LLQP Exam Preparation Complete

Study Kit

LLQP Exam Prep 1

 What is insurance? Insurance is a financial arrangement (contract) between two parties,
in which one of the parties (the insurer) agrees to protect the other party (the insured)
against a specified financial loss, in exchange for a specified payment (premium). If the
loss occurs, the insurer will pay the insured an amount of money (benefit) to compensate
for the loss. As you can see, insurance is an agreement between the insurer and the
insured; but what would motivate these two parties to come to such an agreement? To put
it quite simply: protection and money.

1. Life Insurance, in General

As a consumer you wish to insure (or protect) certain things which you hold valuable. In
life insurance we protect against the financial impact the loss of our lives (death) may
have. However how can we be sure that we are properly protected? What factors go into
determining our coverage? Who is involved in the process? This first section is an
introduction into the world of insurance.

Parties to an individual insurance contract

There are four parties to an individual insurance contract:

Insurer
The insurer pays the benefit when the covered risk occurs.

Policyholder-insured

The policyholder is the owner of the insurance contract. He or she is a party to the
contract along with the insurer.

Life Insured

The life insured is the person on whose life the life insurance contract is taken.

Beneficiary

The policyholder designates a beneficiary, who receives the benefit when the covered
risk occurs. The policyholder is not required to designate a beneficiary.

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 Basics of insurance
There are five guiding principles which life insurance is based on. These basics are
the foundation on which insurance principles are made.

The five guiding basics of insurance are:

i. Meeting commitments to the insured

The insurer makes a written commitment to pay out a certain amount following the
occurrence of a specific risk.

ii. Creation of a reserve

The creation of a reserve allows the insurer to meet claims-related requirements of

policyholders after the life insured’s death.

iii. The law of large numbers

The more the number of analyzed results or events there are, the more it is possible to
determine the probability of these results or events based on the anticipated
probabilities.

iv. Equitable sharing

According to this principle, each person must contribute a premium that reflects the
risk he represents to the group.

v. Mutual benefit

This principle implies that, by forming groups, it is easier to pay claims, since all the
members of a group will not have an insured risk happen in the same year.

Mortality rate
The mortality rate is used in life insurance to determine the premiums required to cover
the risk of death. It is the ratio of deaths to a given population. For example, the mortality
rate is the number of expected deaths per year per thousand in Canada for people alive in
the beginning of the year, at each age from 1 to 99 years old, for men and women
separately.

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 2. Term Life Insurance
There are two main categories of life insurance: Term and Permanent. Term insurance,
also referred to as temporary insurance, is the simplest form of life insurance. As the
name suggests, it is insurance that is for a term or a specific period of time. The following
is a brief summary in order to identify the main concepts involved in term insurance.

Primary characteristics
Limited duration
Usually term life insurance is valid for a specific number of years.

Example:
Michael, age 30, takes out a 20-year term life insurance policy. As such, he is covered
for the next 20 years (to age 50).

Renewal rights

This means that the policy may be renewed after the initial term without evidence of
insurability (proof of health).

Example
Mary, 28, takes out a 10-year term life insurance policy with a face amount of $100,000
that is renewable until age 65. The premium will be renewable and will increase in
10 years for another 10-year period. This pattern will continue until the policy
anniversary following Marie’s 65th birthday.

Conversion privileges
Policyholders may choose to convert (change) some or all of the term life insurance into
permanent life insurance with no evidence of insurability.

Example
Philip, 46 years old, took out a 10-year term life insurance policy 8 years ago. The policy
has a face amount of $100,000 and is renewable and convertible until age 65. Today he
can choose to convert the policy (or some of the term) into permanent insurance with no
evidence of insurability, by paying the premium applicable to his age group, without
exceeding the face amount of $100,000 in permanent coverage.

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 Types of term life insurance
Decreasing term life insurance or mortgage insurance

The face amount (also known as the death benefit or capital insured) decreases on an
annual basis, but the premium is level (remains the same) for the contract period.

The right to convert term insurance to permanent insurance applies to the remaining face
amount at the conversion date.

Example:
Frank, 31 years old, took out a decreasing term life insurance of $15,000 with his
financial institution to purchase furniture, with 60-month amortization. If Frank dies
while his loan balance is $7,000, this balance will be paid in full, not the initial amount
of the loan.

Term life insurance with a uniform or fixed face amount

Insurance amount and premiums are fixed for the contract period. The premium increases
upon each renewal (at the end of the contract period).

Example:
Alicia, 28 years old, recently completed her notary studies and has started business in
partnership with one of her former classmates. Alicia decides to take out a 10-year term
life insurance with a $25,000 face amount that is renewable and non-convertible. This
contract will be renewable every 10 years, with the premium rising upon each renewal,
but with the same face amount.

Term life insurance clientele

As term is time specific insurance it is best suited for those who need coverage for a
specific period of time. As well term insurance is the most affordable insurance available.

Typical term life insurance clients are:

Young couples
Business partners
People with specific needs for a specific time period
Individuals with limited finances (budget)
Individuals who want to protect their debts from their creditors

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 3. Permanent Life Insurance
Permanent insurance may be categorized in several types of insurance. These include
whole life, term-to-100 and universal life insurance. As the name implies, this category of
insurance is permanent, or until death.

The Different Types of Permanent Insurance

Whole life insurance
Premiums are due for the life insured’s entire life. The premiums are level and
guaranteed for life.

Limited payment whole life insurance:

Premiums are payable only for a specified time period.

Level and guaranteed premium.

The fewer the payments, the higher the annual premium and the cash surrender
value is higher as well.

Example
Paul, 46, bought a 10-pay $100,000 whole life insurance policy on his own life. He only
has to pay premiums for 10 years on this policy. From 56 years of age, premiums will no
longer be due and the coverage will remain in place until the insured dies (or age 100).

Primary characteristics of whole life:

Three guaranteed elements:
i. Death benefit
ii. Fixed premium
iii. Cash value**

**Cash value (or Cash Surrender Value):

Portion of premiums used as savings which accumulate within the policy and are
payable when the policyholder terminates his contract
Cash value is different from death benefit
The amount is known in advance with a whole life insurance
A portion of the cash surrender value (policy gain) is taxable when withdrawn in a
lump sum
May or may not be payable upon death
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 Non-forfeiture options

Many consumers worry about what would happen to their life insurance if they were
unable to pay it. Since whole life insurance contains a savings amount (cash surrender
value) this allows for the option of not having to pay premiums, while still keeping some
form of insurance in place. These are known as non-forfeiture provisions and have four
applications:

Reducing the value of the policy

Reducing the coverage amount of the original contract and eliminating premiums until
the insured’s death. Also known as reduced paid-up insurance, the coverage has been
reduced from the original amount to a lower amount (reduced), however premiums are no
longer due (paid-up)

Extended term insurance

In this case, the whole life insurance contract is converted into a term insurance policy in
the same amount as the original face amount, but for a lesser period, until the cash
surrender value is nil over time. Depending on the amount of the cash surrender value,
the length of time the term insurance will be valid will vary.

Automatic premium loans

The insurance will be automatically kept in effect using the cash surrender value as
payment for the premiums. Each month the premium payable to the insurer is removed
from the cash surrender value. These advances are loans made from the policy and must
be reimbursed with interest.

Policy loans
The insurer can grant the insured a loan up to 90% of the cash surrender value of his
whole life policy. The policy holder is not bound by a strict repayment schedule however
he is charged interest at current rates. The difference between automatic premium loans
and policy loans is that the policy loan is deposited into the client’s bank account to be
used at his discretion.

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 Example of non-forfeiture options

Insured, David, 22, with a permanent life insurance

Face amount: $25,000

Policy year Guaranteed cash Reduced paid-up Extended term insurance

surrender value insurance
At age 60 $11,850 $20,625 17 years and 200 days
At age 100 $25,000 $25,000 N/A

At age 60, David has six options:

i. He can keep on paying the premium and remain insured in the amount of $25,000.
ii. He can withdraw the cash surrender value of $11,850, thereby cancelling his
contract.
iii. He can stop paying the premium and obtain $20,625 in permanent life insurance
for the rest of his life with no premiums due (reduced paid-up insurance).
iv. He can stop paying the premium and obtain a $25,000 term insurance for a period
of 17 years and 200 days (extended insurance term).
v. He can pay the premiums via automatic advance and remain insured as long as the
cash surrender value is positive (automatic premium advance)
vi. He can apply for a policy advance as long as the amount does not exceed the cash
surrender value (policy or contract advance).

Term-100 (T-100) life insurance

Term-100 (T-100) insurance provides level and guaranteed coverage until the age of 100.
Because T-100 insurance does not normally contain any cash value, the premiums are
lower than a whole life policy (for the same amount of coverage).
.
Example
John, 40, took out a $150,000 term-100 life insurance policy offering coverage until age
100. John will pay a fixed premium for the entire length of the contract.

Universal life (UL) insurance

Universal life (UL) insurance combines two components in a single contract: a life
insurance portion and an investment portion. Since UL includes investments rather than
savings, as is the case for whole life, the investment portion is not guaranteed.
Investments fluctuate in value and the returns earned depend on the performance. The
following are characteristics of universal life insurance:

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 Flexible premium
You are not required to pay an annual fixed amount. The premiums can vary between a
minimum (cost of insurance, fees, and taxes) and a maximum (calculated based on
certain criteria for tax purposes) which includes an investment component.

Advances or withdrawals
Policy advances or withdrawals may be made. These are not considered loans, unlike
whole life.

Tax sheltering accumulation

As long as certain rules are respected and as long as the money remains in the policy, the
investment portions and the returns earned on the investment are not subject to tax. At
death all amounts received by the beneficiary are considered a death benefit. Death
benefits received from life insurance are never taxable.

Premium calculations
As stated, premiums in UL policies are flexible. The reason for the flexibility is found in
the way the premiums for a UL policy are calculated. A UL policy holder can choose
one of 2 methods for calculating the actual cost of the life insurance portion.

Yearly renewable term (YRT)

These calculations are based on the insured’s age and increase each year of the
policy. As the policy advances in time and the insured’s age increases, the cost of
the life insurance portion increases. As a consequence, in the beginning while
costs are low, a greater portion of the premium is directed to the investments. This
investment portion, participating in market growth, can be used later on to offset
the rising costs of insurance.

Level of insurance (LCOI)

These costs are based on the insured’s age as at the contract issue date and remain
the same for the duration of the contract. If a policyholder put equal amounts into
both YRT and LCOI contracts, less will go into the investment component of an
LCOI because the cost of LCOI is higher in the early years when compared with a
YRT contract.

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 Death benefits
Level death benefit

The death benefit remains constant; it does not change over time.

Example
Ann took out a $100,000 fixed face amount universal life insurance policy. At her death,
her estate will receive $100,000.

Indexed death benefit

The death benefit is adjusted by the cost of living. It increases annually according
to the rate of inflation.

Example
In 2008, Bernard took out a $100,000 indexed universal life insurance policy with an
annual indexing rate of 2%. He died in 2011. His estate will receive $106,121 (the death
benefit is indexed at 2% for 3 years).

Level death benefit plus account value

The death benefit increases over time to include the investment portion. Both the
amount which was taken as life insurance and the investment portion plus any
growth (returns) on these investments will be paid to the beneficiary as one
amount, tax free.

Example
Sue took out a $100,000 universal life insurance policy with an increasing face amount.
At her death, the investment portion totals $12,000. Her estate will receive $112,000.

Clients
Whole Life and T-100
A method of forced savings (whole life);
Coverage with a guaranteed premium;
Guaranteed coverage during the insured’s lifetime;
Levelled premium;
Permanent needs

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 Universal Life
Provides required coverage and investments all in one
For clients with good debt control and surplus funds to invest
For clients who annually maximize their registered retirement savings plan
(RRSP) and tax-free-savings account (TFSA) contributions
For investment savvy investors looking for tax advantaged investment
opportunities

Comparing main types of life insurance policies

Duration
Life insurance Premiums cost Clients
Individuals with coverage
Cheap (coverage needs for a specific period
Term Specific period
only) of time and who have a
limited budget
Individuals with good
investment knowledge
Variable
seeking tax-sheltered
(based on invested
investments & who need
Universal Until age 100 savings portion in
permanent insurance
addition to the
coverage (good debt control
coverage)
and maximized RRSP &
TFSA contributions).
Individuals seeking a way to
force savings, need long-
Whole Life and Higher (coverage +
Lifetime term and guaranteed
T-100 savings)
coverage, and a guaranteed
& level premium

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 4. Common Clauses, Terminology,
Riders and Supplementary Benefits
The first three chapters of this guide provided you with a basic understanding of life
insurance. Chapter Four will expand your knowledge by explaining some of the common
clauses and terminology found in life insurance contracts. In addition, chapter four will
also discuss some of the ways that policyholders can customize their policies with riders
and supplementary benefits. Although they do not change the basic function of the
insurance policy, riders and supplementary benefits allow for additional insurance
coverage on family members or enhanced benefits. The insurance company adjusts the
premiums to reflect the riders and benefits added to the policy.

Common insurance clauses and terminology

Grace period
This is the time limit that the insurance company grants to the policyholder to pay his
premium. There is no grace period for the first premium payment. For subsequent
premiums, the grace period is 30 days.

If the policyholder were to die during the grace period, the beneficiary would be entitled
to the face amount, less the overdue premium.

Lapsed contract and reinstatement

A lapsed contract is simply a contract that is no longer in effect. A policyholder can
reinstate a lapsed contract by satisfying the following conditions:

1) Make a request

The reinstatement request must be made within two years of the lapse date.

2) Provide evidence of insurability

The insured must provide evidence that he represents the same insured risk as in the
original contract.

3) Pay overdue premiums

The policyholder must pay the overdue premiums and the interest accrued.

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 4) Repay premium loans

The policyholder must repay any premium loans (plus interest) he received from the
insurer before the contract lapsed.

Incontestability clause
An insurer cannot contest a policy after it has been in force for two years unless there is
evidence of fraudulent misrepresentation. It is considered a fraudulent misrepresentation
when the applicant knowingly withholds material information from the insurer at the time
of application and the information withheld could impact the decision to approve the
application. If fraudulent misrepresentation is proven (for example an insured who
failed to disclose a history of cancer), the contract can be cancelled.

Suicide clause
If the suicide occurs less than two years after the effective date of the life insurance, the
face amount will not be paid and the premiums paid from the beginning of the contract
will be refunded to the beneficiary.

If the suicide occurs more than two years after the effective date of the policy, the face
amount will be paid.

The two year period applies to increases in the face amount as well.

Example
If suicide occurs eight months after a $50,000 increase to the original contract of
$100,000, a contract that has been in effect for four years, the insurer will pay a death
benefit of $100,000 to beneficiaries, not $150,000.

Beneficiary Designation
The beneficiary is the person designated to receive benefits under a life insurance
contract upon the death of the life insured. There may be more than one beneficiary in a
life insurance contract.

An insurable interest must also exist between the policy owner and the life insured. An
example of an insurable interest is the relationship between a parent and his child or the
relationship between two business partners.

Example
An ordinary citizen cannot insure his country’s Prime Minister for $1 million that he
would receive at the Prime Minister’s death.

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 Revocable and irrevocable beneficiary of a life insurance contract

A revocable beneficiary may be revoked (changed) without beneficiary’s consent while

an irrevocable beneficiary assignment cannot be changed without the written consent of
the beneficiary.

Only the policyholder may designate a beneficiary in individual insurance and annuity
contracts. The beneficiary must exist at the time of the insured person’s death, but not
necessarily at the time of the designation.

Example
A child who has been conceived but is not yet born may be designated as the beneficiary
if it is born alive and viable. That child would be recognized as the beneficiary following
the death of the insured person.

Payment of Death Benefits

Insurance benefits are always received tax free by the beneficiaries. However,
beneficiaries must be the age of majority in order to receive the death benefit. If the
beneficiary is a minor, the death benefit is paid to his parents or his legal guardian or
trustee. If a person is over the age of majority but incapable of caring for himself, the
death benefit is paid to the individual’s guardian or trustee.

Policy Assignment
Assignment means that the owner of a life insurance policy transfers ownership to
another person with an interest in the insured’s life or health.

Example
A parent purchases life insurance on the life of his son and transfers the ownership of the
contract at the child’s age of majority.

Riders and supplementary benefits

A policyholder can broaden the death benefit on a base policy with riders and
supplementary benefits. Riders bring increased flexibility to the policyholder by
allowing him to customize a basic policy to meet his needs. The following riders are
discussed in detail in the LLQP program:

Paid-up additions (PUAs) rider

Term insurance rider
Accidental death (AD) rider
Guaranteed insurability benefit (GIB) rider
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 Supplementary benefits are benefits that are made available to the insured during his
lifetime. Depending on the type of the benefit, they may or may not affect the amount of
death benefit paid out on the death of the life insured. The following supplementary
benefits are discussed in detail in the LLQP program:

Accelerated death benefits

Accidental dismemberment benefit
Waiver of premium for total disability benefit
Parent / payor waiver benefit

Depending upon the rider or supplementary benefit chosen by the policyholder,

additional underwriting and premiums may be required.

The Application Form

The application for insurance is completed by the Life Insurance Agent and the client.
The Life Insurance Agent must collect the client’s information and record it accurately on
the application form. The insurance company, through a process called underwriting,
evaluates the risk that the client represents. The risk assessment results in the assignment
of a premium for the policy.

Temporary insurance agreement (TIA)

The process for applying for insurance can take several weeks. If a client has no
insurance in place and has an identified need for life insurance, a temporary insurance
agreement can be put into place by the Life Insurance Agent. To qualify for the
temporary insurance, the applicant must answer a short health questionnaire and pay the
first month’s premium on his life insurance application.

Contract Period
A contract may be renewed or ended.

Contract renewal

The renewal is evidenced by a certificate of renewal or the issuing of a new policy after
the expiry of the initial contract.

End of contract

There is a difference between the termination and the cancellation of the contract.

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 Termination of contract

The termination of a contract means that the contract does not exist anymore, as if it had
never existed.

The main reasons of termination are false representations, fraud, concealment (not telling
all the truth) and insurable interest.

Example
Kelly has held a $100,000 term life insurance policy for a short period of time. She has
failed to disclose that she visits a cardiologist approximately three times a year because
of a heart problem. If the insurance company becomes aware of her visits to the
cardiologist, the life insurance contract may be terminated.

Cancellation of contract

Cancellation means that the contract is cancelled based on present circumstances, without
questioning the policy since it was in effect.

Three events or circumstances may cause the cancellation of the contract:

Non-payment of premiums
An attempt to end the insured’s life
Cancellation without cause by policy holder

Example
Kelly did not pay her last two monthly premiums. The insurer has the right to cancel the
life insurance contract.

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 5. Assessing Life Insurance Needs
We all understand that it is not possible to assign a value to a person’s life. It is, of
course, invaluable. As a Life Insurance Agent, one of your tasks is to determine a suitable
amount of life insurance for your clients. The process of accomplishing this task is called
a needs analysis. Discussed below, are some of the key tools used to assess the life
insurance needs of your clients.

Budget
A budget is a process used to determine the amount of money that can be spent and how
it will be spent. It is instrumental in assisting a client with achieving his financial goals.
A budget is a comparison of income sources with fixed, variable, discretionary and non-
discretionary expenses. This tool is used to assist the client and the Life Insurance Agent
in determining whether the client has sufficient cash flow to pay the premium on an
insurance policy.

Balance Sheet or Personal Balance Sheet

A balance sheet is a snapshot of the client’s financial situation; it compares his assets
with liabilities. The difference between the two is called the client’s net worth.

There are three main categories of assets: liquid assets, income-producing and personal
property. There are two main classes of liabilities: current liabilities, which are debts to
be paid within one year, and long-term liabilities, which are debts to be paid after more
than one year.

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 Assessing the client’s situation
Personal information

The consumer must be assured that any information gathered by the Life Insurance Agent
is kept confidential. The Life Insurance Agent must at all times put the needs of the
client first and comply with the rules and regulations of the insurance regulator(s).

Several factors have an impact on the client’s current situation, such as:

Gender (women live longer than men)

Age
Smoking status
Job-related risks
Discretionary income
Regularity of income
Duration of income needs
Ages of dependents

Example
A34 year old man who works on contract as a lineman at Hydro-Québec and has 5
children between the ages of 2 and 8 does not have the same life insurance needs as
another 34 year old man who works as a tax lawyer for the government, is married to a
radiologist and neither has any children.

Financial Goals
Financial goals are the foundation of a financial plan. Individuals write financial goals
and then prepare a budget in order to achieve their goals. Goals can be written to cover a
variety of time frames however it is most common to prepare financial goals that cover
the following different timeframes:

Short-term: Covers plans for the next year

Medium term: Covers plans for the next five years
Long term: Covers plans extending beyond five years

Example
Frank wants to replace his car next May (short term), wants to move to a larger home in
four years (medium term), and retire in 30 years on an after-tax income of $60,000 / year
(long term).

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 Identifying the client’s specific needs
In the process of assessing the client’s needs, some of the following critical questions will
be answered:

How much money does he want to leave to his spouse and/or children in the short
term?
How much money does he want to leave to his spouse and/or children in the long
term?
Will the surviving spouse continue to work?
How long will it take his children to become financially independent?
Does he want all his debts re-paid at death?
What are his tax liabilities at death?

The answers to these questions will help determine the level of insurance required /
desired by the client.

Recommending a Solution
How much?

The evaluation of the client’s financial situation and his answers to the above questions
will assist the Life Insurance Agent in determining the amount of insurance a client
needs.

For how long?

The coverage period is directly related to the client’s needs. To meet short-term needs,
such as the time it takes for children to become independent or the time needed to repay a
mortgage, term insurance coverage is usually the most appropriate and cost effective.

To meet long-term needs, permanent life insurance, such as whole life or universal life
insurance should be considered. Long-term needs such as leaving an inheritance, paying
funeral costs, or paying the tax liability on a vacation property, are satisfied with
permanent insurance.

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 6. Accident and Sickness Insurance
It is said that an individual’s greatest asset is his ability to work and to receive payment
(e.g., salary, wages, or commissions) for that work. The inability to work due to an
accident or an illness (sickness) and the resulting loss of wages (salary, or commissions)
will hinder or prevent clients from reaching their financial goals. These disabilities may
last weeks or, in some cases, years. For the purposes of this guide we will not go into
detail on the various types of accident and sickness insurance coverage however the
following is a list of the types of coverage most often found in accident and sickness
insurance:

Short-term wages;
Long-term wages;
Medical expenses;
Accidental death;
Accidental dismemberment;
Eye care;
Healthcare professional fees; (physiotherapist, massage therapist…)
Dental care;
Medical assistance;
Travel.

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 7. Individual (Private) Disability
Insurance
The processes an insurer takes along with the various types of coverage which may be
purchased by clients are the subject of this section.

Risk Selection
Insurability
Several factors must be considered when evaluating the risk of disability for a given
worker, including:

Health status
Medical and family history
Lifestyle
Occupational class
Place of work
Engaging in dangerous or extreme leisure activities
Place of residence
Age
Gender, and
Earned income

Occupational risks
Work environment

A waitress working in a topless bar is exposed to greater risk than a waitress working in a
shopping centre.

Duties

Workers in the construction industry are more exposed to risk than financial planners.

Job stability

A salesperson that changes employers frequently is more difficult to insure than an

accountant who has been in the same government position for more than 15 years.

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 Medical risks

Past medical history

For an insurer, a person who is overweight and whose parents both died of heart disease
before the age of 60 represents a greater risk than a person who works out three times a
week and whose parents died at the age of 85.

Similarly, a person who has already had a heart attack is a greater risk than a person with
a spotless medical history.

Managing the risk

Insurers use a variety of measures to optimize management of the risks represented by
individuals.

Reduction in the benefits or benefit period

The insurer may reduce the benefit amounts or shorten the benefit payment period to
avoid charging an additional premium, taking into account the person's medical history.

Extension of the elimination period before the first benefit payment

For minor health problems such as skin conditions, an extension of the elimination period
before the first benefit payment reduces the insurer's risk of having to pay benefits to
persons with minor or mild conditions.

Additional premium

Additional premiums are required from persons whose health status increases the
probability of illness or accidents for which risks cannot be excluded.

Exclusions

Exclusion riders allow insurers to insure individuals who otherwise would not be
insurable due to their health status.
For example, an individual with respiratory problems due to asthma may be accepted by
an insurer, but with an exclusion rider for asthma.

Over insurance

One of the major principles of disability insurance is that an individual with a disability
contract must not be paid more during a disability period than when working.

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 Coordinated benefits

A disability benefit amount paid out may be lower than the amount specified in the
disability insurance contract. This occurs when the contract has a coordination of benefits
clause. With this type of clause, the benefit amounts are reduced by benefits received
from other sources (other disability insurance coverage).

Cancellable Contracts
Of the three contract types, the cancellable contract is the one that provides the least
coverage. The insurer may change the premiums and coverage at any time, hence the
name.

Guaranteed Renewable Contracts

Guaranteed renewable contracts (contracts with a guaranteed renewal) are an
intermediate product between cancellable contracts and guaranteed irrevocable contracts
in terms of both benefits and premium costs.

With a guaranteed renewable contract, the insurer cannot change the coverage in the
contract nor refuse to renew the contract as long as the insured pays the premiums, is a
Canadian resident, and holds a job deemed satisfactory by the insurer.

The insured person must notify the insurer of any change in situation under this type of
contract.

Guaranteed Irrevocable Contracts

A guaranteed irrevocable (non-cancellable) contract is the contract type that offers the
best coverage. The premiums are of course higher than with the other two contract types.

If the insured person makes the premium payments as required under the contract, the
insurer may not change the contract (neither the premium nor the coverage).

Even if the insured person changes profession or place of residence, or has a decrease in
income or deterioration in health, he/she is not required to notify the insurer, and the
coverage is maintained as it was when the contract was signed.

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 Optional Coverage’s
Optional coverage’s are used to complete basic individual disability insurance coverage.

Premium reimbursement coverage

Premium reimbursement coverage allows the insured person to receive a reimbursement
of all or part of the premiums paid to the insurer if no claims have been filed during the
qualifying period.

Hospitalization coverage
Hospitalization coverage provides additional coverage if the insured person must be
hospitalized for at least 24 hours due to illness or injury.

Partial disability coverage

Partial disability coverage protects individuals who lose part of their income if they are
unable to work full time at their jobs.

This coverage takes effect if the insured person cannot perform 50% or more of his/her
regular work duties or is unable to devote 50% or more of the time normally spent
working.

Residual disability coverage

Residual disability coverage protects individuals who lose part of their income due to
disability. To qualify, the insured person's loss of income must normally be between 20%
and 80% of the normal income amount.

Cost of living coverage

Cost of living coverage protects the insured person's purchasing power by increasing
benefits to offset the effects of inflation.

Health care profession rider

The health care profession rider protects insured persons who may no longer be able to
work due to a condition such as hepatitis B or C, or HIV.

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 Accidental death or dismemberment coverage

In the event of accidental death

Accidental death or dismemberment coverage provides for the payment of a lump sum to
the insured person's estate if the insured person dies as a result of an accident. Usually, an
amount of $10,000 per $100 of monthly benefits is paid.

Example
If the monthly benefit is $1,000, the lump sum may be $100,000.

The amount received under this coverage must not exceed the limits set out in the
contract.

In the event of accidental dismemberment

Accidental death or dismemberment coverage provides for the payment of benefits to a

person who has lost the use of limbs or faculties as a result of an accident.
Dismemberment can mean the loss of use or total severance of a limb.

Reduced elimination period

The reduced elimination period option provides for a reduction in the elimination period
in the event of an accident or hospitalization due to illness.

Regular occupation extension until the age of 65

The regular occupation definition is the one used in basic contracts. During the first
24 months of a disability, the definition of total disability makes reference to the regular
occupation. After this 24-month period, the definition of total disability refers to the
individual's inability to engage in gainful employment relating to his or her training,
education or work experience.

Insured persons are entitled to the extension option until the age of 65 if they have no
other income, receive care from a physician following an accident or illness, and cannot
perform the main duties of their regular occupation.

Future insurability guarantee

The future insurability guarantee allows for future increases in disability coverage
without proof of health status or occupation. This guarantee allows for supplementary
coverage to be added to the basic coverage, provided that the insured person can prove
that he or she has the insurable income required for the benefit increase.

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 8. Group Disability Insurance
Insurance can be purchased individually or as a group. We will discuss the different
disability policies available for group insurance.

Business group insurance

Business group disability insurance is part of a benefits plan that is also called group
insurance. Eligible employees must normally join the group disability insurance plan.

For group insurance to be in force, a group of insured persons must be established along
with the conditions that qualify the group.

Example
Full-time employees of DFG Inc. who work more than 25 hours a week for the company
may meet the two eligibility requirements for this company's group insurance plan.

Participation

The insurance certificate issued to the insured person confirms enrolment in the
employer's group plan.

To enrol in a group insurance plan without evidence of insurability, one must do so

within 30 days of becoming eligible for the plan.

Management

Contract management is facilitated by the fact that the employer holds much relevant
information on its employees and is best positioned to manage the contract.

Definition

In order for a disability to be accepted, it must be total, and the insured person must not
receive work income except from rehabilitation programs recognized by the insurer and
must receive care from a health care professional on a regular basis.

Short-term group disability insurance coverage

Benefits

The benefits are normally two thirds of remuneration with a set maximum amount.

Benefits are paid weekly and the benefit period is usually 15 to 26 weeks (one half year).

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 The elimination period

The elimination (or waiting) period before the first benefit is paid is quite short, from 0 to
15 days.

Long-term group disability insurance coverage

Exclusions and restrictions

The following exclusions and restrictions apply to both short-term and long-term
coverage:

Injury or illness resulting from an assault or criminal act;

Leave taken to receive aesthetic care;
Attempted suicide;
Self-inflicted injury;
Accidental injury or illness occurring during a temporary layoff, lockout or strike,
if the member's coverage has not been maintained during the layoff, lockout or
strike;
Injury or illness due to participation in a riot, war, civil unrest or uprising.
If a plan member is under treatment for drug dependence or alcoholism, the
insurer may agree to provide coverage.

Pre-existing illnesses

The insurer may decide to exclude pre-existing illnesses from disability insurance if the
group to be insured does not already have such coverage at the time of the agreement.

This exclusion cannot be made when changing insurers upon the expiry of a contract (as
members of the former plan have acquired privileges).

Group plan taxation

An employer which sets up a group insurance plan rather than individual policies for
employees will have tax benefits:

The premiums are deductible for the business;

The premiums are not a taxable benefit for the employee;
The benefits are taxable for the employee.

Premiums paid by the employee

With consolidated disability insurance contracts where the employee pays the premiums,
the benefits paid in the event of disability are not taxable.

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 If the employer pays a portion of the premiums, the employee will be taxed on the
portion of the benefits that exceed the portion paid by the employee.

By health and welfare trust

Employers can also set up a health and welfare trust that will own the disability insurance
contracts on behalf of employees.

The tax benefits of a health and welfare trust are similar to those of a group plan and are
summarized as follows:
The premiums are deductible for the business;
The premiums are not a taxable benefit for the employee;
The benefits are taxable for the employee.

Association Group Insurance

Association group insurance is intended for members of associations rather than
businesses.

Example
Accountants may obtain association insurance through an agreement between their
professional association and an insurer.

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 9. Business Disability Insurance
Along with offering coverage to their employees, certain employers may also consider
protecting their business in the event of a disability. These disabilities may be of an
employee or a business owner. As the insurance is linked to and for the purposes of
maintaining a business, it is referred to as business disability insurance.

Key person coverage

Key person coverage protects businesses from financial losses that may result from the
disability of key persons in an organization.

There is normally a 30-day elimination period before the first benefit is paid. The benefits
are normally received for 12 months, and the benefit may be doubled if the business
expects that it will have to replace the key person.

Example
DESR Inc. purchases key person insurance coverage and asks to receive $8,000 rather
than $4,000 in the event that its key person becomes disabled.
Premiums depend of course on the amount of coverage.

Disability buy-out coverage

Disability buy-out coverage protects businesses from the long-term disability of a partner
(owner). It allows the disabled partner's shares to be bought out over a long period. The
buy-out is accomplished through periodic payments or a lump-sum payment.

Overhead expense coverage

Overhead expense coverage allows for the reimbursement, up to a certain limit, of the
expenses incurred by a business to continue providing services if the owner becomes
disabled.

This coverage is intended in particular for small businesses with a sole owner or key
person. To be eligible, this person must work full time for the business.

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 Expenses covered up to the maximum set out in the contract include:

Wages of employees who perform different duties than the insured;

Rent;
General insurance costs;
Professional or union dues;
Telephone service;
Mailing costs;
Laundry;
Electricity and heating;
Water;
Mortgage payments;
Property taxes;
Equipment rentals; and
Legal and accounting fees.

The expenses that are not covered include:

Travel and entertainment expenses;

Costs of purchasing goods for resale;
Income of the insured person or a person who performs the same work as the
insured person;
Equipment and vehicle operating costs;
Expenses incurred to generate business income while the insured is disabled; and
Expenses incurred by the insured person after the disability has ended.

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 10. Critical Illness Insurance
Critical illness insurance enables individuals who are diagnosed with a critical illness to
receive a lump sum that will help them to better manage the financial and human
consequences of their condition.

The loss of income that results from critical illness and increasing health care costs are
both important reasons for purchasing this type of coverage.

Coverage
Critical illness insurance provides benefits to insured people whether they are able to
work or not.

Premium reimbursement upon death

This clause provides for the reimbursement of premiums if the insured person dies before
the end of the elimination period.

Benefit paid
The maximum benefit is based on the insured person's income. Critical illness insurance
coverage pays an amount that is a multiple of the insured person's wages. The maximum
amount may exceed $1,000,000.

If the insurance is used as disability buy-out coverage, the highest benefit amount will be
the market value of the insured person's share in the business.

If the insurance is used as disability buy-out coverage, insured persons who own more
than 10% of the business must have coverage in proportion to their share in the business.

Example
CVB Inc. is worth $200,000 and the insured person, who has critical illness insurance,
holds 50% of the shares, or $100,000.

Risk Selection
The insurer considers a number of factors before agreeing to insure an individual against
critical illness. The main factors include the individual's health condition, medical
history, family history, lifestyle, profession and financial situation.

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 Elimination period
The elimination period before the lump-sum benefit is received is usually 14 or 30 days.
To receive the benefit, the insured person must survive the elimination period.

Free use of benefit

Insured persons may use the lump-sum benefit from the insurer for whatever purpose
they see fit.

Optional Coverage
Among the optional coverage used to supplement basic critical illness insurance, two in
particular are offered most frequently. These options are presented below.

Premium reimbursement
With the premium reimbursement coverage, premiums paid can be refunded as follows:

At 75 years of age, if a critical illness insurance contract has been bought until age
75 and no claim has been made;
Upon the death of the insured person if it occurs before the end of the elimination
period;
Upon the death of the insured person if it occurs after the end of the elimination
period, and the insured person has not made any critical illness claims.

Waiver of premiums
Waiver of premium coverage allows policyholders to stop paying premiums if they
become disabled.

Main Illnesses Covered

Cancer
For the insurer, cancer is defined as the invasion of tissue, spread of malignant cells and
uncontrolled growth of a tumour.

Heart attack
Heart attack is defined as the acute presentation of heart symptoms with death of part of
the heart muscle and inadequate blood supply.

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 Cerebrovascular accident
A cerebrovascular event producing neurological trauma and caused by thrombosis,
embolism from an extra cranial source, or intracranial hemorrhage.

Loss of speech

Loss of speech is defined by damage to the vocal cords that is sufficiently serious to
result in total and irreversible loss of the ability to speak.

Deafness
Deafness means the irreversible loss of hearing in both ears. The auditory threshold for
each ear must be 90 decibels or greater at frequencies of 500, 1,000 and 2,000 hertz.

Blindness
A diagnosis of blindness must be made by an ophthalmologist. Blindness is the
irreversible loss of vision in both eyes with the field of vision being less than 20 degrees
in each eye and corrected visual acuity being less than 20/200 in each eye.

