LLQP: QuickFact Formulas
UNDERWRITING & CLAIMS NEED FOR INSURANCE
Premiums
Basic life:
(Premium rate x rate per $1,000 of coverage in the policy)
+ Policy fee = annual premium
Assume the premium rate per $1,000 is $11.13 and there
is a policy fee of $121. Then the annual premium for a face
amount of $300,000 would be $300,000 x $11.13 ÷
$1,000 = $3,339 + policy fee = $3,339 + 121 = $3,460
If the premiums are paid monthly, the annual premium is
multiplied by the modal factor for monthly premium (also
called the PAC factor).
e.g., if the annual premium is $3,460 and the modal factor
for monthly premium is 0.08, then the monthly premium
would be $276.80 ($3,460 x 0.08).
Adjustments
For misstatement of age:
premium charged correct premium = correct rate x face
amount = amount of insurance
For special risks:
Flat dollar increase: $/$1,000 of coverage
Table rating (percentage increase): %/$1,000 in coverage
Benefits
Basic life:
face amount of the policy + extras, as entitled – policy loan
and interest to date of death – outstanding premiums =
net death benefit
Accidental Death Benefit (ADB) rider:
face amount x 2 = ADB benefit
Disability:
earned income x 60% (assuming a 60% benefit payment)
12 = monthly disability income benefit
Residual disability:
(pre-disability – income earned) pre-disability income =
residual benefit
Group:
STD: annual salary x 60% or 66 2/3% 12 = monthly
benefit
LTD: annual salary x 60% (employee-paid premium) or 75%
(employer-paid premium) 12 = monthly benefit
Deductibles
Single deductible:
claim ($) – deductible ($) = reimbursement ($)
e.g. if claim = $250; deductible = $50; then: $250 -$50
= $200 reimbursement
Co-insurance:
claim ($) x co-insurance (%) = reimbursement ($)
e.g. if claim = $250; coinsurance = 90%; then: $250 x
90% = $225 reimbursement
Deductible + coinsurance:
claim ($) – deductible ($) = net claim ($) x
co-insurance (%) = reimbursement ($)
e.g. if claim = $250; coinsurance = 90%; deductible = $50;
then: $250 -$50 = $200 net claim x 90% = $180
reimbursement
Family deductible:
claim ($) – (family deductible [$] – single deductible
[$] already paid) = reimbursement ($)
e.g. if claim = $250; family deductible = $100; single
deductible already paid = $0; then: $250 – ($100 -$0) =
$150 reimbursement
Copyright © 2011 Oliver Publishing Inc. All rights reserved.
Amount of Life Insurance
Capitalization of income (human life value
approach):
annual income interest rate = insurance need
Capital retention (capital needs approach):
Four steps:
1: assets – final expenses = cash needs
2: continuing income – continuing expenses = income
needs
3: income needs interest rate = capitalized value
4: capitalized value +/- cash needs* = insurance need
* add cash needs if a negative sum; subtract
cash needs if a positive sum
e.g. if assets = $5,000, final expenses = $10,000, continuing
income = $40,000, continuing expenses = $50,000, interest
rate = 4%; then: step 1: $5,000 - $10,000 = – $5,000 cash
needed; step 2: $40,000 – $50,000 = $10,000 income
needed; step 3: $10,000 4% = $250,000; step 4: $250,000
+ $5,000 = $255,000 insurance needed
Amount of Disability Insurance
Need is based on earned income calculation of benefit. See
column on left.
INVESTMENTS
Segregated Funds (IVICs)
Maturity and Death Benefit Guarantees:
deposits x (guarantee amount, i.e. 75%) = guaranteed
payment 10 years from date of deposit
e.g. if deposits = $10,000, guarantee = 75%; then:
$10,000 x 75% = $7,500
Segregated Funds Withdrawals (reduce guarantees):
Linear reduction method:
Deposits – withdrawals = contract value on which
guarantee is based
e.g. if deposits = $1,000; withdrawal = $500;
then:$1,000 -$500 = $500 contract value
Proportional reduction method:
Three steps:
1. withdrawal value of units = no. of units to be
surrendered
2. original no. of units – no. of surrendered units =
new unit balance
3. (new unit balance original no. of units) x original
value of fund = contract value on which guarantee is
based
e.g. if withdrawal = $5,000; value of units = $10; original no.
