A Glossary of Life Insurance and Financial Terms
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This glossary is arranged in alphabetical order.
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P Q R S
As non-smoking rates caused a major reduction in the cost of life insurance in the early 1980's, the emergence of preferred non-smoker rates in 1998 has caused another noteworthy reduction in rates. A growing number of insurance companies are offering better rates which go beyond simply looking at gender or smoking habits. Other health related factors such as physical build, lifestyle, avocation and personal and family health history indicating longer life expectancy can add up to significant cost savings to new life insurance applicants. Make certain to ask about these new preferred rates.
This is your payment for the cost of insurance. You may pay annually,
semi-annually, quarterly or monthly. The least expensive method is annually.
Using any of the other payment modes will cost you more money. For example, paying monthly
will cost about 17% more. If you pay annually and terminate your coverage part way through the year, you may not receive a refund for the remaining months to the annual renewal date.
The cost of life insurance varies by age, sex,
health, lifestyle, avocation and occupation. Generally speaking, the following
is true at the time of applying for coverage; the older you are, the more
will be the cost; of a male and female of the same age, the female will
be considered 4 years younger; health problems will increase the cost of
insurance and may result in rejection altogether; dangerous hobbies such
as SCUBA diving, private flying, bungi jumping, parachuting, etc. may increase
the cost of insurance and may result in rejection altogether; abuse of
alcohol or drugs or a poor driving record will make getting coverage difficult.
This is an administrative fee which is part of most life insurance
policies. It ranges from about $40 to as much as $100 per year per policy.
It is not a separate fee. It is incorporated in the regular monthly, quarterly,
semi-annual or annual payment that you make for your policy. Knowing about
this hidden fee is important because some insurance companies offer a policy
fee discount on additional policies purchased under certain conditions.
Sometimes they reduce the policy fee or waive it altogether on one or more
additional policies purchased at the same time and billed to the same address.
The rules are slightly different depending on the insurance company. There
could be enormous savings if several people in the same family or business
were intending to purchase coverage at the same time.
This is the person who owns a life insurance policy. This is usually
the insured person, but it may also be a relative of the insured, a partnership
or a corporation. There are instances in marriage breakup (or relationship
breakup with dependent children) where appropriate life insurance on the
support provider, owned and paid for by the ex-spouse receiving the support
is an acceptable method of ensuring future security.
Letters probate represent judicial certification of the validity of a Will and judicial confirmation ofthe authority of the personal representative who is to administer the Will. Essentially, probate fees are a tax on a person's estate and except for the provinces of Quebec and Alberta, there is no limit to this tax.
Registered Pension Plan:
Commonly referred to as an RPP this is a tax sheltered employee group
plan approved by Federal and Provincial governments allowing employees
to have deductions made directly from their wages by their employer with
a resulting reduction of income taxes at source. These plans are easy to
implement but difficult to dissolve should the group have a change of heart.
Employer contributions are usually a percentage of the employee's salary,
typically from 3% to 5%, with a maximum of the lessor of 20% or $3,500
per annum. The employee has the same right of contribution. Vesting is
generally set at 2 years, which means that the employee has right of ownership
of both his/her and his/her employers contributions to the plan after 2
years. It also means that all contributions are locked in after 2 years
and cannot be cashed in for use by the employee in a low income year. Should
the employee change jobs, these funds can only be transferred to the RPP
of a new employer or the funds can be transferred to an individual RRSP
(or any number of RRSPs) but in either scenario, the funds are locked in
and cannot be accessed until at least age 60. The only choices available
to access locked in RPP funds after age 60 are the conversion to a Life
Income Fund or a Unisex Annuity.
To further define an RPP, Registered Pension Plans take two forms;
Defined Benefit or Defined Contribution (also known as money purchase plans).
The Defined Benefit plan establishes the amount of money in advance that
is to be paid out at retirement based usually on number of years of employee
service and various formulae involving percentages of average employee
earnings. The Defined Benefit plan is subject to constant government scrutiny
to make certain that sufficient contributions are being made to provide
for the predetermined pension payout. On the other hand, the Defined Contribution
plan is considerably easier to manage. The employer simply determines the
percentage to be contributed within the prescribed limits. Whatever amount
has grown in the employee's reserve by retirement determines how much the
pension payout will be by virtue of the amount of LIF or Annuity payout
it will purchase.
The most simple group RRSP plan is a group billed RRSP. This means
that each employee has his own RRSP plan and the employer deducts the contributions
directly from the employee's wages and sends them directly to the RRSP
plan administrator. Regular RRSP rules apply in that maximum contribution
in the current year is the lessor of 18% or $13,500. Generally, to encourage
this kind of plan, the employer also agrees to make a regular contribution
to the employee's plans, knowing full well that any contributions made
immediately belong to the employee. Should the employee change jobs, he/she
can take their plan with them and continue making contributions or cash
it in and pay tax in the year in which the money is taken into income.