Coma
A coma is a state of continuous unconsciousness lasting four days with no reaction to
external stimuli or internal bodily needs.

Severe burns
Burns must be medically diagnosed and cover at least 20% of the body surface.

Paralysis
A result of trauma to the nervous system, paralysis is the total loss of voluntary
movement in both legs, or both arms, or one leg and one arm.

Kidney failure
Kidney failure is defined as irreversible failure of both kidneys. As a result of this failure,
a kidney transplant, peritoneal dialysis or regular hemodialysis must be considered and
undertaken.

Major organ transplant

The organ transplant must be carried out and be medically essential. The major organs
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Prep to are the heart, lungs, bone marrow, liver, pancreas and kidneys. 64

Page 36
 Parkinson's disease
The insured person must be unable to perform two of the following six daily activities:

i. Mobility: move 10 metres without assistance

ii. Dressing: dress and undress by oneself
iii. Drive a vehicle
iv. Toileting: able to take care of one's personal hygiene
v. Eat
vi. Stand up and sit down

Alzheimer's disease

Alzheimer's disease is recognized if the insured cannot live alone, requires at least eight
hours of daily supervision and experiences progressive deterioration of memory and
cognitive abilities, in accordance with the Diagnostic and Statistical Manual of Mental
Disorders.

Multiple sclerosis
A multiple sclerosis diagnosis must be confirmed by a neurologist. There must be
objective evidence, supported by investigative and imaging techniques, of lesions at more
than one site in the central nervous system.

Coronary artery bypass

Coronary artery bypass refers to surgery required to correct the narrowing or blockage of
one or more coronary arteries.

The definition does not include laser correction of a blocked artery.

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 Taxation of Critical Illness Insurance.
Owner Beneficiary Premiums Benefits
Group plan Corporation Employee Federal: Non- Non-taxable
Critical illness taxable benefit for
insurance is part of a the employee;
health or accident Provincial:
insurance plan Taxable benefit
for the employee

Group plan Employee Employee Non-deductible; Non-taxable

Critical illness and
insurance is part of a No tax credit
health or accident
insurance plan
Individual insurance Corporation Corporation Non-deductible Non-taxable
for the
corporation;
Non-taxable for
the employee
Individual insurance Corporation Employee Deductibles for Non-taxable
the corporation;
Taxable for the
employee
Individual insurance Individual Individual Non-deductible; Non-taxable
No medical
expense tax credit

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 11. Introduction to Investing
Objectives
r |

'in
Emergency Fund ...
oo 'I I

Treasury bills, Deben tune,

I Travel
School Banker's Acceptance,
New car Commercial Paper, Saving
New house Bonds, Strip coupons,
Pre-retirement Shares, Mutual Funds,
Retirement .°'
°-. f

investor's Profile
Asset Allocation
Type of income?
.-;je;' is it risky ?
Variable Gumnteed income ?
income Can I withdraw my
money ?
Fixed
income

Elements Linked to Financial Products

Before investing in various financial products, we must first ask ourselves about the
purpose of the objective. Then we must make a choice among many products allowing us
to achieve this goal. To do so, we must study various features describing these products.

Security
Security refers to capital protection and the fact that the initial amount invested will be
recovered.

Example
John and Jenny would like to build a residence next summer. Capital protection is
important and they want to avoid any unexpected sudden drop in the market that would
lower their down payment for achieving their real estate dream.

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 Liquidity
A financial product is considered liquid when it is possible to quickly recover the money
invested when you decide to sell.

Example
Max has purchased a mortgage investment in mutual funds 3 years ago. He decided to
redeem his investment and received the full redemption in 3 working days.

Return and Type of Income

Return is the increase in value of a financial product. Return involves three types of
income from investments.

Interest income

This represents the return on the money loaned. We can compare it to an apartment that
you are renting to a tenant; the latter must pay you rent while he is staying in the
apartment.
Interest income is fully taxable, the same as employment income.

Dividend income

Dividend income is a portion of the profit earned by a corporation that is distributed to

the corporation's shareholders.
Canadian dividend income is subject to a preferential tax treatment..

Capital gains or losses

A capital gain is realized when property is sold at a price which is higher than its
purchase price.

A capital loss is realized when property is sold at a price which is lower than its purchase
price.

Capital gains have an inclusion rate of 50%, which means 50% of any realized gains will
be added as taxable income.

Example
Michael purchases a stock fund for $5,000 and sells it for $7,000. His capital gain is
$2,000, $2000 X 50%= $1000 will be added to Michael’s income.

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 Risk
Return and risk are very closely related.

A financial product that provides an anticipated high return has a high risk.

A financial product that provides an anticipated low return has a low risk

Risk related to liquidity

An investment can be difficult to buy or sell when there are few purchasers or sellers for
this investment.

Risk related to politics

Political instability drives away capital money and investors.

Capital money investors look for political stable countries. A country at war does not
attract investors.

Risk related to business

A corporation runs risks that could jeopardize its survival, like a sudden drop in the price
of pork for a business involved in the pork trade.

Risk related to interest rate

When interest rates increase, interest bearing investments recently issued have better rates
compared to those issued earlier. The earlier interest bearing investments will have a
lower market value.

Risk related to exchange rate

The value of investments depends on upward and downward exchange rates movements
at the level of foreign currency.

Risk related to lack of liquidity and to insolvency

A corporation may have difficulty repaying capital and interest owing on its loans. This
illustrates the risk related to lack of liquidity and to insolvency.

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 Risk related to inflation

Purchasing power is reduced by the cost of living and inflation. Inflation is the increase in
the cost of living.

An investment that generates a gross yield of 5% with a 2.5% inflation rate provides a net
yield of 2.5% before taxes.

Ease of management
Ease of management is the time and effort an investor spends to follow-up on the
investments progress.

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 12. Debt Securities
Debt securities are contracts between a borrower and an investor; the investor lends a
sum of money to the borrower. As is all loan transactions, the interest is paid by the
borrower. Therefore it is understood that when an investor receives interest for money
“invested” he has entered into a debt security with his money.

Guaranteed Investment Certificates

Guaranteed deposits, also known as Guaranteed Investment Certificates (GIC) are issued
by financial institutions such as banks, credit unions and insurance companies among
others. They are for a fixed period of time, and usually have a fixed interest rate they will
pay.

Money Market Securities

Treasury bills, banker’s acceptance and commercial paper are part of the money market
securities where debt securities are traded in 1 year or less.

Treasury bills are issued by the Federal and Provincial governments when short-term
liquidities are needed. They are issued frequently up to several times per month.
Bankers’ acceptances and commercial paper are issued by corporations when short-term
liquidities are needed. The number of new issuances varies and is based on economic
conditions and interest rates levels

All three are purchased at a “discount” and sold for their “real” value (also known as
nominal value or face value)

Here is an example to illustrate this statement.

Example
Nancy purchased a T-Bill that will be worth $10,000 in 1 year. She writes a cheque for
$9,891.20 to purchase the T-Bill. The difference between the initial amount invested of
$9,891.20 and the final value of $10,000 constitutes this T-Bill return of 1.10%.

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 Canadian Saving Bonds
SAVINGS BONDS FEATURES
Issued by the Federal RETURN LIQUIDITY RISK
Government Relatively low Very high Very low

Loan granted by an investor to a Interests Generally, they can They are guaranteed
government payments be reimbursed at by the issuing
any time government
Typical maturity varies between MANAGEMENT
8 to 10 years Easy

Bonds
BONDS FEATURES
Issued by governments RETURN LIQUIDITY RISK
and corporations In general, interest is From very liquid to Low to high,
paid at a fixed rate not very liquid, depending on the
Loan granted by an depending on the borrower
investor to the issuer Possibility of a capital borrower
gain or loss if sold on They are covered by
Maturity varies between secondary market prior to They can be bought guarantees
1 and 30 years maturity and sold through MANAGEMENT
securities dealers From “Easy” to
Possibility of additional “High”, depending on
gain if the security is the borrower
convertible

Bonds issued by governments are guaranteed by the governments’ taxation power.

Bonds issued by corporations are guaranteed by property. If a corporation is no longer

able to pay interest owing on the borrowed capital, the bond holders become creditors
with the authority to seize property in order to recover the sums owing to them.

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 Debentures
DEBENTURES FEATURES
Issued by corporations RETURN
Payment of interest
Loan granted by an generally at a fixed rate
investor to the issuer
Possibility of a capital gain borrower
Maturity varying or loss if sold on
between 1 and 30 secondary market prior to
years maturity
Possibility for other gains,
if the bond is convertible
LIQUIDITY RISK
From very liquid to Low to high
not very liquid,
depending on the They are not covered
by any specific
guarantee
They can be bought MANAGEMENT
and sold through “moderate ease of
securities dealers management”

Debentures are similar to marketable bonds but do not offer any specific guarantee.

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 13. Equity Investments
Equity investments allow for the investor to become an owner or stake holder in the
business. Unlike debt securities, the investor no longer has a guaranteed return interest
rate on the amount invested.

Preferred Shares
PREFERRED SHARES FEATURES
Issued by corporations RETURN LIQUIDITY RISK
Dividend income, From liquid to not Medium to high
The investor holds an normally fixed very liquid
ownership interest in a Their market value
corporation Possibility of a capital They can be bought tends to behave like
gain or loss and sold on the that of debt securities
Priority over common stock market,
shareholders with respect through securities MANAGEMENT
to dividends dealers or over-the- From “Easy” to
counter “High”, depending on
Preferred shares have no the issuer
maturity date

Voting Right

Preferred shares carry no voting rights. However, if the corporation has not paid
scheduled dividends in the last quarter or during the previous year, preferred shareholders
may have voting rights.

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 Common Shares
COMMON SHARES FEATURES
Issued by corporations RETURN LIQUIDITY RISK
Possibility of From very liquid to Medium to high and very
The investor holds an dividend income not very liquid high
ownership interest in a
corporation Possibility of a They can be bought Their holders are entitled
capital gain or loss and sold on the to shares in the remaining
Generally carry the right stock market, assets of the corporation if
to vote through securities it is wound up
dealers or over-the- They are affected by the
No maturity counter stock market fluctuations
MANAGEMENT
From “easy” to “high”
depending on the issuer

Voting Right

Each ordinary share entitles to a voting right. It allows the holder to elect the directors of
the company and to participate in the company’s major decisions.

Mutual Funds
MUTUAL FUNDS FEATURES
Access to better returns RETURN LIQUIDITY RISK
Interest income Very liquid Very low to high,
No maturity and/or depending on the
dividend income Normally securities in the portfolio.
and/or redeemable at any
Capital gain or loss time No guarantee.
depending on the MANAGEMENT
securities in the “Easy”
portfolio.

A mutual fund is a portfolio of securities’ pool managed by a team of professionals.

Diversification
Instant diversification is an important advantage of mutual funds. In fact a mutual fund
invests in several dozen securities at the same time and provides diversification at an
affordable cost.
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 Portfolio Management
Mutual funds’ objectives dictate the portfolios composition or the combination of debt
securities, equity securities or derivatives products managed by professionals in charge of
the money representatives collected from investors.
The professionals managing mutual funds decide of the time to purchase and to sell
securities that make up portfolios.

Segregated Funds
SEGREGATED FUNDS FEATURES
Contract between an RETURN LIQUIDITY RISK
investor and an insurer Interest income Very liquid Very low to high
and/or depending on the
Assets held by an insurer Dividend income Normally redeemable at securities in the portfolio
separately from its other and/or any time
assets, hence the term Capital gain or Offers a guarantee upon
“segregated funds” loss depending on maturity or death ,
the securities in which protects at least
the portfolio. 75% of the capital
invested over a 10 year
period
MANAGEMENT
“Easy”

Segregated funds are offered by life and health insurance companies. Monies invested in
the fund are pooled and kept separate from the insurer’s other assets and cannot be used
for any other purpose than the benefit of segregated funds contract holders (not owners).
A segregated fund is an Individual variable insurance contract.

Fees
Management fees of segregated funds are higher than management fees of a comparable
mutual fund as they offer additional features and guarantees. These distinct features are:
exemption from seizure, guarantee at death or at maturity of the contract and reset option.

Exemption from seizure

The exemption of segregated funds from seizure is possible because they are insurance
products and not securities and an appropriate beneficiary was designated.

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 Guarantee at death
The guarantee at death provided by a segregated fund may vary between 75% and 100%.

Guarantee at maturity
The guarantee provided by a segregated fund must be at least 75% of the invested capital
at maturity of the contract (and at death). It can be 100% with higher management fees.

This maturity date must be at least 10 years after the contract is taken out.

The reimbursement guarantee of the contract is only valid at maturity.

Example A
Damien purchased a $10,000 segregated fund on February 8, 2000. The contract
maturity is 10 years with a 75% guarantee. On June 12, 2008, Damien requested full
redemption of his segregated fund, which was then worth $6,800. He received $6,800 and
not $7,500 (75% of $10,000) as he did not wait for the 10 year maturity period of the
contract.

Renewal or Reset

Several insurers offer the possibility to renew the guarantee. Renewal is similar to update
or reset of the segregated fund market value following an attractive increase of the fund
value since the contract was taken.

Example
Diane invested $15,000 in a segregated fund on June 12, 2008. This fund’s guarantee is
75% of the amount invested and the maturity is 20 years. On April 16, 2012 the
segregated fund is worth $18,755 and she decides to restart her fund guarantee.
The new maturity date of the contract is April 16, 2032 and the amount guaranteed is
now based on $18,755.

Maturity
The maturity date must be at least 10 years after the renewal.

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 Types of Funds
Money Market Funds
Money market funds also called money market securities funds are made up mostly of
Treasury Bills, Banker’s acceptance, commercial papers and short term government
bonds (less than 1 year).

Mortgage Funds
Mortgage Funds are made up of first-ranking mortgages on first-ranking residential
buildings.

The risk is lower than that of bond funds as the term of a mortgage is often shorter than
that of marketable bonds.

Bond Funds
Bond Funds are made up of mid to long-term bond debt securities.

Balanced Funds
Balanced Funds are made up of both fixed-income securities (bonds) and variable income
securities (shares). We frequently hear about half and half, referring to fixed-income
content and variable income content close to 50% in each case.

Dividend Funds
Dividend Funds are made up of preferred and common shares which pay dividends.
Portfolio growth is a secondary goal compared to the regularity of dividends payment.

Equity Index Funds

Equity index funds reproduce a market index and are made up of large corporations’
common shares, which pay dividends; but the payment of dividends is not mandatory.

Large-cap Equity Funds

Large-cap equity funds are made up of common shares of large capitalization companies,
which pay dividends but the payment of dividends is not mandatory.

The return potential is slightly higher to that of the index equity fund.

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 Mid-cap Equity Funds
Mid-cap equity funds are made up of common shares of mid-capitalization companies,
which pay dividends but the payment of dividends is not mandatory.

Small-cap Equity Funds

Small-cap equity funds are made up of common shares of small capitalization companies,
which pay dividends but the payment of dividends is not mandatory.

Specialized Funds
Specialized funds are made up exclusively of securities in a single sector. They
concentrate on a single sector. They may invest, among others, in high technology,
natural resources, health care or even income trusts.

Segregated Funds Volatility from the lowest to the highest:

A
+ Expected
Return
Specialized Funds
Small-cap Equity Funds
Equity Funds

Index-linked Equity Funds

Dividend Fund

Balanced Funds (the most diversified funds)

Bonds Funds
Mortgage Funds (less risk than the Bonds Funds)
Money Market Securities Funds (fixed value)
>

Risk +

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 Front-end Fees (acquisition)
Front-end fees are fees to be paid when purchasing segregated funds. Also called
subscription or purchase or front load fees and represent a percentage of the amount
invested.

Example
An investor invests $5,000 in a dividends segregated fund with 2.5% front-end fees.
Therefore 97.5% of %5,000 is actually invested.

Back-end load Fees (Retrocession Fees)

Back-end load fees are fees to be paid when redeeming segregated funds. They are also
called retrocession fees and represent a percentage of the amount invested.

Example A
An investor invests $5,000 in a dividends segregated fund without front-end fees and with
decreasing retrocession fees on the market value over 6 years decreasing at the rate of
1% per year.
The segregated fund has a market value of $6,000 in the 4th year whereas retrocession
fees are 3% of the market value; i.e., $180.

Transfer Fees
Transfer fees occur when switching a segregated fund for another segregated fund of the
same family.

Management Fees
Management fees, based on a percentage of the asset under management are charged by
segregated funds for the work done by management teams as well as various
administration fees.

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 14. Annuity Products
An annuity provides an individual with a regular income, usually periodic and constant
over a fixed period of time. The biggest advantage of an annuity is the ease of
management. The main disadvantage is that once the payments have started you cannot
reverse the decision.

There are two main types of annuities: Immediate Annuities and Deferred Annuities.

Immediate Annuities
As its name implies, immediate annuities are paid immediately following the first period
after the annuity contract is taken.

An immediate annuity is set-up in consideration for the lump sum of an amount as the
full amount must be paid before the benefits can begin.

Example
67 year old Francis takes out an immediate annuity on June 12, 2012 to receive $1,000
per month for the rest of his life. He pays $125,000 now to take out this annuity. The first
annuity payment will be on July 12, 2012.

It can also be said the annuity is in the payment phase

During the payment phase, the invested capital and the yield on the capital are returned in
the form of payments. The variables and the manner in which the annuity amount is
calculated must be specified in the annuity contract

There are two categories of immediate annuities:

Annuity certain
An annuity certain is an annuity of which the periodic are guaranteed for a certain
number of years. The lifetime (life expectancy) has no impact on the periodic payments
received.

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 Life annuities
Life annuities are immediate annuities providing periodic payments until the death of the
annuitant. Life means “during the life time”.

With guaranteed period

The payment of benefits under a life annuity with a guaranteed period ceases upon the
death of the annuitant when the death occurs after the end of the guaranteed period
Or
At the end of the guaranteed period, when the death of the annuitant occurs before the
end of the guaranteed period.

Without guaranteed period

The payment of benefits under a life annuity without guaranteed period ceases upon the
death of the annuitant.

Joint Life and Survivor annuity

Upon the death of the annuitant, the surviving spouse continues to receive payments. This
is what a joint and survivor annuity provides. At the death of the surviving spouse
(second death) payments will cease.

Indexed

The purpose of an indexed life annuity is to protect the annuitant against the ever
increasing cost of living.

Deferred Annuities
As the name indicates, a deferred annuity allows for benefits to be made at a future date
and not immediately after the contract has been taken out.

A deferred annuity is created either by paying a lump sum or by accumulating capital

over time. The amount of money must be paid in full before the annuity benefits can start.

It can also be said that the annuity is in the capitalization phase

During the capitalization phase, the insurer grows the capital invested by the owner. The
invested capital may be paid in a single amount or by periodic payments.

To constitute an annuity contract, there must be alienation of capital by the owner. This
alienation entitles the owner to oblige the insurer to make periodic payments to the
annuitant.

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 Annuity Contract
An annuity contract may involve up to five different parties:

i. Owner (holder): The owner is the contract holder. The contract belongs to him.
ii. Annuitant: The person for whose lifetime the annuitant is specified.
iii. Payee: The person who receives the benefits.
iv. Beneficiary: The person who inherits the balance of the annuity upon the death
of the annuitant.
v. Grantor of annuity (debtor): The financial organization who is making the
payments to the payee.

Beneficiary designation
The designation, which may either be revocable or irrevocable, of a beneficiary and
annuitant may be done in a written document, will, or annuity contract.

A designation made in a will may always be revoked. Designating an annuity contract

beneficiary means that the death benefit goes directly to the beneficiary without passing
through the estate

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 15. Legal Concepts
Clients are intrusting all those in the financial services industry. In order to ensure a
certain standard is met by all those in the industry certain guidelines are set forth. These
rules are what each representative must comply with and each client must understand.

Rules Governing the Representative's Activities

Financial advisers must behave ethically in their dealings with the general public, clients
and insurers (companies offering insurance of persons).

Example
A representative may not guarantee that a client will receive any given return on a
variable financial product. A representative who has acted in this manner to secure a
client has failed to act honestly with the client.

Duties and obligations of financial advisers

To the profession

A financial adviser who is under inquiry must refrain from contacting the person
who requested the inquiry.
A financial adviser who observes a colleague engaging in inappropriate conduct
must notify the appropriate regulatory organization.

Example
You surprise a colleague drinking alcohol in his office while he is preparing to meet a
client. You had seen the same colleague in the corridor a few minutes earlier and judging
by his gait, he did not appear to be in a condition for meeting a client. Such behaviour
must be reported.

A financial adviser may not receive payment from individuals other than those
who have asked to do business with him or her.
A financial adviser may not pay a prospective client to do business with him or
her.
A financial adviser may not receive any compensation from a person who does
not hold a licence but who acts as if he or she had one.
A financial adviser may not pay a person as a representative if the person does not
hold a representative's licence.

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 Example
A financial adviser who is assisted in telephone solicitations by a person who does not
hold a licence cannot pay this person by sharing sales commissions. The adviser may
compensate the person by paying wages or fees, but the source of the funds cannot be
sales commissions.

A financial adviser must act honestly at all times. No premium discounts for
clients are acceptable, nor is any agreement to change the premium payment
method stipulated in a contract.

To other financial advisers, independent partnerships, firms, financial institutions and

insurers

A financial adviser must remit the amounts collected for an insurer along with
whatever information the insurer requires.

To the client

A financial adviser must respect a client's decision to seek a second opinion on his
or her financial situation.
The adviser must also give back to a client any documents borrowed to work on
the client's case, even if the prospect owes the adviser money.
A financial adviser must respect the confidentiality of all documents and
information received from clients. The use of these documents and information
must not benefit the financial adviser to the detriment of clients.
A financial adviser must demonstrate diligence and availability.

Example
A client calls her financial adviser twice in the same week, in addition to sending him an
e-mail, because she wants to change the beneficiaries in her life insurance contract. The
adviser has still not returned her calls after one week. This is a breach of ethics.

A financial adviser may not conduct any transactions with clients who are unable
to manage their affairs on their own.
A financial adviser may not conduct transactions for a client if he or she acts as
curator or dative tutor for the client.
A financial adviser may not accept any assistance from a third party, which may
be detrimental to a client.
A financial adviser may not make personal use of securities that belong to clients.
A financial adviser must have full knowledge of the facts before offering specific
advice to clients. He or she must provide clients with accurate advice. If
information is missing, the adviser must seek it out and refrain from offering any
advice that may be mistaken or inaccurate.

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 A financial adviser must refrain from making misrepresentations to clients. He or
she must demonstrate the pros and cons of the products and services offered to
clients.
A financial adviser must respect his or her limits and knowledge when dealing
with clients.

To the public

A financial adviser must avoid pressuring clients to sign contracts or accept

suggested strategies.
The adviser must demonstrate moderation, objectivity, discretion and dignity.
A financial adviser must seek to educate and inform the public and promote the
quality of services offered.

Liability of Financial Advisers

A financial adviser will be considered liable if the following three elements are found
together: fault, damage or harm, and a relationship between the two.

Fault
A fault can be one of three types: non-intentional, intentional, or gross. Civil liability can
occur with any of the three.

In cases of civil liability, the damage sustained must be repaired.

Damage

Harm or damage may be bodily (physical injury suffered by the victim), material
(involving the victim's property), or moral (inconvenience suffered). The burden of proof
lies with the victim.

A causal link must appear between the fault and the damage.

Example
A financial adviser has a client add a critical illness coverage rider to a contract that
already provides life insurance coverage. The client receives an invoice for
administrative fees on a new contract. The adviser forgot to mention to the insurer that
the critical illness coverage was to be added to the existing contract, not to a new
contract. In this case there is harm to the client due to a fault by the adviser.

Civil liability
Civil liability refers to the obligation to repair any injury caused to another person.
The purpose of a civil liability suit is to receive financial compensation for harm suffered.
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 Criminal liability
Financial advisers will be criminally liable if they are found guilty of embezzlement,
fraud or theft by a court under the Criminal Code.
The case is prosecuted by the Crown Prosecutor.

Professional liability
Financial advisers who work for a firm without being employees of the firm must take
out professional liability insurance that protects them in the performance of their duties
and for a further five years after they cease their professional activities.

Ethical liability
Actions involving breaches of ethics do not lead to financial compensation (unlike civil
liability suits). They instead lead to the levying of fines or removal of the financial
adviser's right to pursue professional activities.

Protection of personal information

The following example is a good illustration of what is meant by protection of personal
information.

Example
An insured person makes a claim with a firm that offers credit and insurance services,
and the claim includes information on the person's lifestyle and medical history. The
financial adviser may not disclose the information that he knows about the insured. The
adviser sends the claim to the insurer and keeps no copy of it.

The insurer is not entitled to give a firm that offers credit and insurance services the
information on the lifestyle and medical history of a client even if the client authorizes
the insurer to do so.

Default of the Policyholder

Fraud
Fraud consists in providing misinformation or concealing information in order to
influence the insurer's decision regarding an insurance contract.

If fraud is proven, the contract may be cancelled.

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 Example
A client meets a financial adviser and does not mention the fact that the year before he
was accused of aggravated assault in a case of road rage, which caused him to lose his
driver's licence for five years.

Concealment
Concealment occurs when the policyholder's intention is not to mislead the insurer. It is
an oversight or failure to declare information that the policyholder deems of little
importance.

Example
A policyholder forgets to mention that he takes a prescription drug on a regular basis.

Concealment may lead to cancellation of the contract or a reduction in insurance

coverage.

If the insured person dies more than two years after the effective date of the contract, the
insurer is obliged to pay the face amount, unless fraud has occurred.

If the insured person dies less than two years after the effective date of the contract, the
insurer may apply for cancellation of the contract and avoid having to pay the face
amount.

Misrepresentation
Misrepresentation occurs when the policyholder provides false or inaccurate information
to the insurer that may have an impact on the risk assessment.

Example
A policyholder tells his financial adviser that he saw his doctor five times in the last five
years, when in fact it was five times a year because he has high blood pressure.

Misrepresentation may lead to cancellation of the contract.

Example
Serge declares that he did not take any illegal drugs in the year preceding the effective
date of his insurance contract. In fact he took drugs at a party with friends two months
earlier, and witnesses have confirmed the fact. Serge dies suddenly three months after the
effective date of his contract.

The insurer is not obliged to pay the face amount because of the misrepresentation.

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 Conditions Necessary to Form an Insurance
Contract
For an insurance contract to be valid, four conditions are required: cause, object, capacity
and consent.

Cause
Cause is simply the reason for the contract. It justifies the contract and its existence. In
the case of life insurance contracts, the premium is the cause of the contract for the
insurer, while the death benefit is the cause for the policyholder.

Object
The object of the contract is the obligation to provide property or a service or an amount
of money to respect the agreement between the parties. In the case of life insurance
contracts, the benefit is the object of the contract for the insurer, while the premium is the
object for the policyholder.

Capacity
Capacity refers to the legal capacity that both parties must have in order for the contract
to be valid. Minors and incapable persons of full age are considered unable to exercise
their civil rights and therefore unable to enter into a contract.

Minors

Minors need their tutor (mother or father) to take out an insurance contract, unless they
are fully emancipated (through marriage or by court order).

Parents are also responsible for administering property received upon payment of an
insurance benefit.

Consent
The consent of both parties is essential to forming a contract.

Consent may be tacit, that is through an act that demonstrates acceptance of the contract.

Example
Jenny is offered a financial product and she responds by asking when she can meet with
the person making the offer to purchase the product. The acceptance in this case is tacit,
or implicit.
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 Consent may also be express.

Example
A financial adviser offers a client to pay his contribution to a retirement savings plan.
The client accepts immediately and takes out his chequebook.

Consent must be free and enlightened, thus it may not be the result of lesion, fear, fraud
or error on the part of either party.

Defect of consent: harm

Harm involves the exploitation of one party by the other. Harm vitiates consent in the
case of minors and incapable persons of full age under protective supervision (under a
mandate given in anticipation of incapacity).

Minors and incapable persons of full age must prove that they have suffered prejudice.

Defect of consent: fear

Fear refers to a constraint such as threats or blackmail.

Example
An employee takes out an insurance contract because of a threat that he will not be
promoted to a higher position in his company in the future if he does not.

Defect of consent: fraud

Fraud is misrepresentation by one of the parties to influence the other party's decision to
enter into the contract.

Example
A representative does not state the correct premium amount to get a client to take out a
life insurance contract.

Defect of consent: error

Error can involve the type of contract, for instance.

Example
A client signs a disability insurance contract (to cover his salary) when he has in fact
given his approval for critical illness insurance.

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 Main and Secondary Characteristics
The main characteristics of an insurance contract are good faith and the fact that is a
contract of adhesion.

In a contract of adhesion, the essential clauses are drafted by one of the parties without
negotiation from the other party.

The contract is formed by the simple acceptance of both parties and is called consensual.

Components of an insurance contract

There are four components that are an integral part of insurance contracts: the insurable
interest, the benefit, the premium and the risk.

Insurable interest

The policyholder must have an insurable interest in the life or health of the insured
person.

Examples of insurable interest:

A policyholder with a financial or moral interest;

A person who supports the policyholder;
An employee of the policyholder;
A descendant of the policyholder's spouse;
The policyholder's spouse;
The policyholder.

If there is no insurable interest, the insured must provide written consent for the contract
to be valid. The insurable interest is determined only when the contract is entered into,
not when there is a loss.

Benefit

The benefit is paid by the insurer when the covered risk occurs.

Premium

The policyholder pays the insurer a premium in return for a benefit that the insurer will
pay when a covered risk occurs.

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 Risk

The occurrence of a risk causes financial loss from which the policyholder wishes to be
protected.

The risk must be uncertain. It is a possible and future event that does not depend on the
will of the parties. A risk cannot be impossible nor can it have already occurred.

Federal Public Plans

Canada Health Act

The Canada Health Act is the federal act that governs health insurance. It facilitates
access to health services by providing that some of them be offered free of charge.

The Act is based on five principles that the provinces must comply with to receive cash
transfers from the federal government. These principles are: public administration,
portability, comprehensiveness, accessibility and universality.

Old Age Security Act and Guaranteed Income Supplement

Four plans make up the income security programs: the basic Old Age Security pension,
the Guaranteed Income Supplement, the spouse's allowance and the Survivor Allowance.

Old Age Security pension

Canadian citizens who have lived in Canada for at least 10 years after the age of 18 and
who are aged 65 or older are eligible to receive the Old Age Security pension.

Guaranteed Income Supplement

To be eligible for the Guaranteed Income Supplement, an individual must have a low
annual income and receive the Old Age Security pension.

Spouse's allowance

The spouse's allowance is offered to couples with a low total income and in which one
partner receives the Old Age Security pension and the other is aged between 60 and 64.

Survivor Allowance

The Survivor Allowance is for individuals aged between 60 and 64 whose spouse is
deceased, who are not the spouse of another person, and who have low income.

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 Canada Pension Plan
The Canada Pension Plan applies in all provinces except Quebec, which decided to set up
its own pension plan. The provinces may choose to use their own plan or the Canada
Pension Plan. Workers aged 18 and older are required to contribute.

The Canada Pension Plan offers three types of benefits: retirement benefits, disability
benefits and survivor benefits.

Retirement benefits

Individuals aged 65 or older or between 60 and 64 who no longer work and whose
income is lower than the maximum provided for are eligible to receive benefits.

Disability benefits

Dependent children of eligible disabled individuals may also receive disability benefits.
To be eligible, individuals must be less than 65 years of age, be considered disabled
under the Canada Pension Plan Act, and have contributed for a sufficient number of
years.

Survivor Allowance

The Survivor Allowance is paid to the surviving spouse and orphan. Survivors receive
benefits if the deceased person paid contributions for 10 years or for one third of the
contribution years. A minimum of three years of contributions is required.

Employment Insurance Act

Employment insurance provides temporary financial assistance to unemployed
individuals who seek employment. It also helps people who care for seriously ill family
members, parents with a newborn or recently adopted child, pregnant women, and sick
workers.

Canadian Sources of Law

The Canadian Constitution
The British North America Act of 1867 is the foundation of the Canadian Constitution.
This Act establishes the legislative powers of the federal and provincial governments.

Since the Constitution Act of 1982, Canada may amend its constitution without the
consent of the British Parliament.

The Canadian Constitution has precedence over all other Canadian laws.
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 Personal Information Protection and Electronic Documents Act
The Personal Information Protection and Electronic Documents Act applies to the
collection and use of personal information in the course of business activities in the
provinces, including companies under provincial jurisdiction.

Proceeds of Crime (Money Laundering) Act

The Proceeds of Crime (Money Laundering) Act helps Canada in its international fight
against crime. It is also intended to fight organized crime through the implementation of
policies and measures for detecting and deterring money laundering and the financing of
terrorist activities.

Financial Transactions and Reports Analysis Centre of Canada

(FINTRAC)
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) collects,
analyses and communicates financial information on money laundering and terrorist
activity financing.

A number of persons and organizations must report suspicious financial transactions to

FINTRAC. These include financial advisers, insurance of persons firms and independent
partnerships, credit unions, banks, and life insurance companies.

Transactions that must be reported

International electronic fund transfers of at least $10,000, large cash transactions of at

least $10,000, and transactions that may be related to money laundering and terrorist
activity financing and raise suspicion must be reported to FINTRAC.

Reports must be made no more than 30 days after suspicions are raised as to the validity
of a transaction with regard to the Proceeds of Crime (Money Laundering) Act.

Money laundering

Money laundering involves three steps. First, the proceeds of criminal activities are
introduced into the financial system. Second, these proceeds are transformed into other
types of assets. Finally, the proceeds are reintroduced into the economy to conceal their
origin.

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 Example:
Simon opens bank accounts after selling illegal drugs and deposits
$9,000 into these accounts (Step 1).
Then Simon uses the $9,000 to purchase two paintings (Step 2).
Finally, Simon sells off the two paintings for $10,000 and uses the money to purchase
investment funds (Step 3).

Social and tax laws

Social laws (governing relations between individuals) have enabled the creation of
Canadian public insurance plans such as legislation involving health, pensions,
employment insurance, and old age security.

Tax laws have led to the creation of the Income Tax Act.

Canadian Charter of Rights and Freedoms

The Canadian Charter of Rights and Freedoms is called the supreme law of Canada.
Legislation passed in Canada may not be incompatible with the provisions of the Charter.

Insurance contracts and the management of provincially chartered insurance companies

are under provincial jurisdiction.

Other sources of law

Other sources of law apply to the insurance of persons: case law, doctrine, and customs
and usage.

Case law

Case law is an important source of law. It consists of the decisions made by various
courts.

Doctrine

Doctrine consists of texts written be legal experts that comment on laws, regulations and
case law. It is very useful for interpreting legal texts.

Customs and usage

Customs and usage are the sources least used in law.

Custom is a form of conduct established by usage, habits and practices. It is public in

nature and has existed for a number of years

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 16. Taxation
Canadian individuals who pay taxes are either residents or non-residents. In all provinces
except Quebec, the Government of Canada collects provincial income taxes, which it
then returns to the provinces. Although unavoidable, an understanding of the basic
principles will allow you to better meet your clients’ needs.

Taxation of Canadian residents

Individuals who remain in Canada a minimum of 183 days during the year and who
maintain economic and family ties in the country are deemed Canadian residents for the
duration of the year.

They are taxed on their income in its entirety, earned both in Canada and overseas.

Taxation of resident corporations

If administrative control of a corporation is in Canada, the corporation is deemed resident
in Canada and must pay taxes on all of its income worldwide, even if the business was
incorporated in another country.

A corporation incorporated in Canada is of course considered a Canadian resident.

Taxation of non-residents
Individuals who reside in another country or who have no residential ties with Canada
must pay taxes in Canada if they have worked in Canada, carried on a business in
Canada, or disposed of property that is taxable in Canada.

The average tax rate

The average tax rate, also called the effective tax rate, is the total tax paid divided by the
total taxable income.

Example
Bernard paid $12,500 in taxes last year and had taxable income of $50,000 for the year.
His average or effective tax rate is 25% ($12,500 ÷ $50,000).

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 The marginal tax rate
The marginal tax rate is the tax rate for each additional dollar of taxable income.