of units = 1,000; original value of fund = $2,000 ; then:
step 1: $5,000 $10 = 500 units; step 2: 1,000 – 500 =
500 units; step 3:(500 1,000) x $2,000 = $1,000 contract
value
Inflation and investment returns
Rates of return:
Nominal: return (%) = nominal rate of return (%)
Real: return (%) – inflation rate (%) = real rate of return
 LLQP: QuickFact Formulas
TAXATION
Adjusted cost basis (ACB)
Before December 2, 1982
Premiums – dividends* = adjusted cost basis (ACB)
After December 2, 1982
Premiums – net cost of pure insurance (NCPI) –
dividends* = adjusted cost basis (ACB)
e.g. if premiums = $5,000; NCPI = $3,000; dividends = $100;
then: $5,000 -$3,000 -$100 = $1,900 adjusted cost basis
*if applicable
Taxation of Cash Surrender Value (CSV)
Before December 2, 1982
CSV – (premiums – dividends*) = taxable gain
After December 2, 1982
CSV – (premiums - net cost of pure insurance [NCPI] –
dividends*) = taxable gain
e.g. if CSV = $10,000; premiums = $5,000; NCPI = $3,000;
dividends = $500; then: $10,000 – ($1,500) = $8,500 taxable
gain *if applicable
Policy Loans and Taxation of Policy Loans
Loan: CSV x 90% = max. policy loan
e.g. if CSV = $6,000; then: $6,000 x 90% = $5,400 max. loan
Tax on loan: loan – adjusted cost basis (ACB) =
taxable portion of loan
e.g. if loan = $5,400; ACB = $4,000; then: $5,400 - $4,000 =
$1,400 of the loan is taxable under certain conditions
Tax Deferral
RRSP Contributions:
Basic: earned income x 18% = contribution limit to a
maximum dollar limit for the year (2014 = $24,740;
2013 = $23,820)
With Pension Adjustment (PA): basic contribution –
pension adjustment for previous year
With Past Service Pension Adjustment (PSPA):
basic contribution – PSPA for current year
MORE INVESTMENT FORMULAS
Present Value
present value (PV) = future value (FV) (1 + interest
rate [i])n
e.g., if future value is $50,000; interest rate is 3.1%;
and n (number of compounding periods [typically the
number of years]) is 3; then:
PV = 50,000 (1 + .031)3; PV = 50,000 (1.031) 3;
PV = 50,000 (1.031 x 1.031 x 1.031)*;
PV = 50,000 1.096; PV = $45,620.44
*(remember to solve the calculation in the brackets first)
Copyright © 2011 Oliver Publishing Inc. All rights reserved.
Taxation of Investments
Interest:
interest income x investor’s marginal tax rate (MTR) =
tax on interest income
e.g. if $1,000 earned in interest and a marginal tax rage of 26%;
then: $1,000 x 26% = $260 owed in interest
Capital gains/loss:
market value of capital property – cost of capital property
= capital gain or capital loss on capital property
e.g. if $6,500 selling price - $500(cost) = $6,000 capital gain;
if $6,500 selling price - $8,000 (cost) = ($1,500) capital loss
Capital gains tax:
market value of capital property – cost of capital
property = capital gain x .5 = taxable portion of gain x
investor’s marginal tax rate = capital gains tax
e.g. if $6,000 sale and a marginal tax rate of 26%: then:
$6,000 x .5 =$3,000 x 26% = $780 owed in capital
gains tax
Stock Dividends:
The dividend tax credit and the dividend gross-up
amount are changing each year as of 2010. For
this reason, the calculation of taxation on stock
dividends is no longer being tested.
Segregated Funds (tax consequence of withdrawal):
Three steps:
1. amount of withdrawal fair market value of contract =
percentage of disposition
2. fair market value of contract – adjusted cost basis =
basis for taxation
3. basis for taxation x percentage of disposition =
capital gain
e.g. if withdrawal = $1,000; fair market value of contract =
$5,000; adjusted cost basis = $2,500; then: step 1: $1,000
$5,000 = 20% of contract being disposed; step 2: $5,000 –
$2,500 = $2,500 basis for taxation; step 3: $2,500 x 20% =
$500 capital gain
Future Value
future value (FV) = present value (PV) x (1 +
interest rate [i])n
e.g., if present value is $50,000; interest rate is 3.1%;
and n (number of compounding periods [typically the
number of years]) is 3; then:
FV = 50,000 x (1 + .031)3; FV = 50,000 x (1.031)3;
FV = 50,000 x (1.031 x 1.031 x 1.031)*;
FV = 50,000 x 1.096; FV = $54,800
*(remember to solve the calculation in the brackets first)