrupt. Eligible deposits include:

- savings and chequing accounts;

- Guaranteed Investment Certificates (GICs) and similar term deposits with a maturity date of

five years or less;

- money orders

- certified cheques

- bank drafts

- traveller’s cheques (when issued by a CDIC member)

Ineligible deposits include:

- mutual funds;

- stocks;

- bonds;

- treasury bills

- GICs with a maturity date of more than five years.

CDIC coverage is automatically provided to depositors; they do not need to apply for coverage.

Advisor Resource: http://www.cdic.ca


http://www.cdic.ca

http://www.cdic.ca

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Advisor Remarks:

1. The insurers of deposits at financial institutions are:

- Assuris for insurance products;

- CDIC for banks, trust and loan companies, and some deposit-taking associations;

- Canadian Investor Protection Fund (CIPF) for investment dealers who sell stocks and securities;

- the Mutual Fund Dealers Association (MFDA) Investor Protection Corporation (IPC) for mutual funds.

2. All insurers across the industry provide protection against insolvency of firms; they do not insure against

losses suffered by investors.

Canada Pension PlanThe Canada Pension Plan (CPP) is a program delivered by the federal government and is in

place in all Canadian provinces except Quebec. In Quebec, the Quebec Pension Plan (QPP)

provides the equivalent of the CPP.

The CPP provides five forms of income to those who qualify:

1. Retirement income. All Canadians who are employed or self-employed contribute to the

CPP when they earn more than an amount established as the minimum for contributions.

There is also a maximum amount above which contributions cease. The full retirement

income is paid monthly at age 65. CPP can begin as young as age 60 but at a reduced

amount.

2. A survivor’s pension. This monthly payment is made to the spouse of a CPP contributor

who dies.

3. A children’s benefit. This monthly payment is made to the child of a CPP contributor if

the contributor dies. It is paid to age 18 or age 25 if the child attends school full time.

4. A disability benefit. When disability is proven to be both severe and prolonged, CPP will

pay a monthly income to the disabled person.

5. A children’s disability pension. This is payment made to a disabled contributor and his

or her child.

CPP also provides a lump-sum payment as a death benefit when a contributor dies. The amount,

to a maximum of $2,500, is paid to the contributor’s estate.

Advisor Resource: http://www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml


http://www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml

http://www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml

20

Advisor Remarks:

1. An employed person shares his or her contribution to CPP with his or her employer. Those who are self-

employed contribute the full amount.

2. Contributions can be made to CPP to age 70 if a person continues and work, and whose income is

greater than the minimum for CPP contributions.

3. The CPP disability pension begins after a four-month waiting period once disability has been proven.

Related Term: Old Age Security.

Canadian Life and Health Insurance Association (CLHIA)The Canadian Life and Health Insurance Association (CLHIA) is a voluntary trade association that

represents the collective interests of its member life and health insurers. The Association’s

membership accounts for 99 per cent of the life and health insurance in force in Canada and

administers about two-thirds of Canada’s pension plans.

The Association compiles industry statistics, develops and publishes guidelines on key issues for

financial advisors, and provides consumer publications and resources.

The mission of the CLHIA is to serve its members in areas of common interest, need or concern.

In carrying out this mission, the Association ensures that the views and interests of its diverse

membership and of the public are equitably addressed.

Its strategic objectives include:

- To build consensus among members on issues and concerns of importance to the

industry.

- To promote a legislative and regulatory environment favourable to the business of its

members.

- To foster sound and equitable principles in the conduct of the business of its members.

- To inform and educate members about domestic developments and, where warranted,

international developments of importance to them.

- To preserve and advance the industry's reputation.

- To promote, on behalf of its members, public policies that contribute to the betterment of

the Canadian economy and society.

Advisor Resource: http://www.clhia.ca


http://www.clhia.ca/domino/html/clhia/CLHIA_LP4W_LND_Webstation.nsf/page/155D2E272E4A7D87852578150078A752!OpenDocument

http://www.clhia.ca/domino/html/clhia/CLHIA_LP4W_LND_Webstation.nsf/page/155D2E272E4A7D87852578150078A752!OpenDocument

http://www.clhia.ca

http://www.clhia.ca

21


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23

1595 Sixteenth Ave., Suite 301, Richmond Hill, ON L4B 3N9 905-731-4646 www.clifece.ca




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