Example
Beatrice's taxable income is $50,000. If she contributes $1,000 to her registered
retirement savings plan and deducts this amount from her taxable income, how much is
the tax deduction?
Answer: $1,000 X 38.4% = $384 tax deduction

Taxable income
Work or employment income

Work or employment income includes wages, remuneration from employment,

commissions, professional fees and taxable benefits.

Taxable benefits

The amounts paid by an employer to an employee as part of the latter's employment must
be declared each year.

The following benefits must also be declared:

Trips for personal rather than business purposes which are paid for by the
employer;
Gifts exceeding $500 in value;
Training paid by the employer which is not required for the job;
Loans from the employer offered at rates lower than those prescribed by
governments;
Low-rent or rent-free dwellings offered by the employer;
Vehicle costs paid by the employer;
Life insurance plans paid for by the employer;
Employer contributions to medical, hospital and dental care plans (applies to
Quebec income tax only).

Business income

Business income refers to the production of goods or delivery of services. It is earned

actively, unlike property income, which is earned passively.

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 Property income

Property income is income that is earned passively.

Example
Pascal has a guaranteed deposit of $5,000, a dividend fund of $8,000, and an income
property that earns him $12,000 annually in rental income.

Rental income, interest, dividends and capital gains are included in property income.

Other types of taxable income

Pension income and employment insurance are types of taxable income.

Types of pension income include the Old Age Security pension, withdrawals from
registered retirement savings plans (RRSPs), benefits paid under the Canada Pension Plan
or Quebec Pension Plan, and payments from an RRSP converted into what is called a
registered retirement income fund (RRIF).

Example
Ben is 65 years old and has just retired. He receives his Old Age Security pension, his
pension from the Quebec Pension Plan, and monthly payments from a registered
retirement income fund. All of this income is taxable at Ben's personal tax rate.

Taxable income and income tax payable

There are three steps in determining income tax payable:

i. Net income

Net income is calculated by starting with gross income, which is the sum of all income
that must be declared (work, investment, pension, retirement, business), and subtracting
the allowable deductions relating to this income, such as contributions to a registered
retirement savings plan.

Example
Andrew received $45,000 in employment income from a transportation business last year
and contributed $1,500 to his registered retirement savings plan. He also collected rental
income of $15,000 for his house, which he rents to his brother-in-law. However, he had
to repair the emergency staircase, which cost him $5,000.
His net income is therefore calculated as follows:
($45,000 - $1,500) + ($15,000 - $5,000) = $53,500

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 ii. Taxable income

Taxable income is determined by subtracting certain deduction amounts from net income.

Example
Andrew lives in the Bay James area and has claimed a $100 monthly deduction for the
area where he lives. He can deduct $1,200 (12 X $100) from his $53,500 net income,
which gives him a taxable income of $52,300.

iii. Income tax payable

The income tax payable is derived from the taxable income, to which the following are
applied:

First, the appropriate tax rate; and

Second, the relevant tax credits.

𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 × 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 = 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝑜𝑤𝑒𝑑

𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝑜𝑤𝑒𝑑 − 𝑇𝑎𝑥 𝐶𝑟𝑒𝑑𝑖𝑡𝑠 = 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝑝𝑎𝑦𝑎𝑏𝑙𝑒

Deductions versus tax credits

There is a difference between a tax deduction and a tax credit.

Tax deductions

Tax deductions reduce net income or taxable income and thereby reduce the income tax
payable.

Tax credits

Tax credits reduce the income tax payable. Federal and provincial tax credits differ
slightly.

Non-refundable tax credits – federal:

Medical expenses
Tuition fees
Disability
Employment insurance and Quebec Pension Plan or Canadian Pension Plan
Spouse and dependents
Age
Basic personal
Differences in taxation
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 Property generates income that receives a different tax treatment based on the type of
income.

Government Plans
Registered retirement savings plans (RRSP)
A registered retirement savings plan is a contract between a financial institution and an
individual under which the individual can contribute a maximum annual amount to the
plan.

The contributions are tax deductible for the individual and accumulate tax deferred.
Amounts withdrawn from the registered retirement savings plan are fully taxable at the
individual's personal tax rate.

Contributions to a registered retirement savings plan

To calculate the maximum amount that can be invested in a registered retirement savings
plan:

- Start with the unused registered retirement savings plan contribution room.
- Add 18% of the earned income for the previous year, up to an established limit.
- Add the pension adjustment reversal
- Subtract the pension adjustment for the registered pension plan or deferred profit
sharing plan for the previous year.
- Subtract the past service pension adjustment for the year.

Note that contributions to a registered retirement savings plan for a given year can be
made during the calendar year or within 60 days following the end of the calendar year.

Group registered retirement savings plans

Employers can create optional group registered retirement savings plans for their
employees. Employees contribute to the group registered retirement savings plans and the
employers can do so as well if they wish.

The tax rules for individual registered retirement savings plans also apply to group plans.

Pension adjustment
The amount invested in a registered pension plan or deferred profit sharing plan is called
a pension adjustment, or PA. The pension adjustment reduces the amounts that qualify
for a registered retirement savings plan.

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 Past service pension adjustment
Like the pension adjustment, the past service pension adjustment reduces the amounts
that qualify for a registered retirement savings plan. The past service pension adjustment
is created when a defined-benefit pension plan member purchases years for past service.

Pension adjustment reversal

The pension adjustment reversal is the excess of accumulated pension adjustments over
the value of the pension fund transfer for individuals who sever employment ties with
their employer.

Registered retirement income funds (RRIF)

A registered retirement income fund is a tax-free means of transferring the amounts
accumulated in a registered retirement savings plan, with an obligation to make a
minimum annual withdrawal.

Registered pension plans (RPP)

There are two main types of registered pension plans:

Defined contribution plans

With defined contribution plans, the contributions (by the employer and employee) are
defined in advance, but the amount of the annuity on retirement is not (unlike the defined
benefit plan).

There is a maximum contribution that can be made by the employer and employee. This
limit is the lesser of the following: 18% of annual income or 18% of the money purchase
limit for the year.

Defined benefit plans

With defined benefit plans, the employee's contributions are defined in advance along
with the amount of the annuity to be received by the employee on retirement.

The employer contributions are not defined in advance, although a minimum contribution
is often set.

There is a maximum contribution that can be made by the employer and employee. This
limit is the lesser of the following: 18% of annual income or 18% of the money purchase
limit for the year.

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 Deferred profit sharing plans (DPSP)

With deferred profit sharing plans, only the employer contributes to the employee
retirement plan.

The contributions can be deducted from the employer's income and are non-taxable for
the employee. These contributions generate tax-free income and are taxable when the
employee withdraws them, as with registered retirement savings plans (RRSP).

Locked-in retirement accounts (LIRA)

The locked-in retirement account was created by the Supplemental Pension Plans Act and
is used to transfer amounts accumulated in a pension fund called a retirement plan.

The amounts transferred to a locked-in retirement account may come from:

a registered pension plan;
a deferred profit sharing plan;
another locked-in retirement account;
an annuity ; or
a life income fund .

Life income funds (LIF)

The life income fund, which was also created by the Supplemental Pension Plans Act, is
used to transfer amounts that have accumulated in:

a pension plan;
a locked-in retirement account;
a deferred profit sharing plan;
another life income fund; or
a registered retirement savings plan.
The tax consequences of death on registered plans

Death and Retirement Plans

The general rule is that a taxpayer who dies is deemed to have disposed of all property
just before death at its fair market value.

Three exceptions:

i. Amounts paid to the (legal or common law) spouse of the annuitant (deceased
person).
ii. Amounts paid to a child who is financially dependent on the annuitant at the time
of death and who is totally disabled.
iii. Amounts paid to minor children dependant on the annuitant at the time of death
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 Registered retirement savings plan
If amounts from the deceased person's registered retirement savings plan are bequeathed
to a surviving (legal or common law) spouse, the spouse can transfer them tax free to a
registered retirement savings plan, registered income fund, or eligible annuity.

If the amounts are bequeathed to a dependent child who is totally disabled, either
physically or mentally, the child can transfer the amounts tax free to his or her own
registered retirement savings plan. This is a total tax-free rollover, the same as with the
spouse of the deceased.

If the dependent child is under 18 years of age and is not totally disabled, the after-tax
amounts can be used to purchase a fixed-term annuity that does not exceed 18 years less
the age of the child.

Registered retirement income fund

The rules that apply to registered retirement savings plans also apply to registered
retirement income funds.

Locked-in retirement fund

Locked-in retirement funds are governed by the same tax rules as registered retirement
savings plans.

Life income fund

Life income funds are governed by the same tax rules as registered retirement income
funds.

Registered pension plan

Following the death of a person with a registered pension plan, if the beneficiary is the
legal or common law spouse, the total amount can be transferred tax free to a registered
retirement savings plan, a registered retirement income fund, or another registered
pension plan.

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 17. Glossary
absolute assignment: the transfer of all of the rights of the original policy owner to
another party, including the right to appoint a beneficiary.
accidental death and dismemberment: a payment made, in addition to the face value of
the policy, if the life insured dies in an accident (also known as double indemnity) that
also provides coverage for dismemberment, such as the loss of a limb.
accident & sickness insurance: provides all or partial coverage for medical and dental
expenses that are not covered by provincial health plans.
adjusted cost basis (ACB): a dollar representation, for tax purposes, of the policy
owner’s cost of a policy, e.g. premiums paid.
administrative services only (ASO): a contract with an insurance company that relieves
the employer (offering group insurance) from the responsibility of administering its self-
insured plan.
after tax dollars: money that has already been taxed (income tax).
allocations: the annual periodic payments of distributions of income (interest, dividends,
or capital gains) within a segregated fund.
annuitant: the person who receives an annuity or the proceeds of a segregated fund on
death or maturity of the fund contract.
annuity: an investment that pays a sum of money annually or at other regular intervals.
annuity certain: also known as a term certain annuity. Pays annuitant a guaranteed
amount for a defined period,
any occupation (any occ): a definition of disability that means a person is considered
disabled if he or she is unable to work at any job.
automatic premium loan (APL): a non-forfeiture benefit which automatically charges
unpaid premiums as a loan against the cash surrender value of a policy.
before tax dollars: money that has not yet been taxed (income tax).
beneficiary: the person who receives all amounts payable when the life insured dies.
benefit: income or payment received by the policy owner.
benefit period: the length of time an income will be received.
bond: represents a debt of a government or corporation to the bondholder.
business overhead policy: covers business overhead expenses when the prime revenue
earner is unable to produce because of an accident or sickness that causes disability.
Canada Pension Plan (CPP): a federal government retirement and disability pension.
Canada Savings Bonds (CSB): issued by the federal government with regular or
compound interest. A minimum interest rate is guaranteed for one or more years,
depending on the issue.
capital gain: occurs when an investment classified as capital property is sold for more
than its purchase price.
capital loss: when capital property is worth less than its purchase price and can be used to
offset capital gains.
carry forward: a feature of RRSPs that allows a person to carry forward any unused
contribution indefinitely and apply it to subsequent years.

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 cash surrender value (CSV): the money in the policy reserve which can be accessed by
the policy owner and received in cash. The value of the CSV is premiums plus interest,
less costs.
certificate of insurance: the document or booklet which a group plan member receives
that outlines the benefits and other relevant details regarding the master contract held by
the employer.
claim: the application made on behalf of an insured to recover benefits due as a result of
death, disability, or accident.
claimant: the person or legal entity that is claiming the benefit from a life insurance
policy.
code of ethics: ethical conduct guidelines that have been established by the Canadian
Life and health Insurance Association (CLHIA) and Advocis.
co-insurance factor: percentage of an insurance claim shared between the insurance
company (larger percentage) and the insured (smaller percentage).
collateral assignment: when a policy is assigned to a financial institution as security for a
loan.
common law: the law which comprises the bulk of law in Canada with the exception of
the Province of Quebec. Common law is based on custom and usage dating from ancient
unwritten laws in England and which were collected together and established as the
Common Law of the Realm. Also known as case law.
common shares: shares which represent ownership in a company and which give the
holder voting rights.
compounding: occurs when an person reinvests distributions from an investment (e.g.
interest), so that he or she is earning growth on growth (e.g. interest on interest).
conflicting interest: an interest that would likely have an adverse effect on an agent’s
judgment, advice, or loyalty to a client or prospective client.
contingent beneficiary: a beneficiary who would receive all or part of the insurance
proceeds if the primary beneficiary is not living when the policy matures.
contract: a promise or a set of promises that the law will enforce.
contract of adhesion: the term used for a life insurance contract because the applicant
either accepts or declines all of the terms and conditions of coverage that are set out in
the contract. There is no opportunity for negotiation.
contributory plan: the group member contributes towards the premium for group
insurance.
conversion: a clause that allows convertible term policies and policies with term riders to
be converted to permanent life insurance without evidence of insurability.
cost of living adjustment (COLA): an adjustment made to help some incomes keep up
with inflation. As an insurance rider benefits will increase according to the amount of
increase specified in the rider.
creditor: a person or an institution that is owed money by another.
critical illness insurance (CII): designed to manage the risk associated with contracting
certain dreaded diseases.
death benefit: the money which is paid to the beneficiary upon death of thelife insured.
death benefit guarantee: the minimum guaranteed amount (usually 75%) on the deposits
(or reset amount) if the holder of a seg fund should die before the maturity date of his or
her contract.
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 debenture: a bond which is supported by the general credit worthiness of the issuing
corporation.
debtor: a person who owes money.
decreasing term insurance: (infrequently used) term insurance which provides a level
premium over a long term, a decrease in the face amount each year, and a death benefit
paid to the beneficiary for the face amount in force at the time of death of the life insured
during the term specified in the policy.
deductible: an amount the insured pays before payment is received from the insurer.
deemed disposition: occurs when the Canada Revenue Agency considers property to be
sold at market price, even if it was not actually sold.
deferred annuity: an annuity that begins at a future date. The annuity can be purchased
with either a single premium or a series of premiums.
deferred sales charge: the investor pays a sales charge when all or part of the original
investment is redeemed. The sales charge declines over an agreed upon number of years
until, at the end, the charge is eliminated.
defined benefit plan: a private pension plan where the employee knows exactly how
much he or she is going to pay for the pension and how much he or she will receive when
retired.
defined contribution plan: pools contributions of the
employer and the employee to provide the pension. Also called a money purchase plan.
disability: as defined in a policy (for example, it may cover a physical impairment but not
a mental disability); however, the disability must result from an accident or sickness that
occurred while the policy was in force, and the disability must require medical attention.
disability buy-out insurance: can only be used for businesses that have buy-sell
agreements in place. It allows partners, owners, or shareholders of a business to purchase
the share in the business held by another partner, owner, or shareholder who becomes
disabled.
disability income insurance: provides a monthly income to those unable to work because
of an accident, sickness, or disability.
distributions: the periodic payments of interest or dividends made by mutual funds or
segregated funds.-also allocation
dividends (corporate): a share of profits that have been earned by the corporation and
distributed to shareholders on a pro-rata basis.
earned income (for disability insurance): includes salary, wages, regularly received
bonuses, and commissions.
earned income (for RRSP and tax purposes): earned income for tax purposes includes
income from all sources, whereas earned income for RRSP purposes does not include
investment and pension income.
effective date: the date that the policy takes effect and coverage starts.
elimination period: the time between the occurrence of the disability and when benefits
begin. The waiting period during which benefits are not paid.
errors and omissions (E&O) insurance: professional liability coverage carried by
insurance agents and insurers against lawsuits claiming mistakes in professional
judgment, and/or failure to properly execute the steps of putting a policy into effect.
estate: a term commonly used on a person’s death to refer to all of his or her assets.

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 ethical conduct: the measure of a life insurance agent’s business character and his or her
adherence to the codes of ethics established by CLHIA and Advocis.
evidence of insurability: information which demonstrates that a life insured can qualify
for coverage.
exclusion rider: a rider that excludes some coverage.
exclusions: benefits denied under certain circumstances.
extended term insurance (ETI): an option which allows a policy owner who stops
paying premiums to keep coverage in force by using the cash surrender value as a single
premium to buy term insurance.
face amount: the amount of the insurance payable.
fair market value: the value of an item today. It is based on what similar items are being
sold, or bid, for in the marketplace.
family deductible: a maximum amount the insured pays for all family members covered
under the group plan. Each person in the family is subject to a single deductible until the
family maximum deductible is reached.
forgery: something written or prepared in writing to deceive, such as a false signature.
Forgery is a criminal offence.
fraud: a fraudulent misrepresentation intended to cheat or deceive; within the insurance
industry it is possible for the insured to defraud the insurance company and the agent, or
the agent to defraud either the customer or the insurance company. Fraud is a criminal
offence. A policy will be terminated if fraud has been committed.
front-end load: a sales charge that is applied at the beginning of a fund contract.
fully-insured plan: a group plan where the policy owner pays a premium and the insurer
pays all claims. Under this plan, it is possible for claims to exceed premiums.
future purchase option (future income option):
allows the policy owner to increase the amount of monthly income protection with no
evidence of insurability.
grace period: the 30 or 31-day period during which the policy remains in full force
before a policy is lapsed for non-payment of a premium.
group insurance: pools the risk of individual members of the group to provide insurance
without requiring evidence of insurability.
group retirement savings plan (GRSP): provides benefits similar to those offered by
individual RRSPs except the employer administers them on a group basis. Employees
contribute by wage deduction, matched in whole or part by employer.
Guaranteed Income Supplement (GIS): monthly benefits paid to residents of Canada
who receive the OAS and have little other income.
guaranteed insurability: a benefit that protects the life insured from becoming
uninsurable by giving the policy owner the right to buy more life insurance at
certain times.
Guaranteed Investment Certificates (GICs): an interest- paying investment in which
principal and interest are guaranteed.
health insurance: sold through accident and sickness policies, it reimburses the insured
for out-of-pocket expenses.
holding out: how an agent presents himself or herself to the general public. A license to
sell life insurance must be obtained before a person can be identified or held out as a
licensed life insurance agent.
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 home buyer’s plan: allows an RRSP plan holder to withdraw up to $25,000 as of 2009
($20,000 previously) from his or her RRSP for the first-time purchase of a home or for
buying a home under certain conditions.
immediate annuity: purchased with a single premium. Income begins at the end of the
first annuity period after it is purchased (e.g. if the annuity period is one year, the first
payment is received one year after the annuity has been purchased.
income splitting: a term used to describe strategiesused to save taxes by diverting income
from a high tax-bracket family member to a family member in a lower tax bracket.
incontestable clause: clause that states that a life insurance contract is incontestable by
the insurer when it has been in effect continually for two years after the issue or
reinstatement date.
increasing term insurance: term insurance which covers a life that is increasing in
economic value, such as an essential employee whose salary increases annually.
Individual Variable Insurance Contract (IVIC):
the contract that buys into a segregated fund.
insurable interest: when the death of the insured would be detrimental or cause harm to
the person taking out the insurance._-REVISE DEF?
insured: the person who is the owner (policy owner) of the policy and pays its premium.
insurer: the party to an insurance arrangement who undertakes to indemnify for losses.
Also called the insurance company.
interest: the charge for the privilege of borrowing money.
intestate: when a person dies without leaving a will.
investment returns: the returns (growth in value) investors receive on their investments.
irrevocable beneficiary: the policy holder cannot change the beneficiary unless the
beneficiary agrees in writing to the change.
joint and last survivor annuity: provides a guaranteed income during the course of two
people’s lives.
joint first/last to die: a contract in which more than one life is insured and settlement is
made to either the survivor (first to die) or the beneficiary (last to die).
key person life/ disability insurance: insurance used to cover a person who is a key
employee. There are three parties to this contract: the policy owner (business), the life
insured (employee), and the insurer.
know your client: part of the Code of Ethics for life insurance agents which states that an
insurance agent must make every effort to understand his or her
client’s needs and financial situation.
law of large numbers: a theorem which states that, as an experiment is repeated over and
over, the observed probability approaches the actual (or true) probability.
legal capacity: a person is legally able to enter into a life insurance contract.
level term insurance: term insurance which specifies in the policy exactly how much the
insurance will cost, how much it will pay out, who will receive the death benefit, and
when the insurance expires.
liability risk: the risk of being held financially responsible for causing injury to another
person or causing damage to another person’s property.
life annuity: makes income payments for the lifetime of the annuitant.

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 life income fund (LIF): retirement fund into which the accumulated savings in a Locked-
in RRSP, LIRA, another LIF, pension funds, may be transferred and then paid out to the
fund owner as retirement income.
life insurance: insurance which provides financial protection against financial loss
resulting from death.
life insured: the person whose life is insured by the life insurance contract.
Life License Qualification Program (LLQP): an entry-level proficiency standard for
individuals that want to become life insurance agents in all provinces except Quebec.
life retirement income funds (LRIF): a variation on the life income fund (LIF) in which
there is no requirement to purchase an annuity by age 80.
limited payment whole life: another form of whole life insurance. Premiums on these
policies are limited and only payable for a certain period or to a certain age.
liquidity: the ease with which investments can be converted to cash or near cash.
loads: sales charges for a mutual or segregated fund.
locked-in retirement account (LIRA): a form of Locked-in RRSP into which pension
benefits may be transferred from an employer’s plan when the employee leaves the
company prior to the age of retirement.
Locked-in Retirement Income Fund (LRIF): a variation on the Life Income Fund in
which there is no requirement to purchase an annuity by age 80.
long-term care insurance: payable when the health condition of the life insured requires
long-term care, such as in a nursing home.
long-term disability policy: has a benefit period of five years or longer. Benefits begin
after short-term disability or government benefits end.
lump sum payment: a single payment received for a death claim or reimbursements for
medical expenses incurred while travelling or, depending on the type of policy, for
treatments or prescriptions.
management expense: fees that cover the cost of running a segregated fund.
marginal tax rate: the highest rate at which an individual is taxed.
master contract: the group insurance policy which is given to the policy owner, usually
an employer.
maturity guarantee: provides for the guaranteed return of at least 75% of the initial
deposit to a segregated fund 10 years after the date the contract is signed by the investor.
meeting of the minds: when the parties have agreed to all the details of a contract.
minor: an individual who has not reached the age of majority as defined in the province
where he or she resides.
misrepresentation: when one of the parties to a contract has been induced or persuaded
to enter into the contract through the misrepresentation (or false representation) of the
other party.
money laundering: the process whereby money that has been gained illegally is moved
into the economy.
morbidity rates: used to estimate the number of people expected to become disabled at a
given age, based on 1,000 people of the same age.
mortality rates: the number of people expected to die at a given age, based on 1,000
people of the same age.
mutual company: a company owned by policy holders.

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 mutual funds: pools of money managed by professional fund managers, funded by
investors with similar investment objectives. The fund’s portfolio may consist of a
variety of investments.
National do not call list: regulation pertaining to solicitation and telemarketing using the
telephone

needs analysis: the process of analyzing the amount of insurance required to meet a
client’s requirements at a particular point in time.
net cost of pure insurance (NCPI): the life insurance cost within the policy.
no-load fund: a fund that charges no sales fee but usually compensates by charging a
higher management expense fee.
nominal rate of return: the “named” rate of return for an investment (i.e. a GIC that pays
4% interest; 4% is the nominal rate of return).
non-contributory plan: the group policy owner, often the employer, pays the full
premium for the group insurance.
non-exempt policy: the policy owner must report the income that is accruing in the policy
yearly.
non-forfeiture option: a benefit or value that allows coverage to continue even if
premiums are not paid. There are three non-forfeiture values: automatic premium loan,
extended term insurance, reduced paid-up insurance.
occupational classification: the five categories into which occupations have been
classified based on the likelihood of a claim being made. The classification is based on
the hazard inherent in the job and the likely duration of the disability that will result from
work in that occupation.
Old Age Security (OAS): a monthly pension payable to all Canadians or legal residents
age 65 and over who apply for the benefit and meet residence requirements.
overhead expenses: expenses incurred in running a business.
overinsurance: paying more to a disabled person than the person received as earned
income.
own occupation (own occ): a definition of disability that applies to a person who is
unable to perform the essential duties of his or her own regular or previous occupation.
paid-up addition: where dividends are used to buy additional paid-up insurance.
paid-up additions rider: adds paid-up permanent life insurance as a policy and it requires
additional premium payments from the policy owner.
partial disability: definition which covers a percentage of the total disability benefit, as
defined in the policy. Unlike residual disability, it is based on the inability to perform
tasks, not on the loss of income.
participating policy (par policy): a whole life policy which pays dividends.
partner: one of two or more individuals in a business organization (referred to a
partnership) that has a financial interest in, or who manages and operates the business.
past service pension adjustment: the adjustment an employer makes to an employee’s
pension plan for the years the employee worked for the employer before the pension plan
was implemented.
pensionable earnings: the amount of income on which the pension contribution is based.

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 pension adjustment: the value of benefits accruing in a company-sponsored RPP or a
DPSP. Pension adjustment for any current year must be deducted when calculating the
allowable RRSP contribution for the subsequent year.
permanent insurance: insurance which insures for life.
policy dividends (life insurance): an overpayment of premiums by the participating
policy owner returned to the policy owner in annual dividend form. They are not
guaranteed and there are a number of ways the dividends can be received.
policy illustrations: point-of-sale tools used to illustrate hypothetical policy dividends
and other benefits derived from life insurance products that are not guaranteed.
policy loan: loans made against the cash surrender value of a policy. Most insurers limit
loans to 90% of the CSV.
policy owner: the owner of a policy, the policyholder.
power of attorney: the appointment of a person to look after financial affairs of someone
who becomes incapacitated due to sickness, accident, or other mishaps.
precedent: a past or present decision of a judge of a court that serves as the guiding
principle in similar cases in other courts.
pre-existing condition: a disability or illness which exists at the time of application.
preferred shares: a type of share that entitles the owner to a dividend ahead of any
dividends paid to common shareholders. Preferred shareholders typically do not have
voting rights.
premium: legally, the consideration for the contract; in other words, the payment
required to bring the policy into force and to keep it in force.
premium offset: when dividends from a whole life policy are used to reduce the cost of
premiums.
premium rebating: prohibited by provincial legislation and association by-laws.
Premium rebating usually occurs when an agent offers to pay all or part of the premium
required by the policy, it may also involve a gift, promotion, or inducement.
prescribed annuity: annuity payments are a blend of capital and interest. The capital is
spread evenly over the expected payment period and the balance of each payment is the
interest. The interest portion is subject to tax, while the capital portion is tax-free.
presumptive disability: definition which covers the loss of use of limbs, sight, hearing, or
speech. Full benefits are payable until the end of the benefit period or for life, regardless
of whether or not the person can return to work.
probate fee: the fee that is levied by the provincial jurisdiction; it is a percentage of the
value of the estate.
proceeds of disposition: money received following a disposition.
public company: refers to a company that is permitted to offer its registered securities
(stock, bonds, etc.) for sale to the general public through a stock exchange.
pure premium: the premium rate that actuaries calculate solely on two factors:
mortality/morbidity rate and projected earnings.
Quebec Pension Plan (QPP): the Quebec equivalent of the Canada Pension Plan.
rated contract: a contract with higher premiums offered to applicants identified as special
risk or substandard risk.
rated premiums: higher-priced premiums.
ratemaking: the calculation of premium rates by actuaries which factors in
mortality/morbidity rates, interest earnings, and the operating expenses of the company.
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 real rate of return: the nominal, or “named” rate of return on an investment minus the
current rate of inflation.
recurring disability: if a disability recurs or a new disability begins within a period of
time set out in the policy’s recurrence clause, it is treated as a continuation of the original
claim and not subject to a new elimination period, but the benefit period is deemed to
begin at the start of the original claim, not the date of the recurrence.
reduced paid-up insurance (PUI): an option when a policy owner stops paying
premiums to convert the cash surrender value to a reduced face amount of the same
policy type.
registered education savings plan (RESP): a savings program developed by the federal
government to encourage parents to save for the post-secondary education of their
children.
registered disability savings plan (RDSP): a plan intended to accumulate savings for a
disabled person
registered pension plans (RPP): private pension registered with CRA, established by
employers for the benefit of their employees.
registered plan: a plan that has been registered with the Minister of Customs and
Revenue as required by the Income Tax Act.
registered retirement income fund (RRIF): a fund registered with CRA to receive
retirement income. It is an account to which accumulated RRSPs can be transferred
without incurred tax at the time of transfer.
registered retirement savings plan (RRSP): a registered savings plan which is a tax
shelter to assist individuals in saving for their retirement years.
regular occupation: a definition of disabled that applies to a person who is unable to
perform the essential duties of his or her regular occupation.
reimbursement plan: the insured pays the cost of the medical service or drugs and is
reimbursed by the insurer.
reinstatement clause: a clause in the policy designed to assist when a life insurance
contract lapses due to premium non-payment.
renewable and convertible (R&C): a feature of term policies which allows the insured to
renew the policy prior to the expiry date and the right to convert the policy to a whole life
policy (a type of permanent life insurance), for the same or a decreased face amount,
without evidence of insurability.
replacement: a term used to describe the act of surrendering an insurance policy or part
of the coverage of an insurance policy in order to buy another policy.
reset feature: when investors decide to lock in the value of their segregated funds,
thereby resetting the maturity guarantee and maturity date of the contract.
residual disability: the benefit paid proportionate to pre-disability earnings. The loss
must be between 20-80% of pre-disability earnings to qualify for a residual benefit.
revocable beneficiary: the policy owner may change the beneficiary named in an
insurance contract at any time, in writing.
riders: policy extras. Premiums are higher based on the riders that are attached to the
policy.
right of rescission: the right to cancel the policy within ten days of acknowledgment of
receipt of the policy. Also called free look provision.

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 risk: the probability of suffering harm or loss in the future. Another definition is the price
volatility of one type of security compared to the price volatility of another.
risk averse: relates to the behaviour of investors and their reluctance to make an
investment with an uncertain payoff, compared to an investment with a more certain
expected payoff.
risk management: the process of planning for risk.
risk retention: when a person accepts or retains all or part of a given risk.
risk severity: the dollar cost of a loss.
risk transfer: shifting some or all of the cost of a potential loss to a third party.
rule of 72: illustrates how long it takes for an investment portfolio to double in size when
its income is reinvested.
segregated funds (seg fund): an investment fund held by an insurance company called an
Individual Variable Insurance Contract (IVIC), in which the funds are separate from the
other assets of the insurance company.
self-insured plan: the group policy owner pays all claims.
settlement: the amount paid to the beneficiary when the life insured dies.
shareholder: an individual or company (including a corporation) that legally owns on or
more shares in a company.
short-term disability policy: has a benefit period of two years or less.
sole proprietor: one person who owns and operates an unincorporated business, and who
pays personal income tax on profits from the business.
special risk: a rating assigned to some life applicants who are at high risk for some
reason usually due to health, habit, or occupation. Also known as the fifth dividend
option.
speculative risk: a risk where someone knowingly gambles on a risk, such as the stock
market.
stock company: a company owned by shareholders.
stock market indices: statistical tools used to measure the state of the market or the
economy.
straight life: the most common form of whole life policies. Premiums are paid over the
entire lifetime of the life insured. Also called whole life.
straight life annuity: pays a guaranteed income for life.
subrogation: a legal process that allows an insurance company to assume the
policyholder’s right to collect damages from a third party.
substandard risk: a rating assigned to some life applicants who are at high risk for some
reason.
suicide exclusion clause: suicide is excluded as a cause of death for which the death
benefit is paid if it occurs up to two years after the policy is issued.
summary fact sheet: a document which outlines a summary of performance, the
investment policies, and the three largest holdings of a segregated fund.
supplementary benefits: policy extras.
tables of non-forfeiture: the tables the policy owner can use to determine the value of the
non-forfeiture options in the policy.
tax credits: a direct reduction in tax.
tax deductions: expenses, payments, and contributions that are allowed to be deducted
from taxable income.
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 tax deferral: tax is paid at a later date.
Tax-free Savings Account: An account to which contributions are not tax deductible but
withdrawals are tax-free
taxable income: income received during the year that is subject to Canadian income
taxes.
temporary insurance agreement (TIA): a temporary but binding contract between the
insurance company and a proposed life insured to provide coverage during the
underwriting process. Also called conditional insurance agreement.
term additions: uses the whole dividend of a whole life policy to buy a non-renewable
one-year term addition that will be paid if the life insured dies during that year.
term insurance: life insurance for a specific period of time.
terminal illness benefit: living benefit payable when the death of the life insured will
occur within six months as declared in a doctor’s certificate.
term-to-100 insurance: a hybrid of term insurance and permanent insurance which
provides a term-type policy to age 100.
third party contract: a contract in which the insured insures the life of another person
(the life insured).
tied selling: when a financial institution requires a client to transact other business with
the institution as a condition of doing business.
time horizon: the length of time available for money to be invested before it is needed.
time value of money: the sum of money received today is worth more than if the same
amount of money is received in the future.
tolerance for risk: the level of risk a person is prepared to take in the purchase securities
and insurance.
tort law: designed to compensate a person who has been harmed for any damage caused
by wrongful civil behaviour.
total disability: is defined in the insurance policy by the work the insured may be able to
resume.
treasury bills (T-bills): short-term investments issued by the federal government.
twisting: when an agent induces a policyholder to surrender or lapse a policy with one
insurer and replace it with another insurer, to the detriment of the policyholder.
unbundling: the listing separately of the cost of insurance, the guaranteed interest rate,
and the expense charges of the insurer in a universal life policy.
underwriter: insurance official who assesses risks.
underwriting: the process of assessing and classifying the potential degree of risk that a
proposed insured represents to an insurance company.
universal life insurance: an interest rate-sensitive policy that is a unique combination of
insurance and investment.
unused contribution room: the dollar amount that a taxpayer is allowed to contribute to
an RRSP.
waiting period: the period from the time a claim is made until benefits begin (provided in
the policy).
waiver of premium: a rider to a policy which ensures that the premiums on the policy are
paid if the life insured becomes disabled.
waiver of premium for payor: pays the premiums on a policy if the policy owner, in a
third party contract, is disabled.
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 whole life insurance: permanent insurance available as straight life or limited payment
life. These policies are in force for the lifetime of the insured and are guaranteed policies.
will: a legal document expressing the desires of the author with regard to the disposition
of property after the author's death.
yield: return on investment.
yield to maturity: the return an investor can expect by holding an investment to maturity.

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Page 87
 Practice Questions

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 Practice Questions for Segregated Funds

1) Hollie owns a Term Certain 10-year prescribed annuity with Hollie as

beneficiary. Hollie
dies in year two of his contract. Which of the following statements correctly
describes
how Hollie will be taxed on the lump sum she receives?

a) on the amount that exceeds the adjusted cost basis of the contract

b) on the present value of the sum received

c) on the full amount

d) on 50% of the amount received

2) John and Samantha ate 68 and 70 respectively. They wish to have a life-time
guaranteed
income. They also wish to ensure that they receive at least their capital back,
either paid

LLQP Exam Prep 117

 out to them or their estate. Leo, their agent, informs them that $175,000 invested
would
give them approximately $11,000 per year. What would be minimum guarantee
period for John and Samantha to ensure their plans are met?

a) 13 years

b) 9 years

c) 16 years

d) 20 years

3) Mike and Claire purchase an immediate joint and last survivor annuity. 3
month5 after
the payments start, they determine that they want to buy a new car and they
contact
their agent in order to make a withdrawal. Which of the following statements is
correct
concerning the withdrawal that Mike and Eliska want to make?

a) the policy will be terminated

b) the withdrawal can be done for cash value

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 c) the withdrawal will not be permitted

d) a market value adjustment (MBA) will be charged

4) Two years ago, Ann invested in a segregated fund without speaking to an

experienced
representative. After Ann meets with Marie, a ten year veteran of the industry,
she tells him that she wants to transfer to a fund that he has recommended with
another insurer. What must Mario do?

a) inform the original representative or company

b) complete a replacement form

c) inform her of the potential penalties

d) divulge any bias toward the original company

5) Jennifer earned an income of $105,000 last year. Her pension adjustment for
last year

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 was $6,300 due to the contributions made on her behalf to the employers
Defined
Benefit Pension Plan (DBPP). Jennifer also has unused registered retirement
savings plan
(RRSP) contributions from previous years of $2,550. What is the maximum amount
that
Jennifer can contribute to her RRSP?

a) 6300

b) 2550

c) 15150

d) 18900

6) Rashna is the plan administrator for the Defined Contribution Pension Plan
(DCPP) a
Catapult Inc. She decides to review the alternatives and select only one
segregated funds
for the employer's contribution. Which of the following options would have the
LOWEST
risk?

a) equity fund

LLQP Exam Prep 120

 b) fixed Income fund

c) high-yield fund

d) dividend fund

7) All else being equal in terms of asset class, types of assets within the portfolio
(e.g.
equities), etc., which of the following investments have the LOWEST
management expense ratio (MER)?

a) mutual funds

b) segregated funds

c) equity funds

d) exchange-traded funds

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 8) Moira age 40 is a member of her employer's Defined Contribution Pension
Plan
(DCPP). When she accepts a new position at a new employer, she is presented
with
options concerning her DCPP. Which of the following statements about Moira's
options
is correct?

a) Moira can transfer her DCPP to her individual Registered Retirement Savings
Plan (RRSP}.

b) Moira can transfer her DCPP to her new employer's Group Registered
Retirement Savings Plan
(Group RRSP].

c) Moira can transfer her DCPP to her new employer's Deferred Profit Sharing
Plan (DPSP}.

d) Moira can transfer her DCPP to a Locked-In Retirement Account (LIRA) or

Locked-In Registered
Retirement Savings Plan (LRRSP].

9) Scott and Claudia are planning to invest $16,666 into a segregated Fund.
They are considering two options: (1) CAD Canadian Growth Fund 75%/75%, or
(2) CAD Canadian Growth Fund 100%/100%. All else being equal in terms of the

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 investment mandate of the fund, portfolio, account type, client circumstances,
etc., which of the funds is higher risk and why?

a) Fund (2) is higher risk because it is less diversified.

b) Fund (1) is higher risk because it is has longer longevity.

c) Fund (1) is higher risk because it has a higher risk of capital loss.

d) Fund (2) is higher risk because it is not covered under investor protection.

10) Based on the information below, which of the following segregated funds will
Most likely
have the highest management expense ratio (MER)?

a) The GP Canadian Equity Segregated Fund 100%/100%

b) The RX Canadian Index Segregated Fund 100%/100%

c) The RX Canadian Index Segregated Fund 75%/75%

d) The GP Canadian Equity Segregated Fund 75%/75%

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 11) Scott (38) has been managing his own investments with a view to saving
money for his
retirement. He has disposable income to invest but he is not a knowledgeable
investor, so
he has been investing in money market funds and guaranteed investment
certificates
(GICs). However, interest rates have been very low and his returns have been
eroded by
inflation for a prolonged period. Which of the following BEST describes what
Scott has a need for?

a) tax-advantaged investing

b) liquidity

c) diversification

d) capital presentation

12) You are meeting with your new clients, Mike

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 and Jenn, and after assessing their needs and situation you determine that they
should invest some of their investable assets into a Life Annuity or a Guaranteed
Lifetime Withdrawal Benefit. Which of the following personal risks would BEST be
mitigated by these types of investments?

a) risk of job loss

b) low level of financial literacy

c) longevity risk

d) risk of leverage

13) Jenn reviews her client Bruce's existing investments. She notices that all of his
investments are concentrated in long-term investments or investments with long
durations to maturity. Bruce is planning on buying a house soon, within the next 2
to 3
months. He will need approximately $50,000 from his investments to put towards
the
down payment on the house and additional amounts to cover other costs
including legal
fees and land transfer costs. Which of the following BEST describes what Bruce
should do
given his planned home purchase?

a) He should purchase 'some highly liquid investments.

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 b) He should purchase an immediate life annuity.

c) He should purchase an accumulation annuity.

d) He should keep his investments as they are.

14) You are meeting with the principles of a new group plan sponsor, HPC Solar
Corp., to define the objectives for the group plan. They will offer a Defined
Contribution Pension Plan (DCPP) which will not be a condition of an
employment contract or collective bargaining agreement.
They appoint the plan administrator who you will be coordinating with in order
to implement the plan. Which of the following is a correct statement about the
plan administrator?

a) The role of administrator may be assumed by the plan sponsor a board of

trustees, a financial
institution, or a pension committee.

b) The administrator will be responsible for the management of the sponsor's

contributions to the plan
since it will be a non-contribution; plan.

c) Final decisions concerning the design and structure of the plan will be the
responsibility of the plan
administrator.

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 d) The plan administrator will be charged with the duty for the matching
formula for sponsor
contributions which cannot be terminated or changed.

15) XYZ Inc. has a Defined Benefit Pension Plan (DBPP). The company is
concerned
about longevity risk and funding their future pension obligations. Which of the
following
investments would be the BEST option for La Tourbe's DBPP?

a) to buy segregated funds with maturity and death benefit guarantees

b) to invest in mutual funds

c) to make segregated funds available to members

d) to buy annuities from an insurer in a "pension buy-in"

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 16) Simon, age 65, is contemplating whether to apply for his Old Age Security
(DAS) benefit now or to defer it for 3 years. If Simon defers his benefit for 3 years,
by what percentage
would his pension increase?

a) 0.072

b) 0.006

c) 0.216

d) 0.36

17) Jenn is drafting her will and she discusses charitable giving with Anna, her
insurance agent. She has always supported the local cancer research
foundation. Having no next of Kin, Jenn would like the foundation to receive her
investments, both registered and non-registered, when she dies. How much can
be claimed as a charitable donation when Jenn dies?

a) 75% of net income in the year if death or year preceding death

b) 50% of net income in the year of death or year preceding death

c) 85% of net income in the year of death or year preceding death

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 d) 100% of net income in the year of death or year preceding death

18) Jim, age 70, wants a steady steam of monthly income with level income tax
for the duration of the payment schedule. During your discussions you explore
annuities and Jim agrees that an annuity with level income and level tax is what
he wants. Which of the following would be the BEST option for Jim?

a) Purchase an immediate life annuity with level income.

b) Purchase a deferred life annuity with level income.

c) Purchase an immediate life annuity with indexed income.

d) Purchase a deferred life annuity with indexed income.

19) Kevin works for ACME Company of Canada (ACME). The pension plan for
ACME is also the
pension plan for ABC Canada and XYZ Canada. The contributions to the
pension are made on a fixed contribution basis as determined in collective
bargaining. What type of pension plan is Kevin a member of?

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 a) a multiple group pension plan (MGPP)

b) a multi-employer pension plan (MEPP)

c) a capital accumulation plan (CAP)

d) a collective union pension plan (CUPP)

20) Jayla is a member of his employer's Deferred Profit Sharing Plan (DPSP) and
he is
moving to a new employer. He does not want a lump sum and he doesn't want
to leave
the proceeds in the DPSP with the employer. Which of the following statements
about Jayla's DPSP is correct?

a) Jayla must take the lump sum

b) Jayla can purchase an annuity.

c) Jayla can receive income payments from the plan.

d) Jayla can make tax-free withdrawals from the plan.

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 21) Carl and Claire are planning to invest $36,000 into the Big Win Segregated
Fund. While they think that the Chinese market will perform well, the
manufacturing
index has declined and they want to be able to lock in returns when Chinese
markets are up. They are considering their reset options. Which of the following is
a correct states
about reset features?

a) The reset occurs at the scheduled intervals, whether the market value
increases or declines.

b) The term to maturity of a segregated fund without a reset feature will be

longer

c) The management expense ratio (MER) of a segregated fund with a reset

feature will be higher

d) The value of the guarantee remains the same, whether the reset is utilized or
not.

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 22) Your client Sam receives a company pension of $17,690 per year His
marginal tax rate (MTR) is 37% but his wife Jeanette's MTR is only 29%. You
suggest pension income splitting at the maximum allowable percentage to
reduce taxes and increase after tax income. If Sam and Jeanette adopt the
pension income splitting strategy at the
maximum allowable percentage, what would the tax payable be on the
pension income?

a) 3273

b) 2565

c) 5838

d) 8845

23) You are preparing the annuity contract for your client, Mike, and completing
the sections
which name the annuitant and the beneficiary. Which of the following
statements about naming the annuitant is correct?

a) An annuity contract will only provide creditor protection where an

irrevocable annuitant has been
designated.

b) For registered plans, a contract may be issued to a person naming him as

annuitant or naming

LLQP Exam Prep 132

 another as annuitant.

c) A joint and last survivor annuity names two or more annuitants in the annuity,
known as co annuitants.

d) The owner and annuitant must be the same person if the annuity is
registered or funded with
registered savings.

24) Sam is employed by ABC Corp. and she is a member of the company's plan.
The company
plan is one which provides a retirement income that is entirely based on
contributions and
investment income that accumulates in the plan. Under the plan, employer
contributions are mandatory. What type of employer plan is Sam a member of?

a) Defined Benefit Pension Plan (DBPP)

b) Defined Contribution Pension Plan (DCPP)

c) Pooled Registered Pension Plan (PRPP)

d) Registered Retirement Savings Plan (RRSP)

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 25) Mike is invested in a mutual fund that holds the preferred and dividend
paying
common shares of Canadian corporations. The income from the fund is eligible
for the
dividend tax credit and the fund is considered low to medium risk. Which of the
following
funds is Mike invested in?

a) income fund

b) balanced fund

c) dividend fund

d) growth fund

26) Ross works for Plugslart Reliance Inc. and he i5 a member of both his
employer'
Group Registered Retirement Savings Plan (Group RRSP) and Deferred Profit
Sharing

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 Plan (DPSP). His employer contributes 5% of Ross's income to each of the 2 plans
an Ross wants to contribute 4% of his income to each of the plans, for a total
combined
contribution to both plans of 18% of his income. Which of the following
statements about
the contributions to Ross's plans is correct?

a) The employer contributions are capped at the lesser of 18% of Ross's income
or 50% of the Group
RRSP limit,

b) Contributions to the DPSP will create a pension adjustment and increase

available contribution room
to the Group RRSR.

c) Ross cannot contribute 4% of his income to both plans because employee

contributions cannot be
made to a DPSP.

d) The contributions will be taxable to Ross at the same rate as regular income.

27) Jenn is the sole proprietor of her business and the business has recently
begun
experiencing financial difficulties. Jenn expresses concerns that creditors could
seize
savings. Which of the following is a correct statement about creditor protection?

LLQP Exam Prep 135

 a) If it appears in bankruptcy proceedings that Jenn invested in segregated
funds to credit proof their
value and protect their seizure against payment of debt, the investments may
be seized.

b) If Jenn invests in segregated funds for the purpose of protecting her savings
from creditors, they will
not be able to pursue a claim against her in bankruptcy proceedings.

c) Creditor protection is Many's most important need and this should motivate
her to select segregated
funds for investment.

d) If Jenn invests in segregated funds for creditor protection and the funds
decline in value, Jenn will be
required to pay the creditors the loss on the capital at the time of seizure.

28) Which of the following statements about Segregated Funds is correct?

a) When segregated funds are sold by investment dealers, they act as agents
of the investment dealer.

b) The legal term for a segregated fund is Individual Variable Insurance

Contract (WIC).

LLQP Exam Prep 136

 c) The deposits made by individuals, groups, and the company's assets are
pooled together in a
segregated fund.

d) There are no age restrictions on deposits made to a segregated fund.

29) Mike (age 71) owns a non-registered immediate life annuity contract. He
receives a monthly income of $800. When filing his income tax return he only has
to pay tax on the interest portion of this income. What type of annuity has he
purchased?

a) accrual annuity

b) prescribed annuity

c) life annuity with a minimum payment guarantee

d) term certain annuity

LLQP Exam Prep 137

 Practice Questions for Accident & Sickness

1) Three years ago Jen took out a disability policy that will pay her a maximum
benefit of $3,000
a month in the event that she is ill or injured and unable to work. The benefit is
the maximum
that the insurance company would offer based on Jen’s income of $60,000 a
year. Two years
after taking out the policy, the company that Jen worked for declared
bankruptcy and she was
forced to find another job. It took her a few months to relocate and she had to
settle for a job
paying only $48,000 a year. A short while ago Jen was injured in an automobile
accident and
will be unable to work for at least six months. The waiting period under her policy
has expired
and she had filed for benefits.
How much of a monthly disability cheque would Jen receive under the
circumstances?

a) 2400

b) Nothing

c) 3000

d) 4000

LLQP Exam Prep 138

 Rationale: Jen’s contract is designed to provide her with a disability benefit that
will not
exceed 60% of her pretax, pre-disability income, so as to discourage anti-
selection and
malingering. At the time the policy was taken out Jen was earning $60,000 a
year, so her
maximum monthly benefit was calculated as $3,000 ([$60,000 / 12] x .6 = $3,000).
At time of
claim, Jen was only earning $48,000 a year, so her maximum benefit would be
reduced to
$2,400 a month ([$48,000 / 12] x .6 = $2,400).

2) Shaan is concerned about maintaining the integrity of his disability coverage

over the long-term.
Only 33, he would like coverage to age 65. He is most concerned that he would
incur a
permanent disability over the course of the next five to 10 years, his peak activity
years in the
business, as well as the effect that inflation might have, long-term, on his
disability income. He
expects inflation to return to the 4-5% range in the near future and to stay at that
level, long-term.

LLQP Exam Prep 139

 Which of the following policy options would best match up with his objectives?

a) A cost of living rider

b) A future purchase option rider

c) A lifetime benefit option

d) A guaranteed insurability rider

Rationale: One of the problems faced by insured’s living off the benefits of a
Long-Term Disability (LTD)
claim is the cost of goods and services (cost of living) the disability benefits are
intended to provide for
are constantly rising with inflation, while the disability benefit may be fixed. A
Cost of Living Adjustment
(COLA) rider provides for an annual increase in the monthly benefits being paid
under a disability
income replacement contract, starting the second year that benefits are paid

3) Alex is looking to acquire an individual disability income replacement policy.

The insurance company that she is dealing with offers maximum coverage of

LLQP Exam Prep 140

 70% of an applicant’s predisability, pre-tax income. A friend of Alex’s who is self-
employed was injured a couple of
years ago and off work for 18 months. She had no coverage and eventually had
to sell her
condominium because she couldn’t keep up the maintenance and mortgage
payments while not
working. So Alex would like the maximum possible coverage because she has
no insurance
right now, individual or group.

At present Alex has the following sources of income:

1. Salary of $4,500 a month
2. $600 a month in commissions from a part-time sales job
3. $500 a month in support payments (for 10 more years) from her ex-husband
4. Investment income of $600 a month
5. Income from a trust set up by her grandmother that pays her $1,000 a month

Which of these income sources would the insurance company take into
consideration in
determining the maximum amount of disability coverage that they would issue
to Alex?

a) Her salary and commission income only

b) Her salary only

c) Her salary, and investment income only

d) Her salary, commissions, support payments, investment income and trust

income

LLQP Exam Prep 141

 4) Matt has applied for a disability policy with the following characteristics:
1. $4,500 monthly benefit
2. 60-month benefit period
3. 30-day waiting period
4. An “any occupation” definition of disability

When Matt received the policy issued, the monthly premium was much higher
than he expected;
higher than he could afford.

Which one of the following changes to the policy, initiated by Mattand his
agent, would likely
have the greatest impact in lowering the policy premiums?

a) Decrease the benefit period to 54 months

b) Decrease the monthly benefit to $4,250

c) Increase the waiting period to 120 days

LLQP Exam Prep 142

 d) Change the definition of disability to “regular occupation”

Rationale: All of the suggested changes, except (D) would help to lower the
premiums.
However, slightly decreasing the benefit period or amount would have only a
nominal impact on
the premium rate. Extending the waiting period is the simplest and most
effective means of
reducing premiums. An extended waiting period means that fewer benefits
would need to be paid
out provided the claim does not last for the maximum benefit period. More
importantly, a longer
waiting period eliminates both the benefits payable and administrative costs
associated with
shorter periods of disability.

5) Which of the following definitions correctly describes the ways in which group
insurance
premium rates are calculated?

a) An experience rating method where the claims experience with similar types
of groups

LLQP Exam Prep 143

 is reviewed to set premium rates for a new group.

b) A manual rating method where all of the claims experience for a group
during the year
is reviewed to calculate premium rates for the following year.

c) A blended rating method where both manual and experience rating

information is
reviewed to establish premium rates.

d) A credibility rating method where renewal premium rates for a group are
modified
because of poor claims experience in the previous year.

Rationale: The more traditional form of funding a group insurance plan is

through the use of a
fully insured (pooled) plan: non-refund accounting. As with most individual
insurance contracts,
the insurance company bears the full financial responsibility for paying all claims.
The insurance
company sets premiums based upon the anticipated cost of claims for the
period, which in turn is
based on past claims experience. If the actual cost of claims exceeds the
anticipated cost, the plan
sponsor (usually the employer) has no liability to cover the excess costs. On the
other hand, if
claims costs for the period are less than were estimated in setting the premiums,
the insurance

LLQP Exam Prep 144

 company benefits from a windfall: there is no provision for a refund of premiums
to the plan
sponsor.
However, excess claims over those predicted will be taken into consideration in
setting future
premium rates (higher) at time of contract renewal.

6) A number of government programs include some disability benefits. Which of

the following
federal and provincial government programs include disability benefits?

1. Old Age Security

2. Workers’ Compensation
3. Employment Insurance
4. CPP/QPP

a) 3 and 4 only

b) 1 and 2 only

c) 1, 2 and 3 only

d) 2, 3 and 4 only

LLQP Exam Prep 145

 7) Alex works for a company that offers its employees a group insurance benefits
package. As
part of the plan Alex has long-term disability coverage. The disability premiums
are shared
50/50 by the employer and the group members. Up until last year Alex had
never made a
claim for disability benefits, but midyear she was injured at work and collected
$12,000 in
benefits. Since joining the plan Alex had paid $2,800 in group premiums.

How would the group premiums and benefits be treated for tax purposes?

a) The employer would not deduct the $2,800 in premiums it had paid, Alex
would
have had to report the $12,000 in benefits as taxable income.

b) The employer would deduct the $2,800 in premiums it paid, Alex would have
to
report $9,200 in benefits as taxable income.

c) The employer would not deduct the $2,800 in premiums it had paid, Alex
would

LLQP Exam Prep 146

 have to report no taxable benefit for the benefits received.

d) The employer would deduct the $2,800 in premiums it had paid, Alex would
have to report $12,000 in benefits as taxable income.

Rationale: Regardless of whether or not the employer-paid premiums are

reported to the plan
member as income or benefits received are taxable, the employer always gets
to deduct the group
plan premiums it pays. If the employer-paid premiums are not reported to the
employee/plan
member as taxable income the benefits received are generally taxable.
However, if the employer
and employee split the premiums, in the event of a claim, an amount of benefits
equal to the plan
member’s aggregate premiums is treated as a tax-free “refund of premium”
with the balance of
benefits being received as taxable income. In this case, Alex would get her first
$2,800 of
benefits tax-free, with the other $9,200 ($12,000 - $2,800 = $9,200) being treated
as taxable
income.

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 8) Which of the following services would generally be covered under an EAP
plan?

a) Massage therapy

b) Prescription drug coverage

c) Dental surgery

d) Marriage counseling

9) John paints his neighbors fence. Instead of paying John in cash, the neighbor
offers John a
ticket to a hockey game. Which term best describes the form of payment for
painting the fence?

a) Unearned income

b) Earned income

LLQP Exam Prep 148

 c) In-kind income

d) Residual income

10) John works in a manual labor position with a small construction company.
The company
offers no group benefits but is covered by Worker's Compensation. John has
worked with the company long enough to qualify for full EI benefits. John
recently suffered an at-work injury that has reduced his ability to work more than
two and a half days a week resulting in a 45%
reduction in his income. In addition to his EI coverage, John has an individual
disability plan
that covers him for 60% of his pre-disability, pretax earnings, for up to one year,
after allowing
for a 30-day waiting period.

What benefits could John expect to receive from EI?

a) John would receive no more than two weeks' of benefits because his EI
benefits

LLQP Exam Prep 149

 would be offset by his private plan.

b) John would receive nothing, because his EI benefits would be fully offset by
CPP
disability benefits

c) John would receive full EI benefits for a maximum of 15 weeks at a level not
to
exceed 55% of his former earnings.

d) John would receive 55% of his former earnings, but only if his disability lasts
more
than 13 months

EI pays benefits to qualifying members who suffer at least a 40% reduction in

income due
to disability. Benefits are paid for a maximum of 55% of average weekly earnings
and for a
maximum of 15 weeks, after a 14-day waiting period. However, EI is a second
payor to
every other source of disability benefits on a dollar-for-dollar basis, except
individual
disability policies. He would not qualify for CPP disability benefits because he is
able to
work part-time.

LLQP Exam Prep 150

 11) Sharron applied for a disability insurance policy three months ago. Because
of complications in
her medical history, which the insurance company had to have verified and
clarified by her
doctor, Sharron’s policy took six weeks to approve. When the issued policy
arrived at Sharron's
agent for delivery, the agent was on vacation. Upon returning from vacation
the agent had quite a
bit of work to catch up on so it was another month before he got around to
delivering the policy.

What is the greatest risk in taking such a long time to deliver the policy?

a) It will be very expensive for Sharron to keep the policy because of several
premiums due.

b) Sharron is more likely to change her mind and decide not to take the policy.

c) Sharron’s health might have deteriorated during such a long period.

d) Leinanie could have had free coverage for three months, to the detriment
of the insurer.

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 12) Lucy earns an income of $60,000 a year as a photographer for a local
paper. Her employer offers
her no group insurance benefits, so Lucy decided that she had to take out
disability income
replacement insurance coverage of her own. The company to which she
applied advised her that
they would not issue coverage for more than 66.67% of her salary, or a maximum
of $3,335 a
month. Lucy took out a policy with a flat benefit of $3,000 a month. The policy
also had a future purchase option associated with it, permitting her to increase
her coverage by up to 20% per option, without medical underwriting, but
subject to standard financial underwriting. Two years after policy issue, when her
salary had increased to $64, 000 a year, Lucy decided that she needed to
increase her coverage.

What is the maximum amount of additional monthly coverage that the

insurance company would
permit her to buy under the option?

a) About $333 a month

b) About $222 a month

c) About $555 a month

d) About $600 a month

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 13) Jason works at Wealth Inc where he is a member of the group benefits plan.
The benefits
plan is with XYZ Insurance. Jason incurs a dental expense and wants to submit a
claim for this
expense.

Who administers the claims process from first notification to final payment?

a) XYZ Insurance

b) Jason

c) Wealth

d) Jason's dentist

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 14) When Eric applied for disability insurance almost five years ago he was
issued a policy, but
with a 5-year exclusion for disability arising from any condition associated with
liver function
and a 50% premium rating. Eric accepted the coverage with the restrictions, but
only took out
two-thirds of the amount of insurance that he needed, because he could not
afford the extra
premium. It had turned out that during the underwriting process, requiring blood
tests, that
Eric had been exposed to a rare parasite that can damage the liver and lead
to other possible
health complications. Fortunately, Hidaka's condition has a 100% survival rate
after five years
and he was recently given a clean Nabil of health.

What is the most important opportunity that is now available to Eric, his agent
and the
insurance company as a result of the expiry of the rating and exclusion,
assuming that he is now
insurable at standard rates?

a) Eric could increase his coverage

b) Eric could reduce his premium

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 c) Eric could increase his premium

d) Eric could cancel his coverage

Rationale: For the past five years Eric has been under-insured because the
increased
premiums arising from his medical condition restrained him from being able to
afford all of the
coverage that he needed. With the premium rating now being dropped, Eric
could afford to
increase the policy coverage to the level that he needs, for the same premium
that he had been
paying for the rated policy.

15) The ACME Co Company was interested in setting up a group plan where all
of the risk
was transferred to the insurer, in exchange for a fixed annual premium to be
paid by Hypo. What
type of funding should they have selected for their group plan?

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 a) Non-refund accounting

b) Refund accounting

c) Blended rating

d) Manual rating

16) Kelly, age 37, works at an assembly plant that manufactures costume
jewelry. She earns a net
income of $500 a week. Last week she got her right hand mangled when she
tried to clear debris
from her snow blower while getting the car ready for her morning drive to work.
She will have to
go through a lengthy period of reconstruction and rehabilitation for the hand
and the doctors
estimate that she will be off work for at least six months. Her employer is a
member of the
provincial Worker's Compensation (WC) plan.

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 What level of benefits could Kelly expect from her WC plan?

a) Up to $540 per week for a maximum of 15 weeks

b) Around $480 per week to age 65 at the latest

c) 75% of her pre-disability gross salary to age 65

d) Nothing; she would not be covered

17) Jim wants to set up a personal disability income replacement plan. In

looking at the amount
of coverage that the insurance company was willing to provide, the agent
asked questions
regarding all of Jim's sources of incoming cash flow. The list was as follows:
1. Salary from employment as a greenskeeper at the local golf course
2. Income from self-employment doing lawn maintenance every second
Saturday. Royalties, for 10 more years, from the authorship of a book
4.Commissions from selling Amway products two evenings a week.

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 For purposes of computing the amount of coverage that the insurance
company would be willing
to issue, which of the above sources would not really be classed as “earned
income”.

a) His self-employment "income"

b) His salary

c) His royalties

d) His commissions

Rationale: Although all four sources of “income” would be considered taxable

income by the Canada
Revenue Agency, the insurers look at “earned income” as sources of income
that would not continue in
the event of a disability. The salary, self-employment income and commissions
all fit into that category.
The royalties would continue to be paid to Jim whether or not he works or is able
to work. So while
included as part of Jim’ overall “income”, the royalties would not be considered
“earned income”
for purposes of computing his overall maximum available benefits.

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 18) Angela applied for a disability income replacement policy three weeks ago.
She works in
residential landscape maintenance (gardening, fertilizing and lawn cutting,
mostly). In her spare
time she engages in a number of leisure activities, including hiking provincial
trails, kayaking on
small lakes in southern Ontario and rock climbing. Her agent delivered the policy
issued to her
today, but she was disappointed to see that it came with an exclusion clause.

Which of her activities most likely resulted in the exclusion?

a) Her practice of hiking

b) Her occupation

c) Her kayaking

d) Her rock climbing

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 19) The ACME Co Company has a group benefits program covering most of its
3,000
employees. The plan has been insured by the ABC Life Insurance Company for
the past four
years and is coming up for its annual renewal. Which of the following rating
methods is ABC
likely to use in setting renewal premiums for Hypo’s group plan?

a) Experience rating

b) Blended rating

c) Credibility rating

d) Manual rating

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 20) Sofia was meeting with a business client who was interested in taking out key
person disability
insurance on one of the employees of her sole proprietorship. One of the
overriding factors in
closing the sale would be the tax treatment of policy premiums and benefits.
The client asked
Sofia "Will I be able to deduct the policy premiums for tax purposes?" and "If
there is a claim
under the policy, will benefits be tax-free or treated as taxable income?"

What should Sofia tell her client?

a) "Premiums are not deductible but benefits would be tax-free."

b) "You should consult your lawyer or accountant in this matter."

c) "Premiums are tax-deductible and benefits would be tax-free."

d) "Premiums are tax-deductible but benefits would be taxable."

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 21) Eloise is applying for disability insurance with a $4,000 a month benefit and a
5-year benefit
period. Her health is excellent and she has a claims-free disability health history,
but the
insurance company is concerned about her part-time job as a skydiving
instructor.
Which of the following techniques is the insurer most likely to employ to reduce
its risk
exposure, assuming that it is willing to issue a policy to Eloise?

a) Imposing a limitation

b) Imposing an exclusion

c) Rating the premium

d) Imposing a deductible

Rationale: It is the responsibility of the group insurer to administer claims from first
notification
to final payment.

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 22) Which of the following sources of income is considered “unearned income”?

a) John makes $2,000 capital as a freelance writer

b) Janice receives $650 in OAS pension

c) Jeff receives a $15,000 bonus at work

d) Tom makes $3,000 in commissions

23) Ingrid has been continuously employed and a CPP premium payor for 20
years. During that time
she has also paid Employment Insurance premiums. She has recently suffered a
serious illness
that will keep her away from work for several months. While her employer's
group insurance
provided for life and health insurance, it did not provide income replacement
coverage. CPP
and/or EI will address her situation in which of the following ways?

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 a) CPP will pay her a percentage of the CPP retirement benefit during the
entire period
that she is disabled.

b) Neither her EI nor CPP coverage will provide any disability income benefits
to her.

c) CPP will pay her a retirement benefit provided she does not return to work
when her
disability ends.

d) EI will pay her a weekly benefit while she is disabled for a maximum period of
15
weeks.

24) Age and severe arthritis have affected Morley's quality of life. He is
considering entering a
nursing home. He did purchase long-term care insurance and is reviewing its
provisions to see

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 what benefits he might expect to receive. His policy calls for the payment of
$100 per day for
care should he qualify for benefits. Morley has home care because he needs
assistance getting
out of bed each day. He is able to walk with the aid of a cane, or when he is
particularly sore,
with the aid of a walker. His hands are getting very stiff, but he can manage to
dress and undress
himself. He can use the toilet that has a special seat and handrails. He has had
no problems with
incontinence to date. He has someone help him into the shower, but he is able
to wash himself.
He has trouble preparing meals but he can eat and his appetite is good.

Considering his current condition, which one of the following statements about
his LTC
coverage is correct?

a) While he remains in his own premises outside the nursing home, he will not
qualify for
LTC benefits

b) Because he requires daily home care, his condition qualifies him for LTC
benefits

c) Since he requires special equipment to allow him to walk and to use the
toilet he
qualifies for LTC benefits.

d) Since he can still attend to his own needs, even with special equipment, he
does not

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 qualify for LTC benefits.

Rationale: The most common ways that most insurers use to determine whether
an
insured qualifies for long-term care assistance is if the insured is unable to
independently perform any two or more of the Activities of Daily Living (ADLs):
1. Dressing: The ability to dress or undress oneself (take off and put on clothes)
without the assistance of a third party.
2. Bathing: The ability to wash oneself in a tub or shower without the assistance
of
a third party.
3. Toileting: The ability to get to and from the toilet, and on and off it,
independently.
4.Transferring: the ability to move from bed to chair, to a wheelchair or to
another location without the aid of a supporting device (e.g. cane or crutches)
or
the assistance of a third party.
5. Eating: The ability to feed oneself without assistance (not merely the ability to
prepare food, but to actually eat food without assistance).
6. Maintaining continence: The ability to control one’s bladder.

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 25) Linda is single and in her mid-50s. She works as an administrative assistant
and belongs to a
group insurance plan provided by her employer, Skinflint Inc. The dental benefits
portion of the
group plan has a $250 annual deductible and a 50% co-insurance factor. Linda
makes one major
visit to the dentist in the year and incurs total dental hygiene and periodontal
charges of $700.

Based on the plan provisions above, which of the following will correctly apply?

a) Linda will pay $225 and the insurer will pay the balance, $475

b) Linda will pay $250 and the insurer will pay the balance, $450

c) Linda will pay $475 and the insurer will pay the balance, $225

d) Linda will pay $350 and the insurer will pay the balance, $350

Rationale: The insurance company’s exposure to claims can, in part, be

managed through the imposition of deductibles and a co-insurance factor:
provisions that require the insured to pay at least a portion of the qualifying
medical expenses. While co-insurance factors are common to both individual
and group policies, deductibles are more rare in individual contracts.

A deductible is a dollar amount of otherwise qualifying expenses that must be

paid 100% by the insured before the plan picks up any of the expense.
Deductibles are applied annually and start anew each year.

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 The co-insurance factor indicates the percentage of a qualifying expense that
will be covered by the plan and, by default, the percentage that would have to
be paid by the insured. In addition to
the insured’s coverage being somewhat restricted by the co-insurance factor, it
is also subject to coverage limits.

26) Raj, age 47, works for himself as an independent taxi driver. He supports his
wife and
four children on the money that he makes driving six days a week, 12 hours a
day. He often has
to work with a cold, or the flu, but realizes that he couldn’t count on being able
to work, should
he suffer a truly serious injury or illness. He hopes all will be well for a least another
seven
years, until the last of his children is through university and self-sufficient. Even so,
he hopes he would not have to rely on his children in his old age. He wouldn’t
want to place that burden on
them.
He himself is just coming off a period of supplementing his aged mother’s
expenses in a
nursing home (she died last year). In fact, the cash drain caused by his mother’s
expenses is a
large part of the reason that he has to work so hard, through health and illness.

Which of the following product combinations would most effectively meet Raj’s
needs
and concerns?

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 a) A long-term care policy and travel insurance

b) A disability policy and a critical illness policy

c) Travel insurance and a critical illness policy

d) Disability insurance and a long-term care policy

27) John is concerned that should he suffer and accident or an illness, he might
not be able to
continue working. Which of the following types of A&S insurance would replace
John’s income
in the event that he is unable to continue working?

a) Life insurance

b) Disability insurance

c) Critical illness insurance

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 d) Medical insurance

Although perhaps not immediately apparent from the title “accident and
sickness
insurance,” one of the most common forms of coverage is disability income
protection:
insurance that will replace a percentage of a person’s regular income from
employment or
self-employment if the insured is ill or injured and unable to work.

28) Last year Greg purchased a disability policy paying benefits of $3,200 a
month, or 64% of his
$5,000 monthly salary. When he left his previous employer, he converted his
group coverage
into private life and disability contracts. That disability policy pays $2,500 a
month in benefits.
Greg was injured recently and had to go on disability claim.

Once the waiting periods under both policies had been met, what is the
maximum amount of
disability benefit that Greg could receive?

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 a) 4250

b) 3500

c) 5000

d) 5700

Rationale: In order to discourage clients from making false claims, or malingering

on claims, most
policies have an “all sources maximum” clause which limits benefits from all
sources of disability
insurance to a maximum of 85% of the insured’s pre-disability, pre-tax income. In
Greg's case the most
he could collect would be 85% of his $5,000 monthly income, or $4,250.

29) Manfred has a disability income policy that provides for 24 months of
benefits, after allowing for
a waiting period of 3 months. The policy also provides that, in the event of a
claim resulting from a recurrence of an injury or illness within six months of the
end of a previous claim for the same condition, the second claim shall be
treated as a continuation of the first claim. Manfred injured

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 himself at work and was off work for 7 months as a consequence. Three months
after returning
to work, he re-aggravated the same injury and was off work for another 27
months.

How many months of benefits would Manfred have received for the second
disability?

a) 20 months

b) 17 months

c) 24 months

d) 27 months

30) Gabriella runs an incorporated business, a coffee shop catering to the

downtown Vancouver
business clientele. Apart from providing good coffee and good service, one of
the keys to the

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 success of her business is the flair and charm that Gabriella's chief brewer,
Andre, brings to the
business. Gabriella knows that without Andre her business would likely drop
dramatically. She
pays him well and has taken all the steps that she can to ensure that he stays
with her business.
However, she knows there is little that she can do to affect his health. If Andre
were to be off
work, ill or injured for a lengthy period of time, the business would suffer, just the
same as if he
left Gabriella's employ. Consequently, Gabriella took out an individual disability
policy on
Andre, owned and paid for by the business and payable to the business, to
replace lost revenue if
he became disabled.

Which of the following statements reflects the tax status of this disability policy?

a) The premiums are tax-deductible and the benefits are tax-free

b) The premiums are tax-deductible and the benefits are taxable

c) The premiums are not tax-deductible and the benefits are tax-free

d) The premiums are not tax-deductible and the benefits are taxable

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 Practice Questions for Life Insurance

1) You and your client Kash have concluded that his insurance needs would be
best served
with a participating whole life policy. You have reviewed the historical dividend
scale and he is satisfied with the performance. However Kash is concerned that
the amount of the dividend is not guaranteed and he asks you what would
make the dividends go down?
Which of the following factors would cause a decline in participating policy
holder
dividends?

a) the provincial insurance regulators lower the policy reserves required

b) more policy holders died than expected

c) administrative expenses were lower than expected

d) investment returns were higher than expected

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 2) You have been assigned to service an existing client. Upon review of their
current coverage, you discover the insured has had a 20 year Limited Pay Term
100 policy for 28 years. The client has had the policy for a long time and it has
been some time since he has reviewed it. He asks you to explain the policy to
him. Which of the following correctly describes the policy in this scenario?

a) The client cannot surrender the policy since the policy will not have a cash
surrender value (CSV).

b) The client has coverage for life and mu5t pay the permanent premiums for
life.

c) The client has coverage for life and he does not have to pay any more
premiums.

d) The client no longer has coverage because the limited pay policy is paid-
up.

3) Jeff was recently been diagnosed with an invasive form of pancreatic cancer
and is
expected to live only 6 months. Jeff's insurance policy has a built in terminal
illness
(TI) supplementary benefit. Which of the following correctly describes a feature
of the TI supplementary benefit?

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 a) it in received tax free

b) it is paid to the beneficiary

c) the maximum benefit is the face value

d) it does not impact the death benefit

4) Mike, 32, a non-smoking fitness instructor, is in very good health. He has

recently married and they are planning on having children . He knows he needs
insurance, however, the instructor job does not pay that well. He has been
promised promotions and will do better
in the next few years. He wants to buy as much insurance as he can afford now
and then
add to it when his salary increases. He has decided on a Term 10 policy for now.
Which one of the following strategies would allow Mike to achieve his objective
of buying
affordable insurance now with the option of increasing coverage in the future?

a) guaranteed in5urability benefit rider

b) paid up additions rider

c) just wait and buy more insurance later

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 d) accidental death rider with double indemnity

5) Jenn, 56, is owner and Chief Executive Officer (CEO) of Big Brand Inc. and she
is your
largest prospect. You are preparing for your second meeting. You know that she
needs a $15 million policy, which is above the $10 million retention limit for the
companies you
represent. Which of the following statements describes the correct course of
action the
insurer can take concerning this policy?

a) The insurer can reinsure the excess amount over the retention limit and Jenn
will have two policies
and premiums for coverage of the $15 million.

b) The insurer can write two policies, one for $10 million and another identical
policy for $5 million, in
order to exceed the retention limit.

c) The insurer can only write the policy if it can reinsure the excess amount over
the retention limit
with one or more reinsurance companies.

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 d) The insurer can write two policies, a base policy and a reinsurance policy,
which combined will cover
the $15 million.

6) Raj and Anita, a young couple, have decided that Anita will be a stay at
home
Mom. Raj is concerned that should Anita pass away, he would not be able to
afford
the expense of child care and domestic help. They have decided to apply for a
$500,000
Term 20 Convertible on Anita's life. Raj will be the insured. They are considering
choosing a waiver of premium for Total Disability Benefit and are asking you
detailed
questions. Which of the following correctly describes the Total Disability Benefit
on their
policy?

a) the benefit will payout if Raj becomes totally disabled

b) the benefit will pay out if Anita becomes totally disabled

c) at the end of 20 years, if premiums were being waived, the waiver will end

d) premiums will be waived immediately upon proof of the total disability

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 7) Your current client, Steph, has requested a meeting with you to discuss her life
insurance
policy. When her policy was issued a year ago, she was in a rated risk class
because she was significantly over Xught. Since then, Steph has lost Xught and
has lost 40 pounds in
the last year alone. She knows she is better than average on the height Xught
charts for
her age and she wants her rating removed. Which of the following is the correct
response
that you can provide her?

a) A physical examination from a nurse will be required to take Steph's height,

Xught, blood pressure,
urine test, and blood test.

b) Because of the significant change in Xught, you can arrange to have the
rating automatically
reduced and premiums lowered.

c) Once a rate class has been assigned, it cannot be changed and Steph
should cancel her existing policy
and apply for a new policy.

d) An Attending Physician's Statement (APS) will likely be required to confirm

that Steph's Xught no

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 longer warrants the rated risk class.

8) Alex learns that her husband of 30 years Miro, has died in a car accident
while travelling with their 25 year old son, Tim. Tim survived but is in a coma.
Three days later, Alex dies of a heart attack. Miro had an outstanding life
insurance policy and had named Alex as beneficiary and Tim as contingent
beneficiary. The estates are being reviewed for probate. Who would receive the
death benefit?

a) Tim

b) Miro's estate

c) Alex's estate

d) Split 50/50 between Tim and Alex's estate

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 9) Potential clients Sonya and JP meet with you to discuss insurance needs and
they
take away information which they later review. You follow up and arrange a
second
meeting. They present to you what they feel will meet their needs. They want a
$500,000
Term 10 policy for JP, and a $150,000 Term 10 with a guaranteed insurability
benefit (GIB) rider for Sonya. They wish to save the policy fee by combining the
coverages. Product combination rules limit choices available to them. Which of
the options
below would be permissible and would best meet their needs?

a) $?50,000 Term 10 with GIB for Sonya with a $500,000 Term 20 rider for JP.

b) $500,000 Term 20 for JP with a $750,000 Term 10 rider with GIB for Sonya.

c) $250,000 Term 20 for JP with a $750,000 Term 10 rider with GIB for Sonya.

d) $500,000 Term 10 with GIB for Sonya with a $500,000 Term 20 rider for JP.

10) Mike, 32, a non-smoking fitness instructor, is in very good health. He has
recently married and they are planning on having children . He knows he needs
insurance, however, the instructor job does not pay that well. He has been
promised promotions and will do better

LLQP Exam Prep 181

 in the next few years. He wants to buy as much insurance as he can afford now
and then
add to it when his salary increases. He has decided on a Term 10 policy for now.
Which one of the following strategies would allow Mike to achieve his objective
of buying
affordable insurance now with the option of increasing coverage in the future?

a) guaranteed in5urability benefit rider

b) paid up additions rider

c) just wait and buy more insurance later

d) accidental death rider with double indemnity

11) You have just completed an insurance application with your new client. You
have reached
the point where you are reviewing the Temporary Insurance Agreement (TIA)
and you
wish to issue the TIA. Which one of the following would allow you to issue the 'ITA

a) The applicant has provided a void cheque for premiums to be paid

automatically.

LLQP Exam Prep 182

 b) The applicant has answered to "yes" all of the questions related to health.

c) The applicant has answered "no" to all of the questions related to health.

d) The applicant has exercised their option for guaranteed TIA coverage.

12) Lilly, owner of a Universal Life (UL) policy, has been very pleased with the
performance
of her investment account. In fact, 30 days ago the policy failed the Maximum
Tax
Actuarial Reserve (MTAR] test. Which of the following remedies would the
insurance
company implement in order to ensure that the policy remains exempt from
annual
accrual taxation?

a) decrease the face value

b) make up the difference by making an additional deposit

c) increase the face value

LLQP Exam Prep 183

 d) make up the difference by moving the amount from the taxable side fund
to the accumulating fund

13) Your client Anastasia has had a permanent life insurance policy with you
since 2006. She
now needs access to some cash. One choice may be to take advantage of her
cash Value
(CV) inside the policy. As such, you are reviewing how the adjusted cost basis
(ACB) of
the policy will change depending on the event. Which of the following
statements is
correct when calculating the ACB of a policy?

a) ACB increases when there is a withdrawal from the policy.

b) ACB deceases when the premium is larger than the net cost of pure
insurance.

c) ACB decreases when interest is paid on a policy lean.

d) ACB decreases when a policy loan is made.

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 14) Mike, a 48 year old widower, has been a successful investor. He has a large
registered
retirement savings plan (RRSP] and a rental property. Both of these assets
consistently
appreciate. He realizes that the tax consequences on his death will be
significant; at this
point he calculates the Nabil would be $400,000 before accounting for
expected appreciation. Mike wants to offset the tax on the RRSP be purchasing
life insurance. He
also has a $250,000 mortgage on the family home with 15 years remaining. He
does not
want to leave his adult son with the burden of the mortgage should he pass
away early
Which of the options below would best meet Mike's needs while being cost
efficient

a) a $650,000 Term 100

b) a $650,000 Universal Life

c) a $400,000 Whole Life Participating and a $250,000 Term 10 renewable rider

d) a $400,000 Term 100 and a $250,000 Term 20 not renewable rider

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 15) Jahinder, 51, is a farmer whose income varies significantly. He wants to
bequeath the
cottage, his second residence, to his children. The cottage consistently
increases in value
and he wants to cover the tax liability that will arise on his death as cost
effectively as
possible, with as much flexibility as possible. Which of the following would be the
best
option for achieving Jahinder's objectives?

a) Term 100

b) Whole Life Non-participating

c) Universal Life

d) Term 10 Renewable Convertible

16) Jen (recently deceased) and Tal were joint owners of a sportswear
company. They

LLQP Exam Prep 186

 have a buy-sell agreement and corporately owned life insurance policy which
you sold to
them. Tal asks you to review the major terms of the buy-sell agreement with him
in
advance of his meeting with Maria, Jen's widow. Which of the following
statements
correctly describes the terms of the buy-sell agreement.

a) Jen and Maria along with counsel will negotiate a satisfactory price.

b) Jen has no choice and i5 obligated to purchase the 5hare5 from Maria.

c) Maria, as new owner can sell her portion to anyone she chooses.

d) The insurance proceeds will be tax free to the company and all proceeds
received by Maria will be
taxable.

17) Which of the following statements about Term Insurance Riders is

correct?

a) rider coverage can extend past the term of the base policy

b) additional premiums for riders are not usually required

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 c) coverage via rider will be more expensive than a stand-alone policy

d) premiums may be lower when a rider is for the life insured

18) You are preparing for a second meeting with new clients to present your
insurance
proposal. Part of your presentation includes the illustrations generated by the
insurance
company's in-house software. Which of the following statements is correct
concerning
the use of illustrations?

a) Term policy illustrations show the premiums payable and the death benefit in
each policy year

b) Term policy illustrations show the future policy dividends and the mortality
deductions.

c) Universal Life policy illustrations show the guaranteed policy dividends and
the mortality deductions.

d) Universal Life policy illustrations show the investment returns that the client
can rely on for
performance.

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 19) Mike, a new client, has listened to your description of a participating whole
life policy
However, he is unclear as to what "whole life" means and how turning 100 will
offer the
premium payments. Which of the following statements is the correct one you
should
provide to Mike?

a) Premiums will be due until Mike dies, but the participating policy guarantees
that at age 100, the cash
surrender value will cover premiums.

b) A whole life contract matures at age 100, becomes paid up, no further
premiums are due, and coverage continues until death.

c) Premiums will be due until Mike dies, or surrenders the policy, or reaches age
100.

d) A whole life policy matures at 100 and the benefit amount in paid to the
beneficiary.

LLQP Exam Prep 189

 20) Nabil, a 42 year old single father, wants to makes sure his daughters Jenn (6)
and Amy
(8) are taken care of should he pass away early. Nabil is seriously considering
using a
Universal Life (UL) policy because he is under the impression that UL insurance is
the
most flexible. However, insurance is new to Nabil and he has asked you to
explain UL
insurance to him. Which of the following correctly describes the policy in this
scenario?

a) Unlike term insurance and guaranteed whole life insurance, the three
factors in the determination of
the premium are fixed for the life of the contract.

b) Like term insurance and guaranteed whole life insurance, the three factors
in the determination of
the premium are mortality costs, investment returns, and guarantee.

c) Like term insurance and guaranteed whole life insurance, the components
which determine the
premium are bundled together to show the net impact to the cash value of the
policy.

d) Unlike term insurance and guaranteed whole life insurance, the calculation
for each component
which determines the premium is disclosed to show how each impacts the cash
value of the policy.

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 21) Jim is 50 years of age and is in good health for a man. Theresa is also 50
years of age and
in good health for a woman. Both Jim and Theresa apply for life insurance and
the policies
go to underwriting for evaluation. Assuming that all other factors are the same,
which of
the following is an accurate statement about the premiums that Jim and
Theresa will pay
on their life insurance policies?

a) Theresa and Jim will pay the same premium since gender has no impact.

b) Theresa will pay a higher premium because men tend to outlive women .

c) Jim will pay a higher premium because women tend to outlive men.

d) Jim will pay a higher premium because he is a man and he will earn a
higher income.

LLQP Exam Prep 191

 22) Xu and Jenn both apply for permanent insurance with you. Xu opts for a
Whole
Life Participating (WL PAR] policy with a paid-up additions (PUA) option. Jenn
chooses a
Universal Life policy (UL). They are very interested in increasing their coverage
over time
to cover future needs, over and above the built in features of the WL PAR and
the UL.
They have settled on the paid-up additions (PUA) rider. Which of the following
correctly
describes a feature of the PUA rider?

a) The PUA rider is only available on whole life policies.

b) The PUT rider increases the death benefit but not the cash surrender value.

c) Unused PUA amounts expire if not used each policy yeah

d) PUA can be added at any time while the policy is in force

23) Xu, 44, a new employee of BC Fish Freezers, is still in his waiting period and is
trying to

LLQP Exam Prep 192

 decide whether to participate in the company's group life insurance plan which
is 50%
employer paid. Xu is a heavy smoker. The plan sponsor asks you to meet with Xu.
When
he asks you what the advantages to him would be if he participates, which of
the
following should you tell him?

a) Xu will pay the same premium as the other members of the group plan,
including those in good
health.

b) Xu will Day reduced premiums because he will join the group plan in the
younger age class of 35 to
44.

c) Xu will have the option to convert to individual coverage with the same
guaranteed premiums after
5 years of group plan participation .

d) Xu will have a death benefit which is 50% tax-free because the premium is
50% employer paid.

24) Tom 67, has a significant cash surrender value (CSV) built up in the life
insurance

LLQP Exam Prep 193

 policy he purchased C based on December 31, 1982. He requires cash h for
living expenses and has
turned to you for assistance. You recommend that Tom collateralize the cash
surrender value (cash) and take out a series of loans secured be the policy's
cash. Which
of the following is an accurate statement about this strategy?

a) The loan proceeds will be paid to Tom tax free.

b) The payments will increase the death benefit that is paid.

c) The estate value and taxes will increase if interest on the loans is capitalized.

d) The payments will be used to calculate net income for Old Age Security
claw-backs.

25) Greg and Jenn Pott need insurance above that provided by their employee
benefits.
They do not want to commit to a fixed policy and they are attracted to the
flexibility
offered by a Universal Life policy (UL). Which of the statements below is true in
describing the flexibility of a UL policy?

LLQP Exam Prep 194

 a) A UL policy holder may increase the face amount on the existing policy
without evidence of
insurability, subject to certain limits.

b) A UL policy holder may change the deposits between minimum and

maximum, but cannot go below
the minimum deposit.

c) A UL policy holder may change the frequency on deposits and choose a

modal factor other than
annual, resulting in a higher annualized payment.

d) A UL policy holder may keep an existing policy in force and substitute the life
insured by providing
evidence of insurability on the new person

26) Guillume an Rhea are very happy the e arrival of their 5th child, a 1 month
old son. When their first child was born 10 years age, Guillume purchased a Term
20 policy with him as the life insured and he added a Family Coverage rider.
Which of the following
statements about Harjit's Family Coverage rider is true?

a) The new born will not be covered since the limit is a maximum of 5 lives,
spouse and eligible children.

LLQP Exam Prep 195

 b) The new born will be covered, however the premium will increase based on
the number of lives
insured.

c) The new born will not be covered until he reaches 1 year of age but proof of
insurability is required.

d) The new born will not be covered until he reaches 1 year of age but proof of
insurability is required.

27) Mike learns that he has the beginnings of demyelization which will lead to
multiple
sclerosis. He knows that he has not paid the insurance premiums on his Term to
policy
In review of his policy, he is considering his options. Which of the following
statements is
correct with respect to missed premium payments?

a) Within the two year grace period, if all missed premiums plus interest are
paid, the policy will be
reinstated.

b) If the insurance company receives the premium within the grace period, the
policy will remain in
force.

LLQP Exam Prep 196

 c) If the life insured dies during the grace period, no death benefit will be paid.

d) If the policy is reinstated after lapse, the attained age on the policy will be
reset to the current age

28) Aurthur wants to apply for a $150,000 10-year Renewable Term insurance
policy. Which
of the following statements is correct concerning the underwriting factors in
relation to
the premium he will pay?

a) critical illness benefit

b) waiver for total disability benefit

c) accidental dismemberment benefit

d) disability benefit

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 29) Ravi and Nancy are married, have ham children, and recently bought a
house. Nancy has
stable employment with above average income and excellent group benefits
including 3
times annual salary life insurance. Ravi is successful working at home as a self-
employed
contractor. The couple has a large mortgage and cash flow is a concern, but
they want to
keep the home should Ravi die early. They want the most cost effective
coverage and a
considering Decreasing Term Insurance to cover the mortgage. Which of the
following is
true about this product?

a) Even though Decreasing Term has a declining death benefit and premiums
are level, it is cost
effective because the decrease is factored into the mortality cost.

b) Decreasing Term is cost effective since the premium deceases, matching

the need with cash flew as
time passes.

c) Decreasing Term is cost effective because at each renewal option the

subsequent term is shorter and
this reduced risk is factored into the mortality cost.

d) Even though Decreasing Term has a declining death benefit, the premiums
also decline, so the cash
flow matches the coverage amount, making it cost effective.

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 30) Attila and Maggie in Ontario after 10 years of marriage, they have divorced.
When
they were married, Attila was the policy holder and life insured of a policy on his
own life
with Maggie as the irrevocable beneficiary. Attila is required to pay spousal
support and
child support under the settlement agreement. Which of the following is true
regarding
their roles in the life insurance contract after the divorce?

a) The policy is void as there no longer is an insurable interest.

b) Maggie can remain the beneficiary on the policy but Attila must give his
written permission.

c) Ownership must be transferred to a person with an insurable interest.

d) Maggie will remain the beneficiary on the policy and no changes are
required.

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 Practice Questions with
Answers

LLQP Exam Prep 200

 Practice Questions for Segregated Funds

1) Hollie owns a Term Certain 10-year prescribed annuity with Hollie as

beneficiary. Hollie
dies in year two of his contract. Which of the following statements correctly
describes
how Hollie will be taxed on the lump sum she receives?

a) on the amount that exceeds the adjusted cost basis of the contract

b) on the present value of the sum received

c) on the full amount

d) on 50% of the amount received

Correct Answer: A

2) John and Samantha ate 68 and 70 respectively. They wish to have a life-time
guaranteed
income. They also wish to ensure that they receive at least their capital back,
either paid

LLQP Exam Prep 201

 out to them or their estate. Leo, their agent, informs them that $175,000 invested
would
give them approximately $11,000 per year. What would be minimum guarantee
period for John and Samantha to ensure their plans are met?

a) 13 years

b) 9 years

c) 16 years

d) 20 years

Correct Answer: C

3) Mike and Claire purchase an immediate joint and last survivor annuity. 3
month5 after
the payments start, they determine that they want to buy a new car and they
contact
their agent in order to make a withdrawal. Which of the following statements is
correct
concerning the withdrawal that Mike and Eliska want to make?

a) the policy will be terminated

b) the withdrawal can be done for cash value

LLQP Exam Prep 202

 c) the withdrawal will not be permitted

d) a market value adjustment (MBA) will be charged

Correct Answer: D

4) Two years ago, Ann invested in a segregated fund without speaking to an

experienced
representative. After Ann meets with Marie, a ten year veteran of the industry,
she tells him that she wants to transfer to a fund that he has recommended with
another insurer. What must Mario do?

a) inform the original representative or company

b) complete a replacement form

c) inform her of the potential penalties

d) divulge any bias toward the original company

Correct Answer: C

5) Jennifer earned an income of $105,000 last year. Her pension adjustment for
last year

LLQP Exam Prep 203

 was $6,300 due to the contributions made on her behalf to the employers
Defined
Benefit Pension Plan (DBPP). Jennifer also has unused registered retirement
savings plan
(RRSP) contributions from previous years of $2,550. What is the maximum amount
that
Jennifer can contribute to her RRSP?

a) 6300

b) 2550

c) 15150

d) 18900

Correct Answer: C

6) Rashna is the plan administrator for the Defined Contribution Pension Plan
(DCPP) a
Catapult Inc. She decides to review the alternatives and select only one
segregated funds
for the employer's contribution. Which of the following options would have the
LOWEST
risk?

a) equity fund

LLQP Exam Prep 204

 b) fixed Income fund

c) high-yield fund

d) dividend fund

Correct Answer: B

7) All else being equal in terms of asset class, types of assets within the portfolio
(e.g.
equities), etc., which of the following investments have the LOWEST
management expense ratio (MER)?

a) mutual funds

b) segregated funds

c) equity funds

d) exchange-traded funds

Correct Answer: D

LLQP Exam Prep 205

 8) Moira age 40 is a member of her employer's Defined Contribution Pension
Plan
(DCPP). When she accepts a new position at a new employer, she is presented
with
options concerning her DCPP. Which of the following statements about Moira's
options
is correct?

a) Moira can transfer her DCPP to her individual Registered Retirement Savings
Plan (RRSP}.

b) Moira can transfer her DCPP to her new employer's Group Registered
Retirement Savings Plan
(Group RRSP].

c) Moira can transfer her DCPP to her new employer's Deferred Profit Sharing
Plan (DPSP}.

d) Moira can transfer her DCPP to a Locked-In Retirement Account (LIRA) or

Locked-In Registered
Retirement Savings Plan (LRRSP].

Correct Answer: D

9) Scott and Claudia are planning to invest $16,666 into a segregated Fund.
They are considering two options: (1) CAD Canadian Growth Fund 75%/75%, or
(2) CAD Canadian Growth Fund 100%/100%. All else being equal in terms of the

LLQP Exam Prep 206

 investment mandate of the fund, portfolio, account type, client circumstances,
etc., which of the funds is higher risk and why?

a) Fund (2) is higher risk because it is less diversified.

b) Fund (1) is higher risk because it is has longer longevity.

c) Fund (1) is higher risk because it has a higher risk of capital loss.

d) Fund (2) is higher risk because it is not covered under investor protection.

Correct Answer: C

10) Based on the information below, which of the following segregated funds will
Most likely
have the highest management expense ratio (MER)?

a) The GP Canadian Equity Segregated Fund 100%/100%

b) The RX Canadian Index Segregated Fund 100%/100%

c) The RX Canadian Index Segregated Fund 75%/75%

d) The GP Canadian Equity Segregated Fund 75%/75%

LLQP Exam Prep 207

 Correct Answer: A

11) Scott (38) has been managing his own investments with a view to saving
money for his
retirement. He has disposable income to invest but he is not a knowledgeable
investor, so
he has been investing in money market funds and guaranteed investment
certificates
(GICs). However, interest rates have been very low and his returns have been
eroded by
inflation for a prolonged period. Which of the following BEST describes what
Scott has a need for?

a) tax-advantaged investing

b) liquidity

c) diversification

d) capital presentation

Correct Answer: C

12) You are meeting with your new clients, Mike

LLQP Exam Prep 208

 and Jenn, and after assessing their needs and situation you determine that they
should invest some of their investable assets into a Life Annuity or a Guaranteed
Lifetime Withdrawal Benefit. Which of the following personal risks would BEST be
mitigated by these types of investments?

a) risk of job loss

b) low level of financial literacy

c) longevity risk

d) risk of leverage

Correct Answer: C

13) Jenn reviews her client Bruce's existing investments. She notices that all of his
investments are concentrated in long-term investments or investments with long
durations to maturity. Bruce is planning on buying a house soon, within the next 2
to 3
months. He will need approximately $50,000 from his investments to put towards
the
down payment on the house and additional amounts to cover other costs
including legal
fees and land transfer costs. Which of the following BEST describes what Bruce
should do
given his planned home purchase?

a) He should purchase 'some highly liquid investments.

LLQP Exam Prep 209

 b) He should purchase an immediate life annuity.

c) He should purchase an accumulation annuity.

d) He should keep his investments as they are.

Correct Answer: A

14) You are meeting with the principles of a new group plan sponsor, HPC Solar
Corp., to define the objectives for the group plan. They will offer a Defined
Contribution Pension Plan (DCPP) which will not be a condition of an
employment contract or collective bargaining agreement.
They appoint the plan administrator who you will be coordinating with in order
to implement the plan. Which of the following is a correct statement about the
plan administrator?

a) The role of administrator may be assumed by the plan sponsor a board of

trustees, a financial
institution, or a pension committee.

b) The administrator will be responsible for the management of the sponsor's

contributions to the plan
since it will be a non-contribution; plan.

c) Final decisions concerning the design and structure of the plan will be the
responsibility of the plan
administrator.

LLQP Exam Prep 210

 d) The plan administrator will be charged with the duty for the matching
formula for sponsor
contributions which cannot be terminated or changed.

Correct Answer: A

15) XYZ Inc. has a Defined Benefit Pension Plan (DBPP). The company is
concerned
about longevity risk and funding their future pension obligations. Which of the
following
investments would be the BEST option for La Tourbe's DBPP?

a) to buy segregated funds with maturity and death benefit guarantees

b) to invest in mutual funds

c) to make segregated funds available to members

d) to buy annuities from an insurer in a "pension buy-in"

Correct Answer: A

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 16) Simon, age 65, is contemplating whether to apply for his Old Age Security
(DAS) benefit now or to defer it for 3 years. If Simon defers his benefit for 3 years,
by what percentage
would his pension increase?

a) 0.072

b) 0.006

c) 0.216

d) 0.36

Correct Answer: C

17) Jenn is drafting her will and she discusses charitable giving with Anna, her
insurance agent. She has always supported the local cancer research
foundation. Having no next of Kin, Jenn would like the foundation to receive her
investments, both registered and non-registered, when she dies. How much can
be claimed as a charitable donation when Jenn dies?

a) 75% of net income in the year if death or year preceding death

b) 50% of net income in the year of death or year preceding death

c) 85% of net income in the year of death or year preceding death

LLQP Exam Prep 212

 d) 100% of net income in the year of death or year preceding death

Correct Answer: D

18) Jim, age 70, wants a steady steam of monthly income with level income tax
for the duration of the payment schedule. During your discussions you explore
annuities and Jim agrees that an annuity with level income and level tax is what
he wants. Which of the following would be the BEST option for Jim?

a) Purchase an immediate life annuity with level income.

b) Purchase a deferred life annuity with level income.

c) Purchase an immediate life annuity with indexed income.

d) Purchase a deferred life annuity with indexed income.

Correct Answer: A

19) Kevin works for ACME Company of Canada (ACME). The pension plan for
ACME is also the
pension plan for ABC Canada and XYZ Canada. The contributions to the
pension are made on a fixed contribution basis as determined in collective
bargaining. What type of pension plan is Kevin a member of?

LLQP Exam Prep 213

 a) a multiple group pension plan (MGPP)

b) a multi-employer pension plan (MEPP)

c) a capital accumulation plan (CAP)

d) a collective union pension plan (CUPP)

Correct Answer: B

20) Jayla is a member of his employer's Deferred Profit Sharing Plan (DPSP) and
he is
moving to a new employer. He does not want a lump sum and he doesn't want
to leave
the proceeds in the DPSP with the employer. Which of the following statements
about Jayla's DPSP is correct?

a) Jayla must take the lump sum

b) Jayla can purchase an annuity.

c) Jayla can receive income payments from the plan.

d) Jayla can make tax-free withdrawals from the plan.

LLQP Exam Prep 214

 Correct Answer: B

21) Carl and Claire are planning to invest $36,000 into the Big Win Segregated
Fund. While they think that the Chinese market will perform well, the
manufacturing
index has declined and they want to be able to lock in returns when Chinese
markets are up. They are considering their reset options. Which of the following is
a correct states
about reset features?

a) The reset occurs at the scheduled intervals, whether the market value
increases or declines.

b) The term to maturity of a segregated fund without a reset feature will be

longer

c) The management expense ratio (MER) of a segregated fund with a reset

feature will be higher

d) The value of the guarantee remains the same, whether the reset is utilized or
not.

Correct Answer: C

LLQP Exam Prep 215

 22) Your client Sam receives a company pension of $17,690 per year His
marginal tax rate (MTR) is 37% but his wife Jeanette's MTR is only 29%. You
suggest pension income splitting at the maximum allowable percentage to
reduce taxes and increase after tax income. If Sam and Jeanette adopt the
pension income splitting strategy at the
maximum allowable percentage, what would the tax payable be on the
pension income?

a) 3273

b) 2565

c) 5838

d) 8845

Correct Answer: C

23) You are preparing the annuity contract for your client, Mike, and completing
the sections
which name the annuitant and the beneficiary. Which of the following
statements about naming the annuitant is correct?

a) An annuity contract will only provide creditor protection where an

irrevocable annuitant has been
designated.

b) For registered plans, a contract may be issued to a person naming him as

annuitant or naming

LLQP Exam Prep 216

 another as annuitant.

c) A joint and last survivor annuity names two or more annuitants in the annuity,
known as co annuitants.

d) The owner and annuitant must be the same person if the annuity is
registered or funded with
registered savings.

Correct Answer: D

24) Sam is employed by ABC Corp. and she is a member of the company's plan.
The company
plan is one which provides a retirement income that is entirely based on
contributions and
investment income that accumulates in the plan. Under the plan, employer
contributions are mandatory. What type of employer plan is Sam a member of?

a) Defined Benefit Pension Plan (DBPP)

b) Defined Contribution Pension Plan (DCPP)

c) Pooled Registered Pension Plan (PRPP)

d) Registered Retirement Savings Plan (RRSP)

LLQP Exam Prep 217

 Correct Answer: B

25) Mike is invested in a mutual fund that holds the preferred and dividend
paying
common shares of Canadian corporations. The income from the fund is eligible
for the
dividend tax credit and the fund is considered low to medium risk. Which of the
following
funds is Mike invested in?

a) income fund

b) balanced fund

c) dividend fund

d) growth fund

Correct Answer: C

26) Ross works for Plugslart Reliance Inc. and he i5 a member of both his
employer'
Group Registered Retirement Savings Plan (Group RRSP) and Deferred Profit
Sharing

LLQP Exam Prep 218

 Plan (DPSP). His employer contributes 5% of Ross's income to each of the 2 plans
an Ross wants to contribute 4% of his income to each of the plans, for a total
combined
contribution to both plans of 18% of his income. Which of the following
statements about
the contributions to Ross's plans is correct?

a) The employer contributions are capped at the lesser of 18% of Ross's income
or 50% of the Group
RRSP limit,

b) Contributions to the DPSP will create a pension adjustment and increase

available contribution room
to the Group RRSR.

c) Ross cannot contribute 4% of his income to both plans because employee

contributions cannot be
made to a DPSP.

d) The contributions will be taxable to Ross at the same rate as regular income.

Correct Answer: C

27) Jenn is the sole proprietor of her business and the business has recently
begun
experiencing financial difficulties. Jenn expresses concerns that creditors could
seize
savings. Which of the following is a correct statement about creditor protection?

LLQP Exam Prep 219

 a) If it appears in bankruptcy proceedings that Jenn invested in segregated
funds to credit proof their
value and protect their seizure against payment of debt, the investments may
be seized.

b) If Jenn invests in segregated funds for the purpose of protecting her savings
from creditors, they will
not be able to pursue a claim against her in bankruptcy proceedings.

c) Creditor protection is Many's most important need and this should motivate
her to select segregated
funds for investment.

d) If Jenn invests in segregated funds for creditor protection and the funds
decline in value, Jenn will be
required to pay the creditors the loss on the capital at the time of seizure.

Correct Answer: A

28) Which of the following statements about Segregated Funds is correct?

a) When segregated funds are sold by investment dealers, they act as agents
of the investment dealer.

b) The legal term for a segregated fund is Individual Variable Insurance

Contract (WIC).

LLQP Exam Prep 220

 c) The deposits made by individuals, groups, and the company's assets are
pooled together in a
segregated fund.

d) There are no age restrictions on deposits made to a segregated fund.

Correct Answer: B

29) Mike (age 71) owns a non-registered immediate life annuity contract. He
receives a monthly income of $800. When filing his income tax return he only has
to pay tax on the interest portion of this income. What type of annuity has he
purchased?

a) accrual annuity

b) prescribed annuity

c) life annuity with a minimum payment guarantee

d) term certain annuity

Correct Answer: A

LLQP Exam Prep 221

 Practice Questions for Accident & Sickness

1) Three years ago Jen took out a disability policy that will pay her a maximum
benefit of $3,000
a month in the event that she is ill or injured and unable to work. The benefit is
the maximum
that the insurance company would offer based on Jen’s income of $60,000 a
year. Two years
after taking out the policy, the company that Jen worked for declared
bankruptcy and she was
forced to find another job. It took her a few months to relocate and she had to
settle for a job
paying only $48,000 a year. A short while ago Jen was injured in an automobile
accident and
will be unable to work for at least six months. The waiting period under her policy
has expired
and she had filed for benefits.
How much of a monthly disability cheque would Jen receive under the
circumstances?

a) 2400

b) Nothing

c) 3000

d) 4000

LLQP Exam Prep 222

 Correct Answer: A

Rationale: Jen’s contract is designed to provide her with a disability benefit that
will not
exceed 60% of her pretax, pre-disability income, so as to discourage anti-
selection and
malingering. At the time the policy was taken out Jen was earning $60,000 a
year, so her
maximum monthly benefit was calculated as $3,000 ([$60,000 / 12] x .6 = $3,000).
At time of
claim, Jen was only earning $48,000 a year, so her maximum benefit would be
reduced to
$2,400 a month ([$48,000 / 12] x .6 = $2,400).

2) Shaan is concerned about maintaining the integrity of his disability coverage

over the long-term.
Only 33, he would like coverage to age 65. He is most concerned that he would
incur a
permanent disability over the course of the next five to 10 years, his peak activity
years in the
business, as well as the effect that inflation might have, long-term, on his
disability income. He
expects inflation to return to the 4-5% range in the near future and to stay at that
level, long-term.

LLQP Exam Prep 223

 Which of the following policy options would best match up with his objectives?

a) A cost of living rider

b) A future purchase option rider

c) A lifetime benefit option

d) A guaranteed insurability rider

Correct Answer: A

Rationale: One of the problems faced by insured’s living off the benefits of a
Long-Term Disability (LTD)
claim is the cost of goods and services (cost of living) the disability benefits are
intended to provide for
are constantly rising with inflation, while the disability benefit may be fixed. A
Cost of Living Adjustment
(COLA) rider provides for an annual increase in the monthly benefits being paid
under a disability
income replacement contract, starting the second year that benefits are paid

3) Alex is looking to acquire an individual disability income replacement policy.

The insurance company that she is dealing with offers maximum coverage of

LLQP Exam Prep 224

 70% of an applicant’s predisability, pre-tax income. A friend of Alex’s who is self-
employed was injured a couple of
years ago and off work for 18 months. She had no coverage and eventually had
to sell her
condominium because she couldn’t keep up the maintenance and mortgage
payments while not
working. So Alex would like the maximum possible coverage because she has
no insurance
right now, individual or group.

At present Alex has the following sources of income:

1. Salary of $4,500 a month
2. $600 a month in commissions from a part-time sales job
3. $500 a month in support payments (for 10 more years) from her ex-husband
4. Investment income of $600 a month
5. Income from a trust set up by her grandmother that pays her $1,000 a month

Which of these income sources would the insurance company take into
consideration in
determining the maximum amount of disability coverage that they would issue
to Alex?

a) Her salary and commission income only

b) Her salary only

c) Her salary, and investment income only

d) Her salary, commissions, support payments, investment income and trust

income

LLQP Exam Prep 225

 Correct Answer: D

4) Matt has applied for a disability policy with the following characteristics:
1. $4,500 monthly benefit
2. 60-month benefit period
3. 30-day waiting period
4. An “any occupation” definition of disability

When Matt received the policy issued, the monthly premium was much higher
than he expected;
higher than he could afford.

Which one of the following changes to the policy, initiated by Mattand his
agent, would likely
have the greatest impact in lowering the policy premiums?

a) Decrease the benefit period to 54 months

b) Decrease the monthly benefit to $4,250

c) Increase the waiting period to 120 days

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 d) Change the definition of disability to “regular occupation”

Correct Answer: C

Rationale: All of the suggested changes, except (D) would help to lower the
premiums.
However, slightly decreasing the benefit period or amount would have only a
nominal impact on
the premium rate. Extending the waiting period is the simplest and most
effective means of
reducing premiums. An extended waiting period means that fewer benefits
would need to be paid
out provided the claim does not last for the maximum benefit period. More
importantly, a longer
waiting period eliminates both the benefits payable and administrative costs
associated with
shorter periods of disability.