Registered Retirement Savings Plan:
Commonly referred to as an RRSP, this is a tax sheltered and tax
deferred savings plan recognized by the Federal and Provincial tax authorities,
whereby deposits are fully tax deductable in the year of deposit and fully
taxable in the year of receipt. The ability to defer taxes on RRSP earnings
allows one to save much faster than is ordinarily possible. The new rules
which apply to RRSP's are that the holder of such a plan must convert it
into income by the end of the year in which the holder turns age 69. The
choices for conversion are to simply cash it in an pay full tax in the
year of receipt, convert it to a RRIF and take a varying stream of income,
paying tax on the amount received annually until the income is exhausted,
or converting it into an annuity with guaranteed payments for a chosen
number of years, again paying tax each year on moneys received.
If you are currently 69 years of age, you may still contribute to your own RRSP until December 31st of this year and realize a tax deduction on this year's income. You must also, however, make provisions before December 31st of the year for converting your RRSP into either a RRIF or an annuity, otherwise, the full balance of your RRSP becomes taxable on January 1 of the following year. If you are older than age 69, still have earned income, and have a younger spouse, you may continue to contribute to a spousal RRSP until that spouse reaches 69 years of age. Contributions would be based on your own contribution level and are deducted from your taxable income.
Registered Retirement Income Fund:
Commonly referred to as a RRIF, this is one of the options available
to RRSP holders to convert their tax sheltered savings into taxable income.
This is a provision in some term insurance policies that allow the insured the right to renew the policy at a more favourable rate by providing updated evidence of insurability.
This is the restoration of a lapsed life insurance policy. The life insurance company will require evidence of continuing good health and the payment of all past due premiums plus interest.
This subject of replacement of existing policies is covered because
sometimes existing life insurance policies are unnecessarily replaced with
new coverage resulting in a loss of valuable benefits. If someone suggests
replacing your existing coverage, insist on having a comparison disclosure
The most important policies to examine in detail are those which
were issued in Canada prior to December 2, 1982. If you have a policy of
this vintage with a significant cash surrender value, you may want to consider
keeping it. It has special tax advantages over policies issued after December
Basically, the difference is this. The cash surrender value of a
pre December, 1982 policy can be converted to an annuity in accordance
with the settlement options in the policy and as a result, the tax on any
policy gain can be spread over the duration of the annuity. Since only
the interest element of the annuity payment will be taxed, there will be
less of a tax impact on the annuitant. Policies issued after December 2,
1982 which have their cash surrender value annuitized trigger a disposition
and the annuitant must pay tax on the total policy gain immediately. If
you still decide to replace existing coverage, don't cancel what you have
until the new coverage has been issued.
Rule of 72:
This is a very important rule to know. The rule is that the number 72 divided by the rate of return of your investment equals the number of years it takes for your investment to double.
- At 1% your money will double in 72 years.
- At 2% your money will double in 36 years.
- At 3% your money will double in 24 years.
- At 4% your money will double in 18 years.
- At 5% your money will double in 14.4 years.
- At 6% your money will double in 12 years.
- At 7% your money will double in 10.3 years.
- At 8% your money will double in 9 years.
- At 9% your money will double in 8 years.
- At 10% your money will double in 7.2 years.
Spousal Registered Retirement Savings Plan:
This is an RRSP owned by the spouse of the person contributing to
it. The contributor can direct up to 100% of eligible RRSP deposits into
a spousal RRSP each and every year. Contributing to a spouses RRSP reduces
the amount one can contribute to one's own RRSP, however, if the spouse
is a lower income earner, it is an excellent way in which to split income
for lower taxation in retirement years.
Split Dollar Life Insurance:
The split dollar concept is usually associated with cash value life insurance where there is a death benefit and an accumulation of cash value. The basic premise is the sharing of the costs and benefits of a life insurance policy by two or more parties. Usually one party owns and pays for the insurance protection and the other owns and pays for the cash accumulation. There is no single way to structure a split dollar arrangement. The possible structures are limited only by the imagination of the parties involved.
Sometimes called seg funds, segregated funds are the life insurance industry equivalent to a mutual fund with some differences.The term "Mutual Fund" is often used generically, to cover a wide variety of funds where the investment capital from a large number of investors is "pooled" together and invested into specific stocks, bonds, mortgages, etc.
Since Segregated Funds are actually deferred annuity contracts issued by life insurance companies, they offer probate and creditor protection if a preferred beneficiary such as a spouse is named. Mutual
Funds don't have this protection.
Unlike mutual funds, segregated funds offer
guarantees at maturity (usually 10 years from date of issue) or death on
the limit of potential losses - at times up to 100% of original deposits
are guaranteed which makes them an