of Life Insurance and Financial Terms
[F to K]
This glossary is arranged in alphabetical order.
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F G H I JK
Fiat Money is paper currency made legal tender by law or fiat. It
is not backed by gold or silver and is not necessarily redeemable in coin.
This practice has had widespread use for about the last 70 years. If governments
produce too much of it, there is a loss of confidence. Even so, governments
print it routinely when they need it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada's currency falls into this category.
Be careful in choosing a financial planner. Some of them are simply life insurance salespeople with extra credentials and spreadsheets. On the other hand, many financial planners are truly in business to help you. Usually, these are "fee-only" financial planners. Unlike "commission-based" planners, they make their living by charging you directly - either by the hour or by a completed financial plan. Don't confuse "fee-based planners" or "fee-offset" with "fee-only" planners. "Fee-based" and "fee-offset" planners are ambi-remunerative, which means they charge you for their time and then collect a commission from the company that issued your new life insurance policy, investment, annuity or tax shelter.
How, then, do you decide on a financial planner who's right for you? Make sure that anyone you hire is a Certified Financial Planner [CFP]. For a qualified, fee-only Certified Financial Planner to examine your finances and prepare a financial plan, expect to pay $150 to $300 an hour. Look for someone with at least five or six years of experience and ask for references.
First To Die Coverage:
This means that there are two or more life insured on the same policy
but the death benefit is paid out on the first death only. If two or more
persons at the same address are purchasing life insurance at the same time,
it is wise to compare the cost of this kind of coverage with individual
policies which some times have a multiple policy discount.
A specific period of time after a premium payment is due during which
the policy owner may make a payment, and during which, the protection of
the policy continues. The grace period usually ends in 30 days.
Group Life Insurance:
This is a very common form of life insurance which is found in employee
benefit plans and bank mortgage insurance. In employee benefit plans the
form of this insurance is usually one year renewable term insurance. The
cost of this coverage is based on the average age of everyone in the group.
Therefore a group of young people would have inexpensive rates and an older
group would have more expensive rates.
Some people rely on this kind of insurance as their primary coverage
forgetting that group life insurance is a condition of employment with
a specific employer. The coverage is not portable and cannot be taken with
you if you change jobs. If you have a change in health, you may not qualify
for new coverage at the new place of employment.
Bank mortgage insurance is also usually group insurance and you can
tell this by virtue of the fact that you only receive a certificate of
insurance, not a complete policy. The form that bank mortgage insurance
takes is reducing term insurance, matching the declining mortgage balance.
The only beneficiary that can be chosen for this kind of insurance is the bank.
In both cases, employee benefit plan group insurance and bank mortgage
insurance, the coverage is not guaranteed. This means that coverage can
be cancelled by the insurance company underwriting that particular plan,
if they are experiencing excessive claims.
This clause in regular life insurance policy provides for voiding
the contract of insurance for up to two years from the date of issue of
the coverage if the life insured has failed to disclose important information
or if there has been a misrepresentation of a material fact which would
have prevented the coverage from being issued in the first place. After
the end of two years from issue, a misrepresentation of smoking habits
or age can still void or change the policy.
This is a tax planning strategy of arranging for income to be transferred
to family members who are in lower tax brackets than the one earning the income,
thus reducing taxes. Even though attribution rules limit income splitting, there
are still a number of legitimate ways to do so, such as through the use of spousal
This is a provincial government licensed independent business person
who usually represents five or more life insurance companies in a sales
and service capacity and who is paid a commission by those life insurance
companies for sales and service of life insurance products. We for example,
have been in business for 12 years and regularly place new business with
over twenty different life insurance companies.
In England in the 1700's it was popular to bet on the date of death
of certain prominent public figures. Anyone could buy life insurance on
another's life, even without their consent. Unfortunately, some died before
it was their time, dispatched prematurely in order that the life insurance
proceeds could be collected. In 1774, English Parliament passed a law which
restricted the right to be a beneficiary on a life insurance contract to
those who would suffer an economic loss when the life insured died. The
law also provided that a person has an unlimited insurable interest in
his own life. Generally, therefore, a person has an insurable interest in his or her own life and in his or her child or grandchild; spouse; any person upon whom he is wholly or in part dependent for, or from whom he is receiving support or education; employee; and any person in the duration of whose life he has a pecuniary interest. It is still a legal stipulation that an insurance contract is not valid unless insurable interest exists at the time the policy is issued. Life Insurance companies will not issue unlimited amounts of coverage to an individual. The amount of life insurance which will be approved has to approximate the loss caused by the death of the individual and must not result in a
windfall for the beneficiary.
This is a telephone interview of the person applying for life insurance
conducted by someone from the underwriting department of the insurance
company. Some insurance companies only sporadically contact applicants
and some contact every applicant. On average the interview lasts between
15 to 30 minutes. The questions asked relate to personal habits (like smoking
and alcohol consumption) and finances, including income and net worth,
confirmation of employment, duties and the nature of the applicant's business.
In addition, there are questions about driving, sports, aviation and currently
held insurance. All information obtained is strictly confidential and is
submitted solely to the underwriter for review.
This is the person covered by the life insurance policy. Upon this
person's death, a tax free benefit will be paid to that person's estate
or a named beneficiary.
An insured mortgage protects only the mortgage lender in case you do not make your mortgage payments. This coverage is provided by CMHC [Canada Mortgage and Housing Corporation] and is required if a person has a high-ratio mortgage. [A mortgage is high-ratio if the amount borrowed is more than 75% of the purchase price or appraised value, whichever is less.]
Insured Retirement Plan:
This is a recently coined phrase describing the concept of using
Universal Life Insurance to tax shelter earnings which can be used to generate
tax-free income in retirement. The concept has been described by some as "the most effective
tax-neutralization strategy that exists in Canada today."
In addition to life insurance, a Universal Life Policy includes a tax-sheltered
cash value fund that cannot exceed the policy's face value. Deposits made into the
policy are partially used to fund the life insurance and partially grow tax sheltered
inside the policy. It should be pointed out that in order for this to work, you must make deposits into this kind
of policy well in excess of the cost of the underlying insurance. Investment of the cash
value inside the policy are commonly mutual fund type investments. Upon retirement, the
policy owner can draw on the accumulated capital in his/her policy by using the policy as
collateral for a series of demand loans at the bank. The loans are structured so the sum of money
borrowed plus interest never exceeds 75% of the accumulated investment account. The loans
are only repaid with the tax free death benefit at the death of the policy holder. Any
remaining funds are paid out tax free to named beneficiaries.
Recognizing the value to policy holders of this use of Universal Life Insurance,
insurance companies are reworking features of their products to allow the policy holder
to ask to have the relationship of insurance to investment growth tracked so that investment
growth inside the policy may be maximized. The only potential downside of this strategy is the
possibility of the government changing the tax rules to prohibit using a life insurance product
in this manner.
This means dying without a will, in which case the provincial laws
of the province in which the death occurred apply to the manner in which
assets will be distributed. In other words, if you don't write your own
will, the government will do it for you after your death and it may not
be as you would have wished.
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