5) Which of the following definitions correctly describes the ways in which group
insurance
premium rates are calculated?

a) An experience rating method where the claims experience with similar types
of groups

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 is reviewed to set premium rates for a new group.

b) A manual rating method where all of the claims experience for a group
during the year
is reviewed to calculate premium rates for the following year.

c) A blended rating method where both manual and experience rating

information is
reviewed to establish premium rates.

d) A credibility rating method where renewal premium rates for a group are
modified
because of poor claims experience in the previous year.

Correct Answer: C

Rationale: The more traditional form of funding a group insurance plan is

through the use of a
fully insured (pooled) plan: non-refund accounting. As with most individual
insurance contracts,
the insurance company bears the full financial responsibility for paying all claims.
The insurance
company sets premiums based upon the anticipated cost of claims for the
period, which in turn is
based on past claims experience. If the actual cost of claims exceeds the
anticipated cost, the plan
sponsor (usually the employer) has no liability to cover the excess costs. On the
other hand, if
claims costs for the period are less than were estimated in setting the premiums,
the insurance

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 company benefits from a windfall: there is no provision for a refund of premiums
to the plan
sponsor.
However, excess claims over those predicted will be taken into consideration in
setting future
premium rates (higher) at time of contract renewal.

6) A number of government programs include some disability benefits. Which of

the following
federal and provincial government programs include disability benefits?

1. Old Age Security

2. Workers’ Compensation
3. Employment Insurance
4. CPP/QPP

a) 3 and 4 only

b) 1 and 2 only

c) 1, 2 and 3 only

d) 2, 3 and 4 only

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 Correct Answer: D

7) Alex works for a company that offers its employees a group insurance benefits
package. As
part of the plan Alex has long-term disability coverage. The disability premiums
are shared
50/50 by the employer and the group members. Up until last year Alex had
never made a
claim for disability benefits, but midyear she was injured at work and collected
$12,000 in
benefits. Since joining the plan Alex had paid $2,800 in group premiums.

How would the group premiums and benefits be treated for tax purposes?

a) The employer would not deduct the $2,800 in premiums it had paid, Alex
would
have had to report the $12,000 in benefits as taxable income.

b) The employer would deduct the $2,800 in premiums it paid, Alex would have
to
report $9,200 in benefits as taxable income.

c) The employer would not deduct the $2,800 in premiums it had paid, Alex
would

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 have to report no taxable benefit for the benefits received.

d) The employer would deduct the $2,800 in premiums it had paid, Alex would
have to report $12,000 in benefits as taxable income.

Correct Answer: B

Rationale: Regardless of whether or not the employer-paid premiums are

reported to the plan
member as income or benefits received are taxable, the employer always gets
to deduct the group
plan premiums it pays. If the employer-paid premiums are not reported to the
employee/plan
member as taxable income the benefits received are generally taxable.
However, if the employer
and employee split the premiums, in the event of a claim, an amount of benefits
equal to the plan
member’s aggregate premiums is treated as a tax-free “refund of premium”
with the balance of
benefits being received as taxable income. In this case, Alex would get her first
$2,800 of
benefits tax-free, with the other $9,200 ($12,000 - $2,800 = $9,200) being treated
as taxable
income.

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 8) Which of the following services would generally be covered under an EAP
plan?

a) Massage therapy

b) Prescription drug coverage

c) Dental surgery

d) Marriage counseling

Correct Answer: D

9) John paints his neighbors fence. Instead of paying John in cash, the neighbor
offers John a
ticket to a hockey game. Which term best describes the form of payment for
painting the fence?

a) Unearned income

b) Earned income

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 c) In-kind income

d) Residual income

Correct Answer: C

10) John works in a manual labor position with a small construction company.
The company
offers no group benefits but is covered by Worker's Compensation. John has
worked with the company long enough to qualify for full EI benefits. John
recently suffered an at-work injury that has reduced his ability to work more than
two and a half days a week resulting in a 45%
reduction in his income. In addition to his EI coverage, John has an individual
disability plan
that covers him for 60% of his pre-disability, pretax earnings, for up to one year,
after allowing
for a 30-day waiting period.

What benefits could John expect to receive from EI?

a) John would receive no more than two weeks' of benefits because his EI
benefits

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 would be offset by his private plan.

b) John would receive nothing, because his EI benefits would be fully offset by
CPP
disability benefits

c) John would receive full EI benefits for a maximum of 15 weeks at a level not
to
exceed 55% of his former earnings.

d) John would receive 55% of his former earnings, but only if his disability lasts
more
than 13 months

Correct Answer: C

EI pays benefits to qualifying members who suffer at least a 40% reduction in

income due
to disability. Benefits are paid for a maximum of 55% of average weekly earnings
and for a
maximum of 15 weeks, after a 14-day waiting period. However, EI is a second
payor to
every other source of disability benefits on a dollar-for-dollar basis, except
individual
disability policies. He would not qualify for CPP disability benefits because he is
able to
work part-time.

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 11) Sharron applied for a disability insurance policy three months ago. Because
of complications in
her medical history, which the insurance company had to have verified and
clarified by her
doctor, Sharron’s policy took six weeks to approve. When the issued policy
arrived at Sharron's
agent for delivery, the agent was on vacation. Upon returning from vacation
the agent had quite a
bit of work to catch up on so it was another month before he got around to
delivering the policy.

What is the greatest risk in taking such a long time to deliver the policy?

a) It will be very expensive for Sharron to keep the policy because of several
premiums due.

b) Sharron is more likely to change her mind and decide not to take the policy.

c) Sharron’s health might have deteriorated during such a long period.

d) Leinanie could have had free coverage for three months, to the detriment
of the insurer.

Correct Answer: C

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 12) Lucy earns an income of $60,000 a year as a photographer for a local
paper. Her employer offers
her no group insurance benefits, so Lucy decided that she had to take out
disability income
replacement insurance coverage of her own. The company to which she
applied advised her that
they would not issue coverage for more than 66.67% of her salary, or a maximum
of $3,335 a
month. Lucy took out a policy with a flat benefit of $3,000 a month. The policy
also had a future purchase option associated with it, permitting her to increase
her coverage by up to 20% per option, without medical underwriting, but
subject to standard financial underwriting. Two years after policy issue, when her
salary had increased to $64, 000 a year, Lucy decided that she needed to
increase her coverage.

What is the maximum amount of additional monthly coverage that the

insurance company would
permit her to buy under the option?

a) About $333 a month

b) About $222 a month

c) About $555 a month

d) About $600 a month

LLQP Exam Prep 236

 Correct Answer: B

13) Jason works at Wealth Inc where he is a member of the group benefits plan.
The benefits
plan is with XYZ Insurance. Jason incurs a dental expense and wants to submit a
claim for this
expense.

Who administers the claims process from first notification to final payment?

a) XYZ Insurance

b) Jason

c) Wealth

d) Jason's dentist

Correct Answer: A

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 14) When Eric applied for disability insurance almost five years ago he was
issued a policy, but
with a 5-year exclusion for disability arising from any condition associated with
liver function
and a 50% premium rating. Eric accepted the coverage with the restrictions, but
only took out
two-thirds of the amount of insurance that he needed, because he could not
afford the extra
premium. It had turned out that during the underwriting process, requiring blood
tests, that
Eric had been exposed to a rare parasite that can damage the liver and lead
to other possible
health complications. Fortunately, Hidaka's condition has a 100% survival rate
after five years
and he was recently given a clean Nabil of health.

What is the most important opportunity that is now available to Eric, his agent
and the
insurance company as a result of the expiry of the rating and exclusion,
assuming that he is now
insurable at standard rates?

a) Eric could increase his coverage

b) Eric could reduce his premium

LLQP Exam Prep 238

 c) Eric could increase his premium

d) Eric could cancel his coverage

Correct Answer: A

Rationale: For the past five years Eric has been under-insured because the
increased
premiums arising from his medical condition restrained him from being able to
afford all of the
coverage that he needed. With the premium rating now being dropped, Eric
could afford to
increase the policy coverage to the level that he needs, for the same premium
that he had been
paying for the rated policy.

15) The ACME Co Company was interested in setting up a group plan where all
of the risk
was transferred to the insurer, in exchange for a fixed annual premium to be
paid by Hypo. What
type of funding should they have selected for their group plan?

LLQP Exam Prep 239

 a) Non-refund accounting

b) Refund accounting

c) Blended rating

d) Manual rating

Correct Answer: A

16) Kelly, age 37, works at an assembly plant that manufactures costume
jewelry. She earns a net
income of $500 a week. Last week she got her right hand mangled when she
tried to clear debris
from her snow blower while getting the car ready for her morning drive to work.
She will have to
go through a lengthy period of reconstruction and rehabilitation for the hand
and the doctors
estimate that she will be off work for at least six months. Her employer is a
member of the
provincial Worker's Compensation (WC) plan.

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 What level of benefits could Kelly expect from her WC plan?

a) Up to $540 per week for a maximum of 15 weeks

b) Around $480 per week to age 65 at the latest

c) 75% of her pre-disability gross salary to age 65

d) Nothing; she would not be covered

Correct Answer: D

17) Jim wants to set up a personal disability income replacement plan. In

looking at the amount
of coverage that the insurance company was willing to provide, the agent
asked questions
regarding all of Jim's sources of incoming cash flow. The list was as follows:
1. Salary from employment as a greenskeeper at the local golf course
2. Income from self-employment doing lawn maintenance every second
Saturday. Royalties, for 10 more years, from the authorship of a book
4.Commissions from selling Amway products two evenings a week.

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 For purposes of computing the amount of coverage that the insurance
company would be willing
to issue, which of the above sources would not really be classed as “earned
income”.

a) His self-employment "income"

b) His salary

c) His royalties

d) His commissions

Correct Answer: C

Rationale: Although all four sources of “income” would be considered taxable

income by the Canada
Revenue Agency, the insurers look at “earned income” as sources of income
that would not continue in
the event of a disability. The salary, self-employment income and commissions
all fit into that category.
The royalties would continue to be paid to Jim whether or not he works or is able
to work. So while
included as part of Jim’ overall “income”, the royalties would not be considered
“earned income”
for purposes of computing his overall maximum available benefits.

LLQP Exam Prep 242

 18) Angela applied for a disability income replacement policy three weeks ago.
She works in
residential landscape maintenance (gardening, fertilizing and lawn cutting,
mostly). In her spare
time she engages in a number of leisure activities, including hiking provincial
trails, kayaking on
small lakes in southern Ontario and rock climbing. Her agent delivered the policy
issued to her
today, but she was disappointed to see that it came with an exclusion clause.

Which of her activities most likely resulted in the exclusion?

a) Her practice of hiking

b) Her occupation

c) Her kayaking

d) Her rock climbing

Correct Answer: D

LLQP Exam Prep 243

 19) The ACME Co Company has a group benefits program covering most of its
3,000
employees. The plan has been insured by the ABC Life Insurance Company for
the past four
years and is coming up for its annual renewal. Which of the following rating
methods is ABC
likely to use in setting renewal premiums for Hypo’s group plan?

a) Experience rating

b) Blended rating

c) Credibility rating

d) Manual rating

Correct Answer: A

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 20) Sofia was meeting with a business client who was interested in taking out key
person disability
insurance on one of the employees of her sole proprietorship. One of the
overriding factors in
closing the sale would be the tax treatment of policy premiums and benefits.
The client asked
Sofia "Will I be able to deduct the policy premiums for tax purposes?" and "If
there is a claim
under the policy, will benefits be tax-free or treated as taxable income?"

What should Sofia tell her client?

a) "Premiums are not deductible but benefits would be tax-free."

b) "You should consult your lawyer or accountant in this matter."

c) "Premiums are tax-deductible and benefits would be tax-free."

d) "Premiums are tax-deductible but benefits would be taxable."

Correct Answer: A

LLQP Exam Prep 245

 21) Eloise is applying for disability insurance with a $4,000 a month benefit and a
5-year benefit
period. Her health is excellent and she has a claims-free disability health history,
but the
insurance company is concerned about her part-time job as a skydiving
instructor.
Which of the following techniques is the insurer most likely to employ to reduce
its risk
exposure, assuming that it is willing to issue a policy to Eloise?

a) Imposing a limitation

b) Imposing an exclusion

c) Rating the premium

d) Imposing a deductible

Correct Answer: B

Rationale: It is the responsibility of the group insurer to administer claims from first
notification
to final payment.

LLQP Exam Prep 246

 22) Which of the following sources of income is considered “unearned income”?

a) John makes $2,000 capital as a freelance writer

b) Janice receives $650 in OAS pension

c) Jeff receives a $15,000 bonus at work

d) Tom makes $3,000 in commissions

Correct Answer: B

23) Ingrid has been continuously employed and a CPP premium payor for 20
years. During that time
she has also paid Employment Insurance premiums. She has recently suffered a
serious illness
that will keep her away from work for several months. While her employer's
group insurance
provided for life and health insurance, it did not provide income replacement
coverage. CPP
and/or EI will address her situation in which of the following ways?

LLQP Exam Prep 247

 a) CPP will pay her a percentage of the CPP retirement benefit during the
entire period
that she is disabled.

b) Neither her EI nor CPP coverage will provide any disability income benefits
to her.

c) CPP will pay her a retirement benefit provided she does not return to work
when her
disability ends.

d) EI will pay her a weekly benefit while she is disabled for a maximum period of
15
weeks.

Correct Answer: D

24) Age and severe arthritis have affected Morley's quality of life. He is
considering entering a
nursing home. He did purchase long-term care insurance and is reviewing its
provisions to see

LLQP Exam Prep 248

 what benefits he might expect to receive. His policy calls for the payment of
$100 per day for
care should he qualify for benefits. Morley has home care because he needs
assistance getting
out of bed each day. He is able to walk with the aid of a cane, or when he is
particularly sore,
with the aid of a walker. His hands are getting very stiff, but he can manage to
dress and undress
himself. He can use the toilet that has a special seat and handrails. He has had
no problems with
incontinence to date. He has someone help him into the shower, but he is able
to wash himself.
He has trouble preparing meals but he can eat and his appetite is good.

Considering his current condition, which one of the following statements about
his LTC
coverage is correct?

a) While he remains in his own premises outside the nursing home, he will not
qualify for
LTC benefits

b) Because he requires daily home care, his condition qualifies him for LTC
benefits

c) Since he requires special equipment to allow him to walk and to use the
toilet he
qualifies for LTC benefits.

d) Since he can still attend to his own needs, even with special equipment, he
does not

LLQP Exam Prep 249

 qualify for LTC benefits.

Correct Answer: C

Rationale: The most common ways that most insurers use to determine whether
an
insured qualifies for long-term care assistance is if the insured is unable to
independently perform any two or more of the Activities of Daily Living (ADLs):
1. Dressing: The ability to dress or undress oneself (take off and put on clothes)
without the assistance of a third party.
2. Bathing: The ability to wash oneself in a tub or shower without the assistance
of
a third party.
3. Toileting: The ability to get to and from the toilet, and on and off it,
independently.
4.Transferring: the ability to move from bed to chair, to a wheelchair or to
another location without the aid of a supporting device (e.g. cane or crutches)
or
the assistance of a third party.
5. Eating: The ability to feed oneself without assistance (not merely the ability to
prepare food, but to actually eat food without assistance).
6. Maintaining continence: The ability to control one’s bladder.

LLQP Exam Prep 250

 25) Linda is single and in her mid-50s. She works as an administrative assistant
and belongs to a
group insurance plan provided by her employer, Skinflint Inc. The dental benefits
portion of the
group plan has a $250 annual deductible and a 50% co-insurance factor. Linda
makes one major
visit to the dentist in the year and incurs total dental hygiene and periodontal
charges of $700.

Based on the plan provisions above, which of the following will correctly apply?

a) Linda will pay $225 and the insurer will pay the balance, $475

b) Linda will pay $250 and the insurer will pay the balance, $450

c) Linda will pay $475 and the insurer will pay the balance, $225

d) Linda will pay $350 and the insurer will pay the balance, $350

Correct Answer: C

Rationale: The insurance company’s exposure to claims can, in part, be

managed through the imposition of deductibles and a co-insurance factor:
provisions that require the insured to pay at least a portion of the qualifying
medical expenses. While co-insurance factors are common to both individual
and group policies, deductibles are more rare in individual contracts.

A deductible is a dollar amount of otherwise qualifying expenses that must be

paid 100% by the insured before the plan picks up any of the expense.
Deductibles are applied annually and start anew each year.

LLQP Exam Prep 251

 The co-insurance factor indicates the percentage of a qualifying expense that
will be covered by the plan and, by default, the percentage that would have to
be paid by the insured. In addition to
the insured’s coverage being somewhat restricted by the co-insurance factor, it
is also subject to coverage limits.

26) Raj, age 47, works for himself as an independent taxi driver. He supports his
wife and
four children on the money that he makes driving six days a week, 12 hours a
day. He often has
to work with a cold, or the flu, but realizes that he couldn’t count on being able
to work, should
he suffer a truly serious injury or illness. He hopes all will be well for a least another
seven
years, until the last of his children is through university and self-sufficient. Even so,
he hopes he would not have to rely on his children in his old age. He wouldn’t
want to place that burden on
them.
He himself is just coming off a period of supplementing his aged mother’s
expenses in a
nursing home (she died last year). In fact, the cash drain caused by his mother’s
expenses is a
large part of the reason that he has to work so hard, through health and illness.

Which of the following product combinations would most effectively meet Raj’s
needs
and concerns?

LLQP Exam Prep 252

 a) A long-term care policy and travel insurance

b) A disability policy and a critical illness policy

c) Travel insurance and a critical illness policy

d) Disability insurance and a long-term care policy

Correct Answer: D

27) John is concerned that should he suffer and accident or an illness, he might
not be able to
continue working. Which of the following types of A&S insurance would replace
John’s income
in the event that he is unable to continue working?

a) Life insurance

b) Disability insurance

c) Critical illness insurance

LLQP Exam Prep 253

 d) Medical insurance

Correct Answer: B

Although perhaps not immediately apparent from the title “accident and
sickness
insurance,” one of the most common forms of coverage is disability income
protection:
insurance that will replace a percentage of a person’s regular income from
employment or
self-employment if the insured is ill or injured and unable to work.

28) Last year Greg purchased a disability policy paying benefits of $3,200 a
month, or 64% of his
$5,000 monthly salary. When he left his previous employer, he converted his
group coverage
into private life and disability contracts. That disability policy pays $2,500 a
month in benefits.
Greg was injured recently and had to go on disability claim.

Once the waiting periods under both policies had been met, what is the
maximum amount of
disability benefit that Greg could receive?

LLQP Exam Prep 254

 a) 4250

b) 3500

c) 5000

d) 5700

Correct Answer: A

Rationale: In order to discourage clients from making false claims, or malingering

on claims, most
policies have an “all sources maximum” clause which limits benefits from all
sources of disability
insurance to a maximum of 85% of the insured’s pre-disability, pre-tax income. In
Greg's case the most
he could collect would be 85% of his $5,000 monthly income, or $4,250.

29) Manfred has a disability income policy that provides for 24 months of
benefits, after allowing for
a waiting period of 3 months. The policy also provides that, in the event of a
claim resulting from a recurrence of an injury or illness within six months of the
end of a previous claim for the same condition, the second claim shall be
treated as a continuation of the first claim. Manfred injured

LLQP Exam Prep 255

 himself at work and was off work for 7 months as a consequence. Three months
after returning
to work, he re-aggravated the same injury and was off work for another 27
months.

How many months of benefits would Manfred have received for the second
disability?

a) 20 months

b) 17 months

c) 24 months

d) 27 months

Correct Answer: B

30) Gabriella runs an incorporated business, a coffee shop catering to the

downtown Vancouver
business clientele. Apart from providing good coffee and good service, one of
the keys to the

LLQP Exam Prep 256

 success of her business is the flair and charm that Gabriella's chief brewer,
Andre, brings to the
business. Gabriella knows that without Andre her business would likely drop
dramatically. She
pays him well and has taken all the steps that she can to ensure that he stays
with her business.
However, she knows there is little that she can do to affect his health. If Andre
were to be off
work, ill or injured for a lengthy period of time, the business would suffer, just the
same as if he
left Gabriella's employ. Consequently, Gabriella took out an individual disability
policy on
Andre, owned and paid for by the business and payable to the business, to
replace lost revenue if
he became disabled.

Which of the following statements reflects the tax status of this disability policy?

a) The premiums are tax-deductible and the benefits are tax-free

b) The premiums are tax-deductible and the benefits are taxable

c) The premiums are not tax-deductible and the benefits are tax-free

d) The premiums are not tax-deductible and the benefits are taxable

Correct Answer: C

LLQP Exam Prep 257

 Practice Questions for Life Insurance

1) You and your client Kash have concluded that his insurance needs would be
best served
with a participating whole life policy. You have reviewed the historical dividend
scale and he is satisfied with the performance. However Kash is concerned that
the amount of the dividend is not guaranteed and he asks you what would
make the dividends go down?
Which of the following factors would cause a decline in participating policy
holder
dividends?

a) the provincial insurance regulators lower the policy reserves required

b) more policy holders died than expected

c) administrative expenses were lower than expected

d) investment returns were higher than expected

Correct Answer: B

LLQP Exam Prep 258

 2) You have been assigned to service an existing client. Upon review of their
current coverage, you discover the insured has had a 20 year Limited Pay Term
100 policy for 28 years. The client has had the policy for a long time and it has
been some time since he has reviewed it. He asks you to explain the policy to
him. Which of the following correctly describes the policy in this scenario?

a) The client cannot surrender the policy since the policy will not have a cash
surrender value (CSV).

b) The client has coverage for life and mu5t pay the permanent premiums for
life.

c) The client has coverage for life and he does not have to pay any more
premiums.

d) The client no longer has coverage because the limited pay policy is paid-
up.

Correct Answer: C

3) Jeff was recently been diagnosed with an invasive form of pancreatic cancer
and is
expected to live only 6 months. Jeff's insurance policy has a built in terminal
illness
(TI) supplementary benefit. Which of the following correctly describes a feature
of the TI supplementary benefit?

LLQP Exam Prep 259

 a) it in received tax free

b) it is paid to the beneficiary

c) the maximum benefit is the face value

d) it does not impact the death benefit

Correct Answer: A

4) Mike, 32, a non-smoking fitness instructor, is in very good health. He has

recently married and they are planning on having children . He knows he needs
insurance, however, the instructor job does not pay that well. He has been
promised promotions and will do better
in the next few years. He wants to buy as much insurance as he can afford now
and then
add to it when his salary increases. He has decided on a Term 10 policy for now.
Which one of the following strategies would allow Mike to achieve his objective
of buying
affordable insurance now with the option of increasing coverage in the future?

a) guaranteed in5urability benefit rider

b) paid up additions rider

c) just wait and buy more insurance later

LLQP Exam Prep 260

 d) accidental death rider with double indemnity

Correct Answer: D

5) Jenn, 56, is owner and Chief Executive Officer (CEO) of Big Brand Inc. and she
is your
largest prospect. You are preparing for your second meeting. You know that she
needs a $15 million policy, which is above the $10 million retention limit for the
companies you
represent. Which of the following statements describes the correct course of
action the
insurer can take concerning this policy?

a) The insurer can reinsure the excess amount over the retention limit and Jenn
will have two policies
and premiums for coverage of the $15 million.

b) The insurer can write two policies, one for $10 million and another identical
policy for $5 million, in
order to exceed the retention limit.

c) The insurer can only write the policy if it can reinsure the excess amount over
the retention limit
with one or more reinsurance companies.

LLQP Exam Prep 261

 d) The insurer can write two policies, a base policy and a reinsurance policy,
which combined will cover
the $15 million.

Correct Answer: C

6) Raj and Anita, a young couple, have decided that Anita will be a stay at
home
Mom. Raj is concerned that should Anita pass away, he would not be able to
afford
the expense of child care and domestic help. They have decided to apply for a
$500,000
Term 20 Convertible on Anita's life. Raj will be the insured. They are considering
choosing a waiver of premium for Total Disability Benefit and are asking you
detailed
questions. Which of the following correctly describes the Total Disability Benefit
on their
policy?

a) the benefit will payout if Raj becomes totally disabled

b) the benefit will pay out if Anita becomes totally disabled

c) at the end of 20 years, if premiums were being waived, the waiver will end

d) premiums will be waived immediately upon proof of the total disability

LLQP Exam Prep 262

 Correct Answer: D

7) Your current client, Steph, has requested a meeting with you to discuss her life
insurance
policy. When her policy was issued a year ago, she was in a rated risk class
because she was significantly over Xught. Since then, Steph has lost Xught and
has lost 40 pounds in
the last year alone. She knows she is better than average on the height Xught
charts for
her age and she wants her rating removed. Which of the following is the correct
response
that you can provide her?

a) A physical examination from a nurse will be required to take Steph's height,

Xught, blood pressure,
urine test, and blood test.

b) Because of the significant change in Xught, you can arrange to have the
rating automatically
reduced and premiums lowered.

c) Once a rate class has been assigned, it cannot be changed and Steph
should cancel her existing policy
and apply for a new policy.

d) An Attending Physician's Statement (APS) will likely be required to confirm

that Steph's Xught no

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 longer warrants the rated risk class.

Correct Answer: D

8) Alex learns that her husband of 30 years Miro, has died in a car accident
while travelling with their 25 year old son, Tim. Tim survived but is in a coma.
Three days later, Alex dies of a heart attack. Miro had an outstanding life
insurance policy and had named Alex as beneficiary and Tim as contingent
beneficiary. The estates are being reviewed for probate. Who would receive the
death benefit?

a) Tim

b) Miro's estate

c) Alex's estate

d) Split 50/50 between Tim and Alex's estate

Correct Answer: A

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 9) Potential clients Sonya and JP meet with you to discuss insurance needs and
they
take away information which they later review. You follow up and arrange a
second
meeting. They present to you what they feel will meet their needs. They want a
$500,000
Term 10 policy for JP, and a $150,000 Term 10 with a guaranteed insurability
benefit (GIB) rider for Sonya. They wish to save the policy fee by combining the
coverages. Product combination rules limit choices available to them. Which of
the options
below would be permissible and would best meet their needs?

a) $?50,000 Term 10 with GIB for Sonya with a $500,000 Term 20 rider for JP.

b) $500,000 Term 20 for JP with a $750,000 Term 10 rider with GIB for Sonya.

c) $250,000 Term 20 for JP with a $750,000 Term 10 rider with GIB for Sonya.

d) $500,000 Term 10 with GIB for Sonya with a $500,000 Term 20 rider for JP.

Correct Answer: B

10) Mike, 32, a non-smoking fitness instructor, is in very good health. He has
recently married and they are planning on having children . He knows he needs
insurance, however, the instructor job does not pay that well. He has been
promised promotions and will do better

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 in the next few years. He wants to buy as much insurance as he can afford now
and then
add to it when his salary increases. He has decided on a Term 10 policy for now.
Which one of the following strategies would allow Mike to achieve his objective
of buying
affordable insurance now with the option of increasing coverage in the future?

a) guaranteed in5urability benefit rider

b) paid up additions rider

c) just wait and buy more insurance later

d) accidental death rider with double indemnity

Correct Answer: A

11) You have just completed an insurance application with your new client. You
have reached
the point where you are reviewing the Temporary Insurance Agreement (TIA)
and you
wish to issue the TIA. Which one of the following would allow you to issue the 'ITA

a) The applicant has provided a void cheque for premiums to be paid

automatically.

LLQP Exam Prep 266

 b) The applicant has answered to "yes" all of the questions related to health.

c) The applicant has answered "no" to all of the questions related to health.

d) The applicant has exercised their option for guaranteed TIA coverage.

Correct Answer: C

12) Lilly, owner of a Universal Life (UL) policy, has been very pleased with the
performance
of her investment account. In fact, 30 days ago the policy failed the Maximum
Tax
Actuarial Reserve (MTAR] test. Which of the following remedies would the
insurance
company implement in order to ensure that the policy remains exempt from
annual
accrual taxation?

a) decrease the face value

b) make up the difference by making an additional deposit

c) increase the face value

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 d) make up the difference by moving the amount from the taxable side fund
to the accumulating fund

Correct Answer: A

13) Your client Anastasia has had a permanent life insurance policy with you
since 2006. She
now needs access to some cash. One choice may be to take advantage of her
cash Value
(CV) inside the policy. As such, you are reviewing how the adjusted cost basis
(ACB) of
the policy will change depending on the event. Which of the following
statements is
correct when calculating the ACB of a policy?

a) ACB increases when there is a withdrawal from the policy.

b) ACB deceases when the premium is larger than the net cost of pure
insurance.

c) ACB decreases when interest is paid on a policy lean.

d) ACB decreases when a policy loan is made.

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 Correct Answer: B

14) Mike, a 48 year old widower, has been a successful investor. He has a large
registered
retirement savings plan (RRSP] and a rental property. Both of these assets
consistently
appreciate. He realizes that the tax consequences on his death will be
significant; at this
point he calculates the Nabil would be $400,000 before accounting for
expected appreciation. Mike wants to offset the tax on the RRSP be purchasing
life insurance. He
also has a $250,000 mortgage on the family home with 15 years remaining. He
does not
want to leave his adult son with the burden of the mortgage should he pass
away early
Which of the options below would best meet Mike's needs while being cost
efficient

a) a $650,000 Term 100

b) a $650,000 Universal Life

c) a $400,000 Whole Life Participating and a $250,000 Term 10 renewable rider

d) a $400,000 Term 100 and a $250,000 Term 20 not renewable rider

Correct Answer: C

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 15) Jahinder, 51, is a farmer whose income varies significantly. He wants to
bequeath the
cottage, his second residence, to his children. The cottage consistently
increases in value
and he wants to cover the tax liability that will arise on his death as cost
effectively as
possible, with as much flexibility as possible. Which of the following would be the
best
option for achieving Jahinder's objectives?

a) Term 100

b) Whole Life Non-participating

c) Universal Life

d) Term 10 Renewable Convertible

Correct Answer: C

16) Jen (recently deceased) and Tal were joint owners of a sportswear
company. They

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 have a buy-sell agreement and corporately owned life insurance policy which
you sold to
them. Tal asks you to review the major terms of the buy-sell agreement with him
in
advance of his meeting with Maria, Jen's widow. Which of the following
statements
correctly describes the terms of the buy-sell agreement.

a) Jen and Maria along with counsel will negotiate a satisfactory price.

b) Jen has no choice and i5 obligated to purchase the 5hare5 from Maria.

c) Maria, as new owner can sell her portion to anyone she chooses.

d) The insurance proceeds will be tax free to the company and all proceeds
received by Maria will be
taxable.

Correct Answer: D

17) Which of the following statements about Term Insurance Riders is

correct?

a) rider coverage can extend past the term of the base policy

b) additional premiums for riders are not usually required

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 c) coverage via rider will be more expensive than a stand-alone policy

d) premiums may be lower when a rider is for the life insured

Correct Answer: D

18) You are preparing for a second meeting with new clients to present your
insurance
proposal. Part of your presentation includes the illustrations generated by the
insurance
company's in-house software. Which of the following statements is correct
concerning
the use of illustrations?

a) Term policy illustrations show the premiums payable and the death benefit in
each policy year

b) Term policy illustrations show the future policy dividends and the mortality
deductions.

c) Universal Life policy illustrations show the guaranteed policy dividends and
the mortality deductions.

d) Universal Life policy illustrations show the investment returns that the client
can rely on for
performance.

LLQP Exam Prep 272

 Correct Answer: A

19) Mike, a new client, has listened to your description of a participating whole
life policy
However, he is unclear as to what "whole life" means and how turning 100 will
offer the
premium payments. Which of the following statements is the correct one you
should
provide to Mike?

a) Premiums will be due until Mike dies, but the participating policy guarantees
that at age 100, the cash
surrender value will cover premiums.

b) A whole life contract matures at age 100, becomes paid up, no further
premiums are due, and coverage continues until death.

c) Premiums will be due until Mike dies, or surrenders the policy, or reaches age
100.

d) A whole life policy matures at 100 and the benefit amount in paid to the
beneficiary.

LLQP Exam Prep 273

 Correct Answer: A

20) Nabil, a 42 year old single father, wants to makes sure his daughters Jenn (6)
and Amy
(8) are taken care of should he pass away early. Nabil is seriously considering
using a
Universal Life (UL) policy because he is under the impression that UL insurance is
the
most flexible. However, insurance is new to Nabil and he has asked you to
explain UL
insurance to him. Which of the following correctly describes the policy in this
scenario?

a) Unlike term insurance and guaranteed whole life insurance, the three
factors in the determination of
the premium are fixed for the life of the contract.

b) Like term insurance and guaranteed whole life insurance, the three factors
in the determination of
the premium are mortality costs, investment returns, and guarantee.

c) Like term insurance and guaranteed whole life insurance, the components
which determine the
premium are bundled together to show the net impact to the cash value of the
policy.

d) Unlike term insurance and guaranteed whole life insurance, the calculation
for each component
which determines the premium is disclosed to show how each impacts the cash
value of the policy.

LLQP Exam Prep 274

 Correct Answer: D

21) Jim is 50 years of age and is in good health for a man. Theresa is also 50
years of age and
in good health for a woman. Both Jim and Theresa apply for life insurance and
the policies
go to underwriting for evaluation. Assuming that all other factors are the same,
which of
the following is an accurate statement about the premiums that Jim and
Theresa will pay
on their life insurance policies?

a) Theresa and Jim will pay the same premium since gender has no impact.

b) Theresa will pay a higher premium because men tend to outlive women .

c) Jim will pay a higher premium because women tend to outlive men.

d) Jim will pay a higher premium because he is a man and he will earn a
higher income.

Correct Answer: C

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 22) Xu and Jenn both apply for permanent insurance with you. Xu opts for a
Whole
Life Participating (WL PAR] policy with a paid-up additions (PUA) option. Jenn
chooses a
Universal Life policy (UL). They are very interested in increasing their coverage
over time
to cover future needs, over and above the built in features of the WL PAR and
the UL.
They have settled on the paid-up additions (PUA) rider. Which of the following
correctly
describes a feature of the PUA rider?

a) The PUA rider is only available on whole life policies.

b) The PUT rider increases the death benefit but not the cash surrender value.

c) Unused PUA amounts expire if not used each policy yeah

d) PUA can be added at any time while the policy is in force

Correct Answer: C

23) Xu, 44, a new employee of BC Fish Freezers, is still in his waiting period and is
trying to

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 decide whether to participate in the company's group life insurance plan which
is 50%
employer paid. Xu is a heavy smoker. The plan sponsor asks you to meet with Xu.
When
he asks you what the advantages to him would be if he participates, which of
the
following should you tell him?

a) Xu will pay the same premium as the other members of the group plan,
including those in good
health.

b) Xu will Day reduced premiums because he will join the group plan in the
younger age class of 35 to
44.

c) Xu will have the option to convert to individual coverage with the same
guaranteed premiums after
5 years of group plan participation .

d) Xu will have a death benefit which is 50% tax-free because the premium is
50% employer paid.

Correct Answer: C

24) Tom 67, has a significant cash surrender value (CSV) built up in the life
insurance

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 policy he purchased C based on December 31, 1982. He requires cash h for
living expenses and has
turned to you for assistance. You recommend that Tom collateralize the cash
surrender value (cash) and take out a series of loans secured be the policy's
cash. Which
of the following is an accurate statement about this strategy?

a) The loan proceeds will be paid to Tom tax free.

b) The payments will increase the death benefit that is paid.

c) The estate value and taxes will increase if interest on the loans is capitalized.

d) The payments will be used to calculate net income for Old Age Security
claw-backs.

Correct Answer: A

25) Greg and Jenn Pott need insurance above that provided by their employee
benefits.
They do not want to commit to a fixed policy and they are attracted to the
flexibility
offered by a Universal Life policy (UL). Which of the statements below is true in
describing the flexibility of a UL policy?

LLQP Exam Prep 278

 a) A UL policy holder may increase the face amount on the existing policy
without evidence of
insurability, subject to certain limits.

b) A UL policy holder may change the deposits between minimum and

maximum, but cannot go below
the minimum deposit.

c) A UL policy holder may change the frequency on deposits and choose a

modal factor other than
annual, resulting in a higher annualized payment.

d) A UL policy holder may keep an existing policy in force and substitute the life
insured by providing
evidence of insurability on the new person

Correct Answer: B

26) Guillume an Rhea are very happy the e arrival of their 5th child, a 1 month
old son. When their first child was born 10 years age, Guillume purchased a Term
20 policy with him as the life insured and he added a Family Coverage rider.
Which of the following
statements about Harjit's Family Coverage rider is true?

a) The new born will not be covered since the limit is a maximum of 5 lives,
spouse and eligible children.

LLQP Exam Prep 279

 b) The new born will be covered, however the premium will increase based on
the number of lives
insured.

c) The new born will not be covered until he reaches 1 year of age but proof of
insurability is required.

d) The new born will not be covered until he reaches 1 year of age but proof of
insurability is required.

Correct Answer: D

27) Mike learns that he has the beginnings of demyelization which will lead to
multiple
sclerosis. He knows that he has not paid the insurance premiums on his Term to
policy
In review of his policy, he is considering his options. Which of the following
statements is
correct with respect to missed premium payments?

a) Within the two year grace period, if all missed premiums plus interest are
paid, the policy will be
reinstated.

b) If the insurance company receives the premium within the grace period, the
policy will remain in
force.

LLQP Exam Prep 280

 c) If the life insured dies during the grace period, no death benefit will be paid.

d) If the policy is reinstated after lapse, the attained age on the policy will be
reset to the current age

Correct Answer: B

28) Aurthur wants to apply for a $150,000 10-year Renewable Term insurance
policy. Which
of the following statements is correct concerning the underwriting factors in
relation to
the premium he will pay?

a) critical illness benefit

b) waiver for total disability benefit

c) accidental dismemberment benefit

d) disability benefit

Correct Answer: B

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 29) Ravi and Nancy are married, have ham children, and recently bought a
house. Nancy has
stable employment with above average income and excellent group benefits
including 3
times annual salary life insurance. Ravi is successful working at home as a self-
employed
contractor. The couple has a large mortgage and cash flow is a concern, but
they want to
keep the home should Ravi die early. They want the most cost effective
coverage and a
considering Decreasing Term Insurance to cover the mortgage. Which of the
following is
true about this product?

a) Even though Decreasing Term has a declining death benefit and premiums
are level, it is cost
effective because the decrease is factored into the mortality cost.

b) Decreasing Term is cost effective since the premium deceases, matching

the need with cash flew as
time passes.

c) Decreasing Term is cost effective because at each renewal option the

subsequent term is shorter and
this reduced risk is factored into the mortality cost.

d) Even though Decreasing Term has a declining death benefit, the premiums
also decline, so the cash
flow matches the coverage amount, making it cost effective.

LLQP Exam Prep 282

 Correct Answer: A

30) Attila and Maggie in Ontario after 10 years of marriage, they have divorced.
When
they were married, Attila was the policy holder and life insured of a policy on his
own life
with Maggie as the irrevocable beneficiary. Attila is required to pay spousal
support and
child support under the settlement agreement. Which of the following is true
regarding
their roles in the life insurance contract after the divorce?

a) The policy is void as there no longer is an insurable interest.

b) Maggie can remain the beneficiary on the policy but Attila must give his
written permission.

c) Ownership must be transferred to a person with an insurable interest.

d) Maggie will remain the beneficiary on the policy and no changes are
required.

Correct Answer: D

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 TERMinator Cards

LLQP Exam Prep 284

 T he transf er of al l of the ri ghts of the ori gi nal pol i cy owner to another party,
Absol ute Assi gnment
i ncl udi ng the ri ght to appoi nt a benef i ci ary.

A i der that pays al l or some of the f ace amount of the pol i cy to the l i f e i nsured
Accel erated D eath Benef i t thereby reduci ng the amount of death benef i t the benef i ci ary wi l l ul ti matel y
recei ved (aka l i vi ng benef i t ri der/termi nal i l l ness benef i t)

An acci dental death benef i t that al so provi des coverage f or di smemberment, such
Acci dental D eath and D i smemberment
as the l oss of a l i mb.

A payment made, i n addi ti on to the f ace val ue of the pol i cy, i f the l i f e i nsured
Acci dental D eath Benef i t
di es i n an acci dent (aka doubl e i ndemni ty)

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 Provi des al l or parti al coverage f or medi al and dental expenses that are not
Acci dent & Si ckness I nsurance
covered by provi nci al heal th pl ans.

Accumul ated Val ue T he net amount pai d f or a def erred annui ty pl us i nterest.

Accumul ated F und T he pool of savi ngs bui l t by depsi ts to a uni versal l i f e pol i cy

T he peri od between the date a def erred annui ty i s purcahsed and the begi nni ng
Accumul ati on Peri od
of annui ty payments duri ng whi ch the val ue of the deposi t grows.

LLQP Exam Prep 286

 Speci f i es that i f an empl oyee i s absent f rom work on the day the group i nsurance
Acti vel y-at-work Provi si on contract i s due to begi n, (because of si ckness, i nj ury, or certai n other speci f i ed
reasons) coverage wi l l not begi n unti l the day the empl oyee returns to work.

Actual Authori ty T he authori ty gi ven to an agent to perf orm certai n tasks.

Adj ustabl e Premi um Premi ums that change over the l i f e of a whol e l i f e pol i cy.

A dol l ar representati on, f or tax purposes, of the pol i cy owner's cost of capi tal
Adj usted Cost Base
property, eg. the amount spent to buy a cottage

LLQP Exam Prep 287

 A dol l ar representati on, f or tax purposes, of the pol i cy owner's cost of a pol i cy, eg.
Adj usted Cost Basi s
premi ums pai d.

T he concept of provi di ng i nsurance coverage f or peopl e b/c they are a member of a

Adverse Sel ecti on
group and not because they need coverage.

Agency Contract T he arrangement btwn the pri nci pal and the agent.

A monthl y benef i t pai d to resi dents of Canada who recei ve the OAS and have
Al l owance
l i ttl e other i ncome.

LLQP Exam Prep 288

 A document that an appl i cant must si gn to i ndi cate that he or she accepts a rated
Amendment
pol i cy bef ore i t i s i ssued.

T he person who recei ves an annui ty or the proceeds of a seg f und on death or
Annui tant
maturi ty of the f und contract.

Annui ti zati on When a pensi on f und i s converted to an annui ty.

Aka T erm Certai n Annui ty. Pays annui tant a guaranteed amount f or ei ther a def i ned
peri od, a peri od endi ng at a speci f i ed age, or a peri od equal to the number of
Annui ty Certai n
years f rom annui tants age at the ti me of purchase and age 90 or unti l hi s or her
spouse turns 90.

LLQP Exam Prep 289

 Of f ers the owner or benef i ci ary three payment opti ons: monthl y i nstal l ments
Anni ty Opti on guaranteed f or l i f e, as a j oi nt and l ast survi vor annui ty f or the contract hol der and
hi s or her spouse, as a vari abl e annui ty, i nstal l ment ref ud or cash ref und.

T he number of uni ts (based on age, gender, and the prevai l i ng i nterest rate) pai d
Anni ty Uni ts
each month to the contract hol der or benef i ci ary of a seg f und.

Annui ty An i nvestment that pays a sum of money annual l y or at other regul ar i nterval s.

A def i ni ti on of di sabi l i ty that means a person i s consi dered di sabl ed i f he or she

Any Occupati on (any occ)
i s unabl e to work at any j ob.

LLQP Exam Prep 290

 T he i mpl i ed or suggested authori ty granted to an agent, even i f thi s was not the
Apparent Authori ty
i ntenti on of the pri nci pal .

Assi gnments of i nsurance pol i ci es can be absol ute or col l ateral , and can be made
Assi gnment
to a person, a chari ty, or corporati on.

T he rei nsurer who accepts the transf erred ri sk when the retenti on l i mi t has been
Assumi ng Company
reached.

A non-f orf ei ture benef i t whi ch automati cal l y charges unpai d premi ums as a l oan
Automati c Premi um Loan (APL)
agai nst the CSV of a pol i cy

LLQP Exam Prep 291

 Average Monthl y Pensi onabl e E arni ngs (AMPE ) Used to determi ne the amount of monthl y reti rement pensi on.

Average T ax Rate One of two actual tax rates, al so known as ef f ecti ve tax rate.

Back-E nd Load A sal es charge that i s appl i ed to the end of a contract.

Back-E nd Surrender Charge A charge that may be appl i ed i f a pol i cy i s surrendered.

LLQP Exam Prep 292

 Can i nsure di f f erent cl asses of empl oyees at rates that can be a mul ti pl e of sal ary.
Basi c Group AD &D
Premi ums are pai d by the empl oyer.

T he promi se i n the pol i cy that i denti f i ed the l i f e i nsured, the amount of the
Basi c Promi se i nsruance payabl e, when and where that amount i s payabl e, and to whom i t i s
payabl e.

T he bearer of the bond can sel l the bond and col l ect the i nterest f rom the
Bearer F orm
coupon.

Benef i ci ary T he person who recei ves al l amounts payabl e when the contract hol der di es.

LLQP Exam Prep 293

 Benef i t I ncome or payment recei ved by the pol i cy owner.

Benef i t Peri od T he l ength of ti me an i ncome wi l l be recei ved.

I denti f i es the amount of l i e i nsurance coverage or the method by whi ch the i nsurer
Benef i t Schedul e
wi l l determi ne the amount of coverage.

A pri vate pensi on beased on the average of the best years of pensi onabl e earni ngs.
Best E arni ngs Pl ans
Usual l y 3-5 consecuti ve years.

LLQP Exam Prep 294

 Bond Represents a debt of a government or corporati on to the bondhol der.

Covers busi ness overhead expenses when the pri me revenue earner i s unabl e to
Busi ness Overhead Pol i cy
produce b/c of an acci dent or si ckness that causes di sabi l i ty.

A l egal contract between the sel l er (the sol e propri etor, partner, or sharehol der)
and the buyer. T hese agreements, f unded wi th l i f e i nsruacen, provi de the
Buy-Sel l Guarantee
benef i ci ary wi th suf f i ci ent f unds to acqui re the deceased's i nterset i n the
propri etorshi p, partnershi p, or corporati on.

Cal l abl e Bond Can be redeemed by the i ssuer bef ore the maturi ty date under certai n condti ons.

LLQP Exam Prep 295

 Canada E ducati on Savi ngs Grant (CE SG) T he contri buti on to an RE SP made by the f ederal government.

Canada Pensi on Pl an (CPP) A f ederal government reti rement and di sabi l i ty pensi on.

I ssued by the f ederal government wi th regul ar or compound i nterest. A mi ni mum

Canada Savi ngs Bonds
i nterest rate i s guaranteed f or one or more years, dependi ng on the i ssue.

Capi tal Gai ns T ax A tax on f i nanci al gai ns made on capi tal property i nvestments.

LLQP Exam Prep 296

 When capi tal property i s worth l ess than i ts purchase pri ce and can be used to
Capi tal Losses
of f set capi tal gai ns.

I nvestments such as stocks, bonds, mortgages, real property, mtuual f unds, and seg
Capi tal Property
f unds.

T he capi tal requi red to provi de th annual cash needs of the survi vors. AKA Capi tal
Capi tal Retenti on Approach
Needs Approach

Based on the cal cul ati on of the present val ue of the survi vor's share of the i ncome
Capi tal i zati on of I ncome stream that the deceased person woul d have recei ved had he or she l i ved. AKA
H uman Li f e Val ue Approach.

LLQP Exam Prep 297

 D etermi nes how much woul d have to be i nvested at a certai n rate of return to
Capi tal i zed Val ue
equal the amount of money a person woul d earn i n a year.

A pri vate pensi on pl an where the empl oyee recei ves a pensi on credi t i n every year of
Career Average E arni ngs Pl an
empl oyment based on empl oyment i ncome f or that year.

A f eature of RRSP's that al l ows a person to carry f orward any unused contri buti on
Carry F orward
i ndef i ni tel y and appl y i t to subsequent years.

Case Law Another name f or Common Law

LLQP Exam Prep 298

 Guarantees the annui tant an i ncome f or l i f e. I f the annui tant di es bef ore recei vi ng
payments equal to the purchase pri ce of the annui ty, the di f f erence between the
Cash Ref und Annui ty
purchase pri ce and the total amount recei ved i s pai d to ei ther a benef i ci ary or
the annui tant's estate i n a l ump sum.

T he money i n the pol i cy reserve whi ch can be accessed by the pol i cy owner and
Cash Surrender Val ue (CSV)
recei ved i n cash. T he val ue of the CSV i s premi ums pl us i nterest, l ess costs.

T he document or bookl et whi ch a group pl an member recei ves that outl i nes the
Certi f i cate of I nsurance benf i ts and other rel evant detai l s regardi ng the master contract hel d by the
empl oyer.

Chi l dren's Benef i t T he benef i t a chi l d recei ves when a parent who was a CPP contri butor di es.

LLQP Exam Prep 299

 Occurs when an agent seeks to repl ace an i n-f orce pol i cy wi th an exi sti ng i nsurance
Churni ng company wi th a new pol i cy f rom the same company f or the purpose of generati ng a
commi ssi on.

T he appl i cati on made on behal f of an i nsured to recover benef i ts due as a resul t

Cl ai m
of death, di sabi l i ty, or acci dent.

Cl ai mant T he person or l egal enti ty that i s cl ai mi ng the benef i t f rom a l i f e i nsurance pol i cy.

A speci al tax whi ch "cl aws back" al l or part of the OAS pensi on f rom hi gh i ncome
Cl awback
earners.

LLQP Exam Prep 300

 E thi cal conduct gui del i nes that have been establ i shed by the Canadi an Li f e and
Codes of E thi cs
H eal th I nsurance Associ ati on (CLH I A) and Advoci s.

Coerci on I nti mi dati ng, threateni ng, or usi ng undue i nf l uence to obtai n i nsurance busi ness.

Co-I nsurance F actor I s expressed as percentage of an i nsurance cl ai m that i s pai d by the i nsurer.

Col l ateral Assi gnment When a pol i cy i s assi gned to a f i nanci al i nsti tuti on as securi ty f or a l oan.

LLQP Exam Prep 301

 Col l ateral Li f e I nsurance A l i f e i nsurance pol i cy assi gned as col l ateral f or a l oan.

T he l aw whi ch compri ses the bul k of l aw i n Canada wi th excepti on of the

Provi nce of Quebec. Common l aw i s based on custom and usage dati ng f rom
Common Law
anci ent unwri tten l aws i n E ngl and and whi ch were col l ected together and
establ i shed as the Common Law of the Real m. Aka Case Law.

Common Mi stake A mi stake made i n a contract that af f ects both parti es. Aka mutual mi stake.

Shares whi ch represent ownershi p i n a company and whi ch gi ve the hol der voti ng
Common Shares ri ghts. D i vi dends are pai d on common shares i f decl ared by the board of di rectors
of the company.

LLQP Exam Prep 302

 Occurs when a person rei nvests di stri buti ons f rom an i nvestment (eg. i nterest), so
Compoundi ng
that he or she i s earni ng growth on growth (eg. i nterest on i nterest).

An i nterest that woul d l i kel y have an adverse ef f ect on an agent's j udgement

Conf l i cti ng I nterest
advi ce, or l oyal ty to a cl i ent or prospecti ve cl i ent.

Consi derati on A part of a contract whi ch i ndi cates the exchange of val ue.

I nf ormati on gi ven by an appl i cant to an agent i s deemed to have been gi ven to the
Constructi ve Noti ce
i nsurer.

LLQP Exam Prep 303

 T he pol i cy can be made voi d wi thi n tow years of i ts date of i ssue i f mi stakes are
Contestabl e
di scovered by the i nsurer.

A benef i ci ary who woul d recei ve al l or part of the i nsurance proceeds i f the
Conti ngent Benef i ci ary
pri mary benef i ci ary i s not l i vi ng when the pol i cy matures.

Contract H ol der T he owner of a contract.

T he term used f or al i f e i nsurance contract b/c the appl i cant ei ther accepts or
Contract of Adhesi on decl i nes al l the terms and condi ti nos of coverage that are set out i n the contract.
T here i s no opportuni ty f or negoti ati on.

LLQP Exam Prep 304

 Contract A promi se or a set of promi ses tha the l aw wi l l enf orce.

D o not requi re the el ements of of f er, acceptance, and consi derati on to be

Contracts Under Seal
enf oraceabl e, but do not requi re a seal .

Contri butory Pl an T he group member contri butes towards the premi um f or group i nsurance.

A cl ause that al l ows converti bl e term pol i ci es and pol i ci es wi th term ri ders to be
Conversi on Pri vi l ege
converted to permanent l i f e i nsurance wi thout evi dence of i nsurabi l i ty.

LLQP Exam Prep 305

 Gui del i nes devel oped by the Canadi an Li f e and H eal th I nsurance Associ ati on to
Coordi nati on of Benef i ts Gui del i nes coordi nate extended heal th care and dental benef i ts pai d under group pl ans to
ensure that benef i ts do not exceed total el i gi bl e expenses.

When the group i nsured must pay a f i xed percentage of costs. Al so cal l ed co-
Co-Pay
i nsurance.

Corporate Bond E vi dence of a corporate debt.

An i ncorporated company. An i ncorporated company i ssues shares and sharehol ders

Corporati on are enti tl ed to certai n ri ghts (eg. such as the ri ght to recei ve f i nanci al i nf o about
the company, and to attend sharehol der's meeti ngs).

LLQP Exam Prep 306

 Poi nt-of -sal e tool s used to i l l ustrate hypotheti cal pol i cy di vi dends and other
Cost I l l ustrati ons
benef i ts deri ved f rom l i f e i nsurance products that are not guaranteed.

An adj ustment made to hel p some i ncomes keep up wi th i nf l ati on. As an i nsurance
Cost of Li vi ng Adj ustment (COLA) ri der benef i ts wi l l i ncrease accordi ng to the amount of i ncrease speci f i ed i n the
ri der.

Coupon Bond I nterest coupons are attached and can be presented f or payment.

Credi tor A person or an i nsti tui on that i s owed money by another.

LLQP Exam Prep 307

 A partnershi p agreement whi ch has al l partners i nsuri ng the l i ves of each other
Cri ss-Cross Agreement
equal l y.

D esi gned to manage the ri sk associ ated wi th contracti ng certai n dreaded

Cri ti cal I l l ness I nsurance
di seases.

Cri ti cal Loss Where f i nanci al rui n i s a possi bl e resul t.

An agreement that names the buyer of the busi ness as the pol i cy benef i ci ary, when
the busi ness i s a sol e propri etorshi p. When the owner di es, the buyer recei ves the
Cross-Purchase Agreement
f ace amount of the pol i cy. T hat money i s then sued to buy the busi ness f rom the
hei rs of the deceased.

LLQP Exam Prep 308

 When a taxpayer di es and al l accrued i ncome, and capi tal gai ns and l osses must
Crystal i zati on
be reported i n the year of death.

Current Yi el d Ref l ects the annual rate of return on a share.

D eath Benef i t T he money whi ch i s pai d the the benef i ci ary upon death of the i nsured.

A bond whi ch i s supported by the general credi t worthi ness of the i ssui ng
D ebenture
corporati on.

LLQP Exam Prep 309

 D ebt Securi ti es Short-term securi ti es or l ong-term securi ti es.

D ebtor A perosn who owes money.

(I nf requentl y Used) term i nsurance whi ch provi des a l evel premi um over a l ong term,
a decrease i n the f ace amount each year, and a death benef i t pai d to the
D ecreasi ng T erm I nsurance
benef i ci ary f or the f ace amount i n f orce at the ti me of death of the l i f e i nsured
duri ng the term speci f i ed i n the pol i cy.

D educti bl e An amount the i nsured pays bef ore payment i s recei ved f rom the i ssuer.

LLQP Exam Prep 310

 An annui ty that begi ns at a f uture date. T he annui ty can be purchased wi th ei ther
D ef erred Annui ty
a si ngl e premi um or a seri es of premi ums.

A trust created f or al l empl oyees of a company, or one or more cl asses of empl oyees
D ef erred Prof i t-Shari ng Pl an (D PSP)
of that company, and regi stered wi th CCRA.

T he i nvestor pays a sal es charge when al l or part of the ori gi nal i nvestment i s
D ef erred Sal es Charge redeemed. T he sal es charge decl i nes over an agreed-upon number of years unti l , at
the end, the charge i s el i mi nated.

A pri vate pensi on pl an where the empl oyee knows exactl y how much he or she i s
D ef i ned Benef i t Pl an
goi ng to pay f or the pensi on and how much he or she wi l l recei ve when reti red.

LLQP Exam Prep 311

 Pool s contri buti ons of the empl oyer and the empl oyer to provi de the pensi on. AKA
D ef i ned Contri buti on Pl an
Money purchase pl an.

T he ti me f ol l owi ng death duri ng whi ch the survi vi ng spouse must have suf f i ci ent
D ependency Peri od i ncome to provi de care f or the chi l dren unti l the youngest reaches the age of
ei ghteen.

When deposi ts are made on a monthl y basi s to a seg f und, and when compani es
D eposi t-Based Guarantee
make the maturi ty date cal cul ati on on a monthl y basi s.

A f i nanci al product that i s deri ved f rom and based upon another f i nanci al
D eri vati ve
product, such as a stock market i ndex, a commodi ty etc...

LLQP Exam Prep 312

 D i rect Wri ter T he i nsurer that i ssues a pol i cy.

Can onl y be used f or busi nesses that have buy-sel l agreements i n pl ace. I t al l ows
D i sabi l i ty Buy-Out I nsurance partners, owners, or sharehol ders of a busi ness to purchase the share i n the busi ness
hel d by another partner, owner, or sharehol der who becomes di sabl ed.

A ri der that provi des a monthl y i ncome, af ter a wai ti ng peri od, when the l i f e
D i sabi l i ty I ncome Benef i t
i nsured i s total l y di sabl ed. T hi s ri der can onl y be added to a two-party contract.

As def i ned i n a pol i cy (ex. i t may cover a physi cal i mpai rment but not a mental
di sabi l i ty); however, the di sabi l i ty must resul t f rom an acci dent or si ckness that
D i sabi l i ty
occurred whi l e the pol i cy was i n f orce, and the di sabi l i ty must requi re medi cal
attenti on.

LLQP Exam Prep 313

 D i sposi ti on When a l i f e i nsurance pol i cy i s di sposed of . D i sposi ti on has tax consequences.

D i stri buti ons T he peri odi c payments of i nterest or di vi dends made by mutual f unds or seg f unds.

A share of prof i ts that have been earned by the corp and di stri buted to
D i vi dends (Corporate)
sharehol ders on a pro-rata basi s. D i vi dend payments are not guaranteed.

An overpayment of premi ums by the parti ci pati ng pol i cy owner returned to the
D i vi dends (Li f e I nsurance) pol i cy owner i n annual di vi dend f orm. T hey are not guaranteed and there are a
number of ways the di vi dends can be recei ved.

LLQP Exam Prep 314

 Achi eved when the same amount of money i s i nvested regul arl y over a peri od of
D ol l ar-Cost Averagi ng
ti me.

Payabl e when death i s caused by one of a number of speci f i ed di seases, such as

D read D i sease Benef i t
cancer.

D ue D i l i gence Bei ng abl e to show that a reasonabl e basi s exi sts f or the recommendati ons gi ven.

I ncome f rom al l sources. E arned i ncome f or tax purposes i ncl udes i nvestment
E arned I ncome (f or RRSP and tax purposes) i ncome (i nterest, di vi dends and capi tal gai ns) whereas earned i ncome f or RRSP
purposes does not i ncl ude i nvestment i ncome.

LLQP Exam Prep 315

 I ncl udes sal ary, wages and commi ssi ons, royal ti es, al i mony payments, net research
E arned I ncome (f or D i sabi l i ty I nsurance)
grants, and net busi ness i ncome.

E f f ecti ve D ate T he date upon whi ch the pol i cy takes ef f ect and the coverage starts.

T he ti me between the occurence of the di sabi l i ty and when benef i ts begi n. T he

E l i mi nati on Peri od
wai ti ng peri od duri ng whi ch benef i ts are not pai d.

E mbezzel ment Steal i ng and usi ng another's money. E mbezzl ement i s a cri mi nal of f ense.

LLQP Exam Prep 316

 Provi de prof essi onal consul tati on to empl oyees and thei r f ami l i es to provi de
E mpl oyee Assi stance Programs i mmedi ate support, educati on, and access to resources f or a wi de range of
empl oyee needs, such as counsel i ng f or stress and dependency probl ems.

A vari ati on of a whol e l i e pol i cy whi ch pays the f ace amount i f the l i f e i nsured
E ndowment Pol i cy
di es wi thi n a speci f i ed peri od of ti me (the endowment peri od)

E qui ty Common or pref erred shares.

Prof essi onal l i abi l i ty coverage carri ed by i nsurance agents and i nsurers agai nst
E rrors and Omi ssi ons I nsurance (E & O) l awsui ts cl ai mi ng mi stakes i n prof essi onal j udgement, and/or f ai l ure to properl y
execute the steps of putti ng a pol i cy i nto ef f ect.

LLQP Exam Prep 317

 E state A term commonl y used on a person's death to ref er to al l hi s or her assets.

T he measure of a l i f e i nsurance agent's busi ness character and hi s or her adherence

E thi ch Conduct
to the codes of ethi cs establ i shed by CLH I A and Advoci s.

E vi dence of the Contract T he i nsured's appl i cati on and the i nsurer's pol i cy.

E xcl usi on Ri der A ri der that excl udes some coverage.

LLQP Exam Prep 318

 E xcl usi ons Benef i ts deni ed under certai n ci rcumstances.

T he part of the pol i cy that conf i rms the date of i ssue of the pol i cy and when
E xecuti on Porti on of Pol i cy si gned by the of f i cers of the i nsurance company, f i nal i zes the contract of
i nsurance.

Provi des tax benef i ts to the pol i cy owner b/c the growth i n the pol i cy i s not taxed
E xempt Pol i cy
unti l i ts di sposi ti on.

Pol i ci es l ast acqui red si nce D ecember 2, 1982 must pass an annual test on the
E xempti on T est
renewal date to determi ne whether the pol i cy i s cl assi f i ed exempt or non-exempt.

LLQP Exam Prep 319

 T he al l ocati on of part of a premi um toward the payment of the i nsurer's operati ng
E xpense Loadi ng
expenses.

E xpi ry D ate T he day term i nsurance coverage ends.

A l i mi tati on i n a di sabi l i ty pol i cy that extends the el i mi nati on peri od when a

E xtended E l i mi nati on Peri od Amendment
cl ai m ari ses f rom a pre-exi sti ng condi ti on.

An opti on whi ch al l ows a pol i cy owner who stops payi ng premi ums to keep coverage
E xtended T erm I nsurance (E T I ) i n f orce by usi ng the cash surrender val ue as a si ngl e premi um to buy term
i nsurance.

LLQP Exam Prep 320

 F ace Amount T he amount of the i nsurance payabl e.

F ace Page D escri bes the basi c components i n the pol i cy. Aka T he Schedul e

When others do not f ul f i l l obl i gati ons they have made to you and you f ace ri sk
F ai l ure of Others
resul ti ng f rom thei r i nacti on.

T he val ue of an i tem today. I t i s based on what si mi l ar i tems are bei ng sol d, or

F ai r Market Val ue
bi d, f or i n the marketpl ace.

LLQP Exam Prep 321

 An amount the i nsured pays f or al l f ami l y members covered under the group pl an
F ami l y D educti bl e bef ore payment i s recei ved f rom the i nsurer; the amount i s reduced i f the si ngl e
deducti bl e i s pai d bef ore the f ami l y deducti bl e.

F i duci ary D uty T he responsi bi l i ty of conf i denti al i ty and trust.

T he rel ati onshi p between a f i duci ary (someone havi ng a responsi bi l i ty of

F i duci ary Rel ati onshi p
conf i denti al i ty and trust) and hi s or her cl i ent.

F i nal Average E arni ngs Pl ans A pri vate pensi on based on the f i nal i ncome-earni ng years.

LLQP Exam Prep 322

 T he i nsurance i ndustry i s one el ement of CD N f i nanci al servi ces whi ch al so
F i nanci al Servi ces
i ncl udes banki ng and securi ti es.

D etermi ne how the gov't wi l l rai se i ncome through taxati on and how the gov't wi l l
F i scal Pol i ci es
spend that i ncome.

F i xed-T erm Annui ty A term Certai n Annui ty

A pri vate pensi on that speci f i es the age and the number of years of servi ce that are
F l at Benef i t Pl ans
requi red bef ore the empl oyee i s el i gi bl e f or the benef i t.

LLQP Exam Prep 323

 Somethi ng wri tten or prepared i n wri ti ng to decei ved, such as a f al se si gnature.
F orgery
F orgery i s a cri mi nal of f ense.

A f raudul ent mi srepresentati on i ntended to cheat or decei ve; Wi thi n the i nsurance
i ndustry i t i s possi bl e f or the i nsured to def raud the i nsurance company and the
F raud
agent, or the agen to def raud ei ther the customer or the i nsurance company. F raud
i s a cri mi nal of f ense. A pol i cy wi l l be termi nated i f f raud has been commi tted.

A f al se representati on whi ch a party makes del i beratel y, knowi ng i t to be f al se,

F raudul ent Mi srepresentati on
and wi th the i ntent of decei vi ng the other party to enter i nto the contract.

F ront-E nd Load A sal es charge that i s appl i ed at the begi nni ng of a f und contract.

LLQP Exam Prep 324

 A group pl an where the pol i cy owner pays a premi um and the i nsurer pays al l cl ai ms.
F ul l y-I nsured Pl an
Under thi s pl an, i t i s possi bl e f or cl ai ms to exceed premi ums.

Contracts that i nvol ve a commi tment to buy or sel l a speci f i c quanti ty of an asset,
F uture Contracts
at a speci f i c pri ce, f or del i very duri ng a speci f i c peri od of ti me.

T he 30 or 31-day peri od duri ng whi ch the pol i cy remai ns i n f ul l f orce bef ore a
Grace Peri od
pol i cy i s l apsed f or non-payment of a premi um.

A pol i cy l ast acqui red bef ore D ec.2,1982. T he pol i cy owners do not have to report
Grandparented Pol i cy
i ncome accrui ng f or tax purposes.

LLQP Exam Prep 325

 Gross Premi um T he net premi um of a pol i cy pl us the expense l oad.

Group Credi tor Li f e Provi ded to credi tors to i nsured the l i f e of thei r debtors.

Pool s the ri sk of i ndi vi dual members of the group to provi de i nsurance wi thout
Group I nsurance
requi ri ng evi dence of i nsurabi l i ty.

provi des benef i ts si mi l ar to those of f ered by i ndi vi dual RRSPs except the
group reti rement savi ngs pl an (GRSP) empl oyer admi ni sters them on a group basi s. E mpl oyees contri bute by wage
deducti on, matched i n whol e or part by empl oyer.

LLQP Exam Prep 326

 LLQP Vo cab
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term i nsurance whi ch covers a l i f e that i s i ncreasi ng i n economi c val ue, such as an
i ncreasi ng term i nsurance:
essenti al empl oyee whose sal ary i ncreases annual l y.

i ndi vi dual vari abl e i nsurance contract (I VI Q: the contract that buys i nto a segregated f und.

i nf l ati on protecti on: the l evel of protecti on agai nst l osses caused by i nf l ati on that an i nvestor requi res.

the prospectus of segregated f unds whi ch provi des the i nvestor wi th i nf ormati on
i nf ormati on f ol der:
regardi ng the f und.

LLQP Exam Prep 327

 LLQP Vo cab
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a f al se representati on made wi thout the i ntent to decei ve the other party. Al so

i nnocent mi srepresentati on:
known as negl i gent mi srepresentati on.

detai l any hazardous recreati onal or occupati onal acti vi ty of the pol i cy
i nspecti on report:
appl i cant, as wel l as f i nanci al data on both pol i cy hol der and l i f e i nsured.

guarantees the annui tant a set number of payments equal to the purchase pri ce. I f
the annui tant di es bef ore recei vi ng payments equal to the purchase pri ce of the
i nstal l ment ref und annui ty:
annui ty, the di f f erence between the purchase pri ce and the total amount recei ved
i s pai d to ei ther a benef i ci ary or the annui tant's estate i n i nstal l ments.

when the death of the i nsured woul d be detri mental or cause harm to the person
i nsurabl e i nterest:
taki ng out the i nsurance.

LLQP Exam Prep 328

 LLQP Vo cab
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i nsured: the person who i s the owner (pol i cy owner) of the pol i cy and pays i ts premi um.

i nsurance regul ators: regul ators of the i nsurance i ndustry and segregated f unds.

pol i ci es that are l i nked to i nterest rates and react to changes i n i nterest rates.
i nterest rate-sensi ti ve pol i ci es:
(Al so known as new money pl ans).

i ntestate: when a person di es wi thout l eavi ng a wi l l .

LLQP Exam Prep 329

 LLQP Vo cab
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i nvestment returns: the returns (growth i n val ue) i nvestors recei ve on thei r i nvestments.

the pol i cy hol der cannot change the benef i ci ary unl ess the benef i ci ary agrees i n
i rrevocabl e benef i ci ary:
wri ti ng to the change.

desi gned to protect agai nst overi nsurance. T hey consi der how much i ncome a
i ssue and parti ci pati on l i mi ts: di sabl ed person i s earni ng f rom al l sources, and provi de the di f f erence between
the i nsured’s l i mi t and what i s al ready bei ng recei ved.

a contract i n whi ch more than one l i f e i s i nsured and settl ement i s made to ei ther
j oi nt f i rst/l ast to di e:
the survi vor (f i rst to di e) or the benef i ci ary (l ast to di e).

LLQP Exam Prep 330

 LLQP Vo cab
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j oi nt and l ast survi vor annui ty: provi des a guaranteed i ncome duri ng the course of two peopl e’s l i ves.

key empl oyee: an i mportant empl oyee whose death woul d cause the busi ness a devastati ng bl ow.

i nsurance used to cover a person who i s a key empl oyee. T here are three parti es to
key person di sabi l i ty i nsurance:
thi s contract: the pol i cy owner (busi ness), the i nsured (empl oyee), and the i nsurer.

whol e l i f e pol i ci es whi ch have premi ums and f ace amounts that are set (do not
guaranteed pol i ci es:
change over ti me).

LLQP Exam Prep 331

 LLQP Vo cab
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ensures an i nvestor wi l l recei ve a predetermi ned amount of growth on the

guaranteed return:
i nvestment.

hazards: contri bute to peri l s and can be both physi cal or moral .

sol d through acci dent and si ckness pol i ci es, i t rei mburses the i nsured f or out-of -
heal th i nsurance:
pocket expenses.

ri sks that have a l ow l i kel i hood of occurrence, but that woul d cause severe l osses
hi gh severi ty/l ow f requency ri sks:
shoul d they occur.

LLQP Exam Prep 332

 LLQP Vo cab
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how an agent presents hi msel f or hersel f to the general publ i c. A l i cense to sel l
hol di ng out: l i f e i nsurance must be obtai ned bef ore a person can be i denti f i ed or hel d out as
a l i censed l i f e i nsurance agent

al l ows an RRSP pl an hol der to wi thdraw up to $20,000 f rom hi s or her RRSP f or

home buyer’s pl an:
the f i rst-ti me purchase of a home or f or buyi ng a home under certai n condi ti ons.

based on the cal cul ati on of the present val ue of the survi vor’s share of the i ncome
human l i f e val ue approach: stream that the deceased person woul d have recei ved had he or she l i ved. Al so
known as the capi tal i zati on of i ncome.

purchased wi th a si ngl e premi um. I ncome begi ns at the end of the f i rst annui ty
i mmedi ate annui ty benef i t: peri od af ter i t i s purchased (e.g. i f the annui ty peri od i s one year, the f i rst payment
i s recei ved one year af ter the annui ty has been purchased.

LLQP Exam Prep 333

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i mportant l oss: where f i nanci al adj ustments are requi red that wi l l reduce the standard of l i vi ng.

part of the Code of E thi cs f or l i f e i nsurance agents whi ch states that an i nsurance
know your cl i ent rul e: agent must make every ef f ort to understand hi s or her cl i ent’s needs and f i nanci al
si tuati on.

al l ows a cl i ent to purchase l i f e i nsurance wi thout di rect contact wi th the

l aw of agency:
i nsurance agency.

l egal capaci ty: a person i s l egal l y abl e to enter i nto a l i f e i nsurance contract.

LLQP Exam Prep 334

 LLQP Vo cab
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the l evel death benef i t of a uni versal l i f e pol i cy pl us the amount of each gross
l evel death benef i t pl us cumul ati ve gross premi um:
deposi t bef ore premi ums, taxes, deducti ons, and expenses.

term i nsurance whi ch speci f i es i n the pol i cy exactl y how much the i nsurance wi l l
l evel term i nsurance: cost, how much i t wi l l pay out, who wi l l recei ve the death benef i t, and when the
i nsurance expi res.

combi nes the benef i ts of a uni versal l i f e i nsurance pol i cy wi th a l oan i n

l everaged def erred compensati on pl an (LD CP):
reti rement.

l everagi ng: when borrowed ni oney i s i nvested.

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when a person i ntenti onal l y or uni ntenti onal l y i nf l i cts personal i nj ury on someone
l i abi l i ty ri sk:
el se, or causes damage to another’s property.

provi des an i ncome that i s guaranteed f or a speci f i ed peri od of ti me or unti l the

death of the annui tant af ter that peri od of ti me. I f the annui tant di es bef ore the
l i f e annui ty wi th a guaranteed number of payments: end of the peri od, the bal ance of the benef i ts are pai d to the benef i ci ary unti l
the guarantee peri od ends. I f the annui tant outl i ves the guaranteed peri od,
payments conti nue unti l the l ast i nstal l ment bef ore hi s or her death.

l i f e annui ty: makes i ncome payments f or the l i f eti me of the annui tant.

reti rement f und i nto whi ch the accumul ated savi ngs i n a Locked-i n RRSP, LI RA,
l i f e i ncome f unds (LI F ): another LI F , l ocked-i n pensi on f unds, or a pensi on f l md may be transf erred and then
pai d out to the f und owner as reti rement i ncome.

LLQP Exam Prep 336

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i nsurance whi ch provi des f i nanci al protecti on agai nst f i nanci al l oss resul ti ng f rom
l i f e i nsurance:
death.

l i f e i nsured: the person whose l i f e i s i nsured by the l i f e i nsurance contract.

a vari ati on on the l i f e i ncome f und (LI F ) i n whi ch there i s no requi rement to
l i f e reti rement i ncome f unds (LRI F ):
purchase an annui ty by age 80.

l i f e strai ght annui ty: pays a guaranteed i ncome f or l i f e.

LLQP Exam Prep 337

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l i f el ong l earni ng pl an: al l ows an RRSP pl an to wi thdraw up to $20,000 educati onal expenses.

a restri cti on i n an i ndi vi dual di sabi l i ty i ncome pol i cy that l i mi ts the benef i t
l i mi ted payment amendment:
peri od when a cl ai m i s made resul ti ng f rom a pre-exi sti ng condi ti on.

another f orm of whol e l i f e i nsurance. Premi ums on these pol i ci es are l i mi ted and
l i mi ted payment l i f e:
onl y payabl e f or a certai n peri od or to a certai n age.

the adj ustment made to a segregated f und contract when there i s a wi thdrawal
l i near reducti on method:
that reduces the val ue of the contract by the dol l ar amount wi thdrawn.

LLQP Exam Prep 338

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l i qui di ty: the ease wi th whi ch i nvestments can be converted to cash or near cash.

l oads: sal es charges f or a mutual or segregated f und.

a restri cti on under the Pensi on Benef i ts Standards Act that prevents a person f rom
cashi ng-out pensi on benef i ts to ensure that the person has an i ncome f or l i f e.
l ocked-i n pl ans:
Pensi on moni es must be pl aced i n l ocked-i n pl ans i f the pensi on pl an member
wi shes to transf er hi s or her pl an out of the empl oyer-sponsored pl an.

a f orm of Locked-i n RRSP i nto whi ch pensi on benef i ts may be transf erred f rom an
l ocked-i n i ncome reti rement account (LI RA): empl oyer’s pl an when the empl oyee l eaves the company pri or to the age of
reti rement.

LLQP Exam Prep 339

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when vested money i s l ocked i n to an RRSP, a L.I RA, or LI F account unti l the
l ocki ng i n:
empl oyee reti res or to a date speci f i ed i n the pl an.

payabl e when the heal th condi ti on of the l i f e i nsured requi res l ong-term care,
l ong-term care benef i t:
such as i n a nursi ng home.

has a benef i t peri od of f i ve years or l onger. Benef i ts begi n af ter short-term

l ong-term di sabi l i ty pol i cy:
di sabi l i ty or government benef i ts end.

the ten days that a pol i cy owner has to deci de whether or not to keep the pol i cy
l ook-see peri od: af ter acknowl edgement of recei pt of the pol i cy. (Al so cal l ed the reci ssi on
peri od).

LLQP Exam Prep 340

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l oss preventi on: control l i ng ri sk by reduci ng the f requency of l oss.

l oss reducti on: control l i ng ri sk by reduci ng the severi ty of l oss.

management expense: f ees that cover the cost of runni ng a segregated f und.

margi nal tax rate: the rate at whi ch an i ndi vi dual i s taxed.

LLQP Exam Prep 341

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i nvestments that move wi th the market. I f the stock market moves down, the val ue
market ri sk:
of the i nvestment moves down.

when an annui ty contract i s surrendered, or an earl y wi thdrawal made, an

market val ue adj ustment: adl ustment i s made to the i nterest rate on whi ch the f i xed benef i t annui ty i s
based.

master contract: the group i nsurance pol i cy whi ch i s gi ven to the pol i cy owner, usual l y an empl oyer.

materi al l oss: where f i nanci al adj ustments are requi red.

LLQP Exam Prep 342

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a mi srepresentati on of a f act such that, i f the truth had been known, a reasonabl e
materi al mi srepresentati on: i nsurer woul d have ref used to i ssue the i nsurance or woul d have charge a hi gher
premi um f or i t.

provi des f or the guaranteed return of at l east 75% of the i ni ti al deposi t to a

maturi ty guarantee:
segregated f und 10 years af ter the date the contract i s si gned by the i nvestor.

the name gi ven to the speci f i ed amount used i n the annual exempti on test to
maxi mum tax actuari al reserve (MT AR):
determi ne whether or not a pol i cy i s tax exempt.

meeti ng of the mi nds: when the parti es have agreed to al l the detai l s of a contract.

LLQP Exam Prep 343

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i ndi vi dual s who have not reached the age of maj ori ty as def i ned i n the provi nce
mi nors:
where they resi de.

When one of the parti es to a contract has been i nduced or persuaded to enter i nto
mi srepresentati on: the contract through the mi srepresentati on (or f al se representati on) of the other
party.

when a mi stake has been made about the detai l s of a contract and there has been
mi stake:
no meeti ng of the mi nds.

an addi ti onal charge f actored i nto the premi um cost to ref l ect addi ti onal costs
modal f actor: associ ated wi th the processi ng of i nsurance premi ums that are pai d monthl y or
quarterl y, rather than i n a si ngl e payment.

LLQP Exam Prep 344

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monetary pol i cy: how the government manages the money suppl y.

the cl assi f i cati on by occupati on based on the probabi l i ty of si ckness and i nj ury
morbi di ty experi ence:
occurri ng.

mortal i ty charge: the cost f or i nsurance protecti on i n a uni versal l i f e pol i cy.

the number of peopl e expected to di e at a gi ven age, based on 1,000 peopl e of

mortal i ty rates:
the same age.

LLQP Exam Prep 345

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mortal i ty tabl es: the tabl es used by underwri ters i n the cal cul ati on of l i f e i nsurance premi um rates.

muni ci pal bonds: i ssued by muni ci pal i ti es. Usual l y term or seri al bonds, Most are non-cal l abl e.

mutual compani es: compani es owned by pol i cyhol ders.

pool s of money managed by prof essi onal f und managers. f unded by i nvestors wi th
mutual f unds: si mi l ar i nvestment obj ecti ves. T he f und’s portf ol i o may consi st of a vari ety of
i nvestments.

LLQP Exam Prep 346

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a mi stake made i n a contract that af f ects both parti es. Al so known as a common
mutual mi stake:
mi stake.

a f al se representati on made wi thout the i ntent to decei ve the other party. Al so

negl i gent mi srepresentati on:
known as i nnocent mi srepresentati on.

the net assets i n a mutual f und mi nus l i abi l i ti es, di vi ded by the number of uni ts
net asset val ue (NA V):
outstandi ng.

net cost of pure i nsurance (NCPI ): the l i f e i nsurance cost wi thi n the pol i cy.

LLQP Exam Prep 347

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the f ace val ue of the pol i cy pl us any extras the pol i cy owner may be enti tl ed to
net death benef i t:
recei ve.

net premi um outl ay: the di f f erence between premi ums pai d and premi ums recei ved.

a f und that charges no sal es f ee but usual l y compensates by chargi ng a hi gher

no-l oad f und:
management expense f ee.

the “named” rate of return f or an i nvestment (i .e. a GI C that pays 4% i nterest; 4% i s

nomi nal rate of return:
the nomi nal rate of return).

LLQP Exam Prep 348

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the group pol i cy owner, of ten the empl oyer, pays the f ul l premi um f or the group
non-contri butory pl an:
i nsurance.

non-di scri mi natory benef i ts schedul e: al l empl oyees i n a group pl an recei ve the same coverage.

non-exempt pol i cy: the pol i cy owner must report the i ncome that i s accrui ng i n the pol i cy yearl y.

a benef i t or val ue that al l ows coverage to conti nue even i f premi ums are not pai d.
non-f orf ei ture opti ons al so cal l ed non-f orf ei ture benef i ts: T here are three non-f orf ei ture val ues: automati c premi um l oan, extended term
i nsurance, reduced pai d-upi nsurance.

LLQP Exam Prep 349

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non-parti ci pati ng pol i cy: a whol e l i f e pol i cy whi ch does not pay di vi dends.

the amount of the credi t i s ref unded onl y when tax i s owed (chari tabl e
non-ref undabl e tax credi t:
contri buti on).

theoreti cal uni ts assi gned to i nvestors i n segregated f unds so that they can moni tor
noti onal uni ts:
the growth of thei r i nvestment.

the f i ve categori es i nto whi ch occupati ons have been cl assi f i ed based on the
l i kel i hood of a cl ai m bei ng made. T he cl assi f i cati on i s based on the hazard
occupati onal cl assi f i cati on:
i nherent i n the j ob and the l i kel y durati on of the di sabi l i ty that wi l l resul t f rom
work i n that occupati on.

LLQP Exam Prep 350

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of f er and acceptance: an essenti al el ement of a contract, al so know as mutual assent or bargai n.

a monthl y pensi on payabl e to al l Canadi ans or l egal resi dents age 65 and over who
ol d age securi ty (OAS):
appl y f or the benef i t and meet resi dence requi rements.

a pool ed i nvestment i n whi ch new uni ts are conti nuousl y sol d to new i nvestors and
open-ended i nvestment f und:
exi sti ng uni ts are redeemed upon demand by the f und.

a contractual ri ght or obl i gati on to buy or sel l a speci f i c quanti ty of a securi ty at

opti on:
a speci f i c pri ce, wi thi n a sti pul ated ti me peri od.

LLQP Exam Prep 351

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a l i f eti me and cumul ati ve l i mi t of $2,000 over the RRSP contri buti on al l owed
over-contri buti on:
bef ore a penal ty of 1% per month i s charged on the over contri buti on.

overhead expenses: expenses i ncurred i n runni ng a busi ness.

overi nsurance: payi ng more to a di sabl ed person than the person recei ved as earned i ncome.

a def i ni ti on of di sabi l i ty that appl i es to a person who i s unabl e to perf orm the
own occupati on (own occ):
essenti al duti es of hi s or her own regul ar or previ ous occupati on.

LLQP Exam Prep 352

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pai d-up addi ti on: where di vi dends are used to buy addi ti onal pai d-up i nsurance.

an opti on when a pol i cy owner stops payi ng premi ums to convert the cash surrender
pai d-up i nsurance (PUI ):
val ue to a reduced f ace amount of the same pol i cy type.

par pol i cy: a whol e l i f e parti ci pati ng pol i cy (pays di vi dends).

al l ows al l f uture premi ums to be wai ved i f the parent di es or becomes total l y
parent wai ver:
di sabl ed, unti l the chi l d i s a certai n age, or unti l the end of the contract.

LLQP Exam Prep 353

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di vi dends and pol i cy l oans made af ter March 31, 1978 are consi dered to be
parti al di sposi ti ons:
parti al di sposi ti ons.

parti ci pati ng pol i cy: a whol e l i f e pol i cy whi ch pays di vi dends.

partnershi p debt: the responsi bi l i ty of a partner f or the debts i ncurred by the partnershi p.

a share i n the partnershi p whi ch a partner i s abl e to sel l at a f ai r pri ce to the other
partnershi p i nterest:
partners, i f desi red.

LLQP Exam Prep 354

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property owned by a partnershi p whi ch a partner may sel l at a f ai r pri ce to the other
partnershi p property:
partners, i f desi red.

partnershi p: a busi ness enti ty owned by a group of two or more i ndi vi dual s,

the adj ustment an empl oyer makes to an empl oyee’s pensi on pl an f or the years the
past servi ce pensi on adj ustment:
empl oyee worked f or the empl oyer bef ore the pensi on pl an was i mpl emented.

pensi ons f or empl oyees who have worked f or thei r empl oyer pri or to the
past servi ce benef i ts:
i mpl ementati on of the pensi on pl an by the empl oyer.

LLQP Exam Prep 355

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the i nsured i s provi ded wi th a drug i nsurance pl an card to pay f or the drugs and
pay-di rect pl an:
the pharmacy bi l l s the i nsurer di rectl y.

the val ue of benef i ts accrui ng i n a company-sponsored RPP or a D PSP. Pensi on

pensi on adj ustment: adj ustment f or any current year must be deducted when cal cul ati ng the al l owabl e
RRSP contri buti on f or the subsequent year.

pensi onabl e earni ngs: the amount of i ncome on whi ch the pensi on contri buti on i s based.

peri l s: exposure to pure ri sk that l eads to l oss.

LLQP Exam Prep 356

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permanent i nsurance: i nsurance whi ch i nsures f or l i f e.

personal contract: a contract i n whi ch the i nsured and the l i f e i nsured are the same.

i denti f i es the needs of dependents and f ami l y members that must be met i n the
personal i ncome needs approach:
event of the l oss of a maj or i ncome stream.

personal ri sk: ri sks that di rectl y af f ect i ndi vi dual s and thei r dependents.

LLQP Exam Prep 357

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l oans made agai nst the cash surrender val ue of a pol i cy. Most i nsurers l i mi t l oans
pol i cy l oan:
to 90% of the CSV.

pol i cy owner: the owner of a pol i cy, the pol i cyhol der.

pol i cy reserve: a porti on of whol e l i f e pol i cy premi ums whi ch accumul ate to f orm a pol i cy reserve.

when deposi ts to a segregated f und are made on an on-goi ng basi s (such as

pol i cy-based guarantee: monthl y) and the maturi ty date i s cal cul ated annual l y, thereby starti ng anew the
ten- year guarantee peri od.

LLQP Exam Prep 358

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an i nvestor’s hol di ngs of stocks, bonds, etc. power of attorney: the appoi ntment of
portf ol i o: a person to l ook af ter f i nanci al af f ai rs of someone who becomes i ncapaci tated
due to si ckness, acci dent, or other mi shaps.

a past or present deci si on of a j udge of a court that serves as the gui di ng

precedent:
pri nci pl e i n si mi l ar cases i n other courts.

pre-exi sti ng condi ti on: a di sabi l i ty or i l l ness whi ch exi sts at the ti me of appl i cati on.

a type of share that enti tl es the owner to a di vi dend ahead of any di vi dends pai d
pref erred shares: to common sharehol ders. Pref erred sharehol ders typi cal l y do not have voti ng
ri ghts.

LLQP Exam Prep 359

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l egal l y, the consi derati on f or the contract; i n other words, the payment requi red to
premi um:
bri ng the pol i cy i nto f orce and to keep i t i n f orce.

premi um of f set: when di vi dends f rom a whol e l i f e pol i cy are used to reduce the cost of premi ums.

part of the f ace page of the pol i cy that sets out the amount and method of
premi um porti on of pol i cy:
payment, as wel l as the f requency and durati on of premi um payments.

prohi bi ted by provi nci al l egi sl ati on and associ ati on by-l aws. Premi um rebati ng
premi um rebati ng: usual l y occurs when an agent of f ers to pay al l or part of the premi um requi red by
the pol i cy, i t may al so i nvol ve a gi f t, promoti on, or i nducement.

LLQP Exam Prep 360

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annui ty payments are a bl end of capi tal and i nterest. T he capi tal i s spread evenl y
prescri bed annui ty: over the expected payment peri od and the bal ance of each payment i s the i nterest.
T he i nterest porti on i s subj ect to tax, whi l e the capi tal porti on i s tax- f ree.

a f ormul a used to i l l ustrate how much money must be i nvested presentl y, i n order
present val ue of a si ngl e sum:
to grow to a desi red amount, at a speci f i ed ti me i n the f uture.

present val ue of money: the val ue of money i n today’s terms f or money pai d i n the f uture.

covers l oss of l i mbs, si ght, heari ng, or speech. F ul l benef i ts are payabl e unti l the
presumpti ve di sabi l i ty cl ause: end of the benef i t peri od or f or l i f e regardl ess of whether or not the person can
return to work.

LLQP Exam Prep 361

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the i nsurer of group extended heal th and dental pl ans that determi nes the
pri mary carri er: benef i ts •f i rst and then cal cul ates the benef i ts as though dupl i cate coverage
does not exi st.

pri nci pal guarantee: the maturi ty guarantee of segregated f unds and the death benef i t.

the l ength of ti me (usual l y one to si x months) that a new group member must wai t
probati onary peri od:
bef ore bei ng el i gi bl e to j oi n the group pl an.

prof essi onal standards: rul es and regul ati ons i mposed by a wi de range of pl ayers i n the i nsurance i ndustry.

LLQP Exam Prep 362

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property ri sk: ri sk f aced by property owners of havi ng thei r property l ost or damaged.

the adj ustment made to a segregated f und contract when there i s a wi thdrawal
proporti onal reducti on method: that reduces the val ue of the contract accordi ng to the number of uni ts
surrendered compared to the number of uni ts pri or to wi thdrawal .

publ i cati on prepared by mutual f und compani es whi ch provi des speci f i c
prospectus:
i nf ormati on regardi ng the f und.

provi nci al bonds: i ssued as a means to f und publ i c works and guaranteed by the provi nce.

LLQP Exam Prep 363

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pure ri sk: of f ers no chance of gai n.

a peri od of ti me af ter the acci dent or i l l ness duri ng whi ch the i nsured must be
qual i f i cati on peri od:
total l y di sabl ed, as speci f i ed i n a pol i cy wi th a resi dual i ncome benef i t.

qual i tati ve i nf ormati on: i nf ormati on col l ected by a l i f e agent that reveal s the cl i ent’s l i f estyl e choi ces.

i nf ormati on col l ected by a l i f e agent regardi ng a cl i ent’s assets, i ncome, and

quanti tati ve i nf ormati on:
expendi tures.

LLQP Exam Prep 364

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Quebec Pensi on Pl an ~QPP~: the Quebec equi val ent of the Canada Pensi on Pl an.

qui ck pay: when di vi dends f rom a whol e l i f e pol i cy are used to reduce the cost of premi ums.

a contract wi th hi gher premi ums of f ered to appl i cants i denti f i ed as speci al ri sk

rated contract:
or substandard ri sk.

rated premi ums: hi gher-pri ced premi ums.

LLQP Exam Prep 365

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f i nanci al support needed by dependents whi l e adj usti ng to a new standard of

readj ustment peri od:
l i vi ng af ter the death of the i ncome earner.

the nomi nal , or “named” rate of return on an i nvestment mi nus the current rate of
real rate of return:
i nf l ati on.

i f a di sabi l i ty recurs or a new di sabi l i ty begi ns wi thi n a peri od of ti me set out i n

the pol i cy’s recurrence cl ause, i t i s treated as a conti nuati on of the ori gi nal cl ai m
recurri ng di sabi l i ty:
and not subj ect to a new el i mi nati on peri od, but the benef i t peri od i s deemed to
begi n at the start of the ori gi nal cl ai m, not the date of the recurrence.

a f orm of term i nsurance whi ch provi des guaranteed renewabi l i ty. T hose who can
re-entry term i nsurance: prove good heal th wi l l have a l ower renewal rate than those who are unabl e to
provi de evi dence of i nsurabi l i ty.

LLQP Exam Prep 366

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regi stered bond: the owner i s i denti f i ed on the bond certi f i cate.

a savi ngs program devel oped by the f ederal government to encourage parents to
regi stered educati on savi ngs pl ans (RE SPs~):
save f or the post-secondary educati on of thei r chi l dren.

pri vate pensi ons, regi stered wi th CCRA, establ i shed by empl oyers f or the benef i t
regi stered pensi on pl ans (RPP):
of thei r empl oyees.

a pl an that has been regi stered wi th the Mi ni ster of Customs and Revenue as
regi stered pl an:
requi red by the I ncome T ax Act.

LLQP Exam Prep 367

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a f und regi stered wi th CCRA to recei ve reti rement i ncome, i t i s an account to

regi stered reti rement i ncome f unds (RRI F ): whi ch accumul ated RRSPs can be transf erred wi thout i ncurred tax at the ti me of
transf er.

one that has been regi stered wi th the CCRA so that tax advantages can be
regi stered reti rement pl an:
recei ved by the pl an owner.

a regi stered savi ngs pl an whi ch i s a tax shel ter to assi st i ndi vi dual s i n savi ng f or
regi stered reti rement savi ngs pl ans (RRSP):
thei r reti rement years.

a def i ni ti on of di sabl ed that appl i es to a person who i s unabl e to perf orm the
regul ar occupati on:
essenti al duti es of hi s or her regul ar occupati on.

LLQP Exam Prep 368

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the i nsured pays the cost of the medi cal servi ce or drugs and i s rei mbursed by the
rei mbursement pl an:
i nsurer.

a cl ause i n the pol i cy desi gned to assi st when a l i f e i nsurance contract l apses due
rei nstatement cl ause:
to premi um non-payment.

part of the ri sk that i s passed al ong to a rei nsurer i f the retenti on l i mi t i s

rei nsurance:
exceeded.

renewabi l i ty: bei ng abl e to renew an i nsurance pol i cy.

LLQP Exam Prep 369

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a term used to descri be the act of surrenderi ng an i nsurance pol i cy or part of the
repl acement:
coverage of an i nsurance pol i cy i n order to buy another pol i cy.

the ri ght to cancel the pol i cy wi thi n ten days of acknowl edgment of recei pt of the
resci ssi on:
pol i cy.

when i nvestors deci de to l ock i n the val ue of thei r segregated f unds, thereby
reset f eature:
resetti ng the maturi ty guarantee and maturi ty date of the contract.

the benef i t pai d proporti onate to pre-di sabi l i ty earni ngs. T he l oss must be
resi dual di sabi l i ty benef i t:
between 20-80% of pre-di sabi l i ty earni ngs to qual i f y f or a resi dual benef i t.

LLQP Exam Prep 370

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retenti on l i mi t: the cap or upper l i mi t that i nsurance compani es pl ace on an i ndi vi dual l i f e.

severance pay, si ck l eave credi ts, and court awards f or wrongf ul di smi ssal that may
reti ri ng al l owance: be transf erred tax-f ree to an RRSP wi thout usi ng up annual RRSP contri buti on
l i mi ts.

retrocessi on: the process of shari ng the ri sk among several i nsurers or retrocessi onai res.

the pol i cy owner may change the benef i ci ary named i n an i nsurance contract at any
revocabl e benef i ci ary:
ti me, i n wri ti ng.

LLQP Exam Prep 371

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pol i cy extras. Premi ums are hi gher based on the ri ders that are attached to the
ri ders:
pol i cy.

the i ssues of the i nvestment can repurchase or redeem them at a ti me and pri ce
ri ght of redempti on:
that i s set out i n the securi ty i tsel f .

the ri ght of uni t hol ders to wi thdraw thei r i nvestment by submi tti ng thei r uni ts to
ri ght of wi thdrawal :
the mutual f und.

opti ons granted to sharehol ders to purchase addi ti onal shares di rectl y f rom the
ri ghts:
company that i ssues them.

LLQP Exam Prep 372

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the probabi l i ty of suf f eri ng harm or l oss i n the f uture. Another def i ni ti on i s the
ri sk:
pri ce vol ati l i ty of one type of securi ty compared to the pri ce vol ati l i ty of another.

ri sk avoi dance: the easi est way to reduce ri sk butavoi di ng al l ri sk i s not possi bl e.

by l oss preventi on, whi ch reduces the f requency of l oss, or by l oss reducti on,
ri sk control :
whi ch reduces the severi ty of l oss.

ri sk f i nanci ng: i ncl udes transf erri ng ri sk and retai ni ng ri sk.

LLQP Exam Prep 373

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ri sk f requency: the probabi l i ty that a l oss wi l l occur.

ri sk management: the process of pl anni ng f or ri sk.

ri sk retenti on: when a person accepts or retai ns al l or part of a gi ven ri sk,

ri sk severi ty: the dol l ar cost of a l oss.

LLQP Exam Prep 374

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ri sk transf er: shi f ti ng some or al l of the cost of a potenti al l oss to a thi rd party.

i l l ustrates how l ong i t takes f or an i nvestment portf ol i o to doubl e i n si ze when i ts

rul e of 72:
i ncome i s rei nvested.

schedul e: descri bes the basi c components i n the pol i cy. Al so known as the f ace page.

the i nsurer of group extended heal th and dental pl ans that determi nes the
benef i ts second and then l i mi ts i ts benef i ts coverage to the l esser of the amount
secondary carri er:
that woul d be pai d by the pri mary carri er or 100% of al l el i gi bl e expenses
reduced by al l other benef i ts payabl e f or the same expenses by the pri mary carri er.

LLQP Exam Prep 375

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an i nvestment f und hel d by an i nsurance company cal l ed an I ndi vi dual Vari abl e
segregated f unds (seg f und): I nsurance Contract (I VI C), i n whi ch the f unds are separate f rom the other assets of
the i nsurance company.

the RRSP pl an hol der’s assets are admi ni stered by a bank, trust company, or
sel f -di rected pl an:
i nvestment deal er. Al l i nvestment deci si ons are made by the pl an hol der.

sel f -i nsured pl an: the group pol i cy owner pays al l cl ai ms.

settl ement: the amount pai d to the benef i ci ary when the l i f e i nsured di es.

LLQP Exam Prep 376

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the opti ons avai l abl e to the benef i ci ari es to settl e the contract when the l i f e
settl ement opti ons:
i nsured di es.

short-term di sabi l i ty pol i cy: has a benef i t peri od of two years or l ess.

a contract that can be enf orced as l ong as there i s an of f er and acceptance and
si mpl e contract:
al so a consi derati on (an exchange of val ue) between the parti es.

sol e propri etorshi p: a busi ness enti ty owned and operated by one person.

LLQP Exam Prep 377

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a rati ng assi gned to some l i f e appl i cants who are at hi gh ri sk f or some reason
speci al ri sk: usual l y due to heal th, habi t, or occupati on. Al so known as the f i f th di vi dend
opti on.

a one-year renewabl e term pol i cy that i s equal to the cash surrender val ue of the
speci al term addi ti ons:
pol i cy at the end of the pol i cy year. Al so known as the f i f th di vi dend opti on.

does not requi re the el ements of of f er, acceptance, and consi derati on but does
speci al l y contract:
requi re a seal . Al so known as contracts under seal .

specul ati ve ri sk: a ri sk where someone knowi ngl y gambl es on a ri sk, such as the stock market.

LLQP Exam Prep 378

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standard group: must have a mi ni mum of 25 peopl e f or group i nsurance purposes.

stock compani es: compani es owned by sharehol ders.

stock market i ndi ces: stati sti cal tool s used to measure the state of the market or the economy.

the most common f orm of whol e l i f e pol i ci es. Premi ums are pai d over the enti re
strai ght l i f e:
l i f eti me of the l i f e i nsured.

LLQP Exam Prep 379

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stri pped bond: i nterest coupons have been removed and sol d separatel y.

used to settl e l arge acci dent and l i abi l i ty cl ai ms that resul t i n seri ous permanent
structured settl ement annui ty:
di sabi l i ty.

a l egal process that al l ows an i nsurance company to assume the pol i cyhol der’s
subrogati on:
ri ght to col l ect damages f rom a thi rd party.

substandard ri sk: a rati ng assi gned to some l i f e appl i cants who are at hi gh ri sk f or some reason.

LLQP Exam Prep 380

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sui ci de i s excl uded as a cause of death f or whi ch the death benef i t i s pai d i f i t
sui ci de excl usi on cl ause:
occurs up to two years af ter the pol i cy i s i ssued.

pol i cy extras. Premi ums are hi gher based on the suppl ementary benef i ts that are
suppl ementary benef i ts:
attached to the pol i cy.

provi des ongoi ng i ncome f or the spouse and dependent chi l dren of a deceased
survi vor i ncome pl an:
group l i f e pl an member.

the peri od of ti me, whi ch may be l i f e l ong, duri ng whi ch the survi vi ng spouse
survi vor l j f e i ncome needs:
requi res i ncome.

LLQP Exam Prep 381

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the tabl es the pol i cy owner can use to determi ne the val ue of the non-f orf ei ture
tabl es of non-f orf ei ture:
opti ons i n the pol i cy.

tax brackets: f our f ederal tax rates appl i ed to di f f erent i ncome l evel s.

tax credi ts: a di rect reducti on i n tax.

expenses, payments, and contri buti ons that are al l owed to be deducted f rom
T ax deducti ons:
taxabl e i ncome.

LLQP Exam Prep 382

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tax def erral : tax i s pai d at a l ater date.

taxabl e i ncome: i ncome recei ved duri ng the year that i s subj ect to Canadi an i ncome taxes.

a temporary but bi ndi ng contract between the i nsurance company and a proposed
temporary i nsurance agreement (T I A):
l i f e i nsured to provi de coverage duri ng the underwri ti ng process.

uses the whol e di vi dend of a whol e l i f e pol i cy to buy a non-renewabl e one-year

term addi ti ons:
term addi ti on that wi l l be pai d i f the l i f e i nsured di es duri ng that year.

LLQP Exam Prep 383

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an annui ty that pays an i ncome f or a pre-determi ned peri od of ti me or to a speci f i c

term certai n annui ty:
age.

term i nsurance: l i f e i nsurance f or a speci f i c peri od of ti me.

payabl e when the death of the l i f e i nsured wi l l occur wi thi n si x months as

termi nal i l l ness benef i t:
decl ared i n a doctor’s certi f i cate.

termi nal tax return: the f i nal tax return f l i ed upon the death of the taxpayer.

LLQP Exam Prep 384

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a hybri d of term i nsurance and permanent i nsurance whi ch provi des a term- type
term-to-l OO i nsurance:
pol i cy to age 100. F or most peopl e thi s woul d provi de coverage f or l i f e.

thi rd party coj i tract: a contract i n whi ch the i nsured i nsures the l i f e of another person (the l i f e i nsured).

when a f i nanci al i nsti tuti on requi res a cl i ent to transact other busi ness wi th the
ti ed sel l i ng:
i nsti tuti on as a condi ti on of doi ng busi ness.

ti me hori zon: the l ength of ti me avai l abl e f or money to be i nvested bef ore i t i s needed.

LLQP Exam Prep 385

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the sum of money recei ved today i s worth more than i f the same amount of money i s
ti me val ue of money:
recei ved i n the f uture.

ti me-wei ghti ng: i ncome based on the l ength of ti me noti onal uni ts i n a segregated f und are hel d.

the l evel of ri sk a person i s prepared to take i n the purchase securi ti es and

tol erance f or ri sk:
i nsurance.

desi gned to compensate a person who has been harmed f or any damage caused by
tort l aw:
wrongf ul ci vi l behavi our.

LLQP Exam Prep 386

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total di sabi l i ty: i s def i ned i n the i nsurance pol i cy by the work the i nsured may be abl e to resume.

treasury bi l l s: short-term i nvestments i ssued by the f ederal government.

a date establ i shed i n a mandatory buy- out cl ause of a di sabi l i ty buy-out

tri gger date: contract, whi ch states when the di sabl ed owner, partner, or sharehol der must sel l
hi s or her share i n the busi ness.

when an agent i nduces a pol i cyhol der to surrender or l apse a pol i cy wi th one
twi sti ng:
i nsurer and repl ace i t wi th another i nsurer, to the detri ment of the pol i cyhol der.

LLQP Exam Prep 387

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the l i sti ng separatel y of the cost of i nsurance, the guaranteed i nterest rate, and
unbundl i ng:
the expense charges of the i nsurer i n a uni versal l i f e pol i cy.

underwri ters: i nsurance of f i ci al s who assess ri sks.

the process of assessi ng and cl assi f yi ng the potenti al degree of ri sk that a

underwri ti ng:
proposed i nsured represents to an i nsurance company.

unf ai r trade practi ces: the use of coerci on, premi um rebati ng, and gi f ti ng to cl i ents.

LLQP Exam Prep 388

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term used f or i nsurance contracts because the i nsurance company i s the onl y party
uni l ateral contract: bound by the contract and i s obl i ged to f ul f i l l the contract as l ong as premi ums
are pai d.

a mi stake made by one party that may onl y be remedi ed i f i t i s an obvi ous mi stake
uni l ateral mi stake:
recogni zed by the other party.

an i nterest rate-sensi ti ve pol i cy that i s a uni que combi nati on of i nsurance and
uni versal l i f e i nsurance:
i nvestment.

vani shi ng premi ums: when di vi dends f rom a whol e l i f e pol i cy are used to reduce the cost of premi ums.

LLQP Exam Prep 389

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takes the noti onal uni ts credi ted to the contract i n a segregated f und and converts
vari abl e annui ty:
them to annui ty uni ts.

the ri ght of an empl oyee to keep the previ ous empl oyer’s pensi on contri buti ons
vesti ng:
when swi tchi ng j obs af ter, usual l y, two years of empl oyment.

vol untary group AD &D : an opti on f or empl oyees covered by a basi c pl an that i ncreases coverage.

the peri od f rom the ti me a cl ai m i s made unti l benef i ts begi n (provi ded i n the
wai ti ng peri od:
pol i cy).

LLQP Exam Prep 390

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a ri der to a pol i cy whi ch ensures that the premi ums on the pol i cy are pai d i f the
wai ver of premi um:
l i f e i nsured becomes di sabl ed.

a certi f i cate that grants the hol der the opportuni ty to buy shares i n a company at a
warrant:
stated pri ce over a speci f i c peri od.

permanent i nsurance avai l abl e as strai ght l i f e or l i mi ted payment l i f e. T hese

whol e l i f e i nsurance:
pol i ci es are i n f orce f or the l i f eti me of the i nsured and are guaranteed pol i ci es.

year’s basi c exempti on (YBE ): the amount of i ncome bel ow whi ch CPP contri buti ons are not made.

LLQP Exam Prep 391

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the amount of pre-reti rement earni ngs that can be contri buted to a pensi on pl an
year’s maxi mum pensi onabl e earni ngs (YMPE ):
every year. T he YMPE i s set by the f ederal government.

yi el d to maturi ty: the return an i nvestor can expect by hol di ng an i nvestment to maturi ty.

yi el d: return on i nvestment.

LLQP Exam Prep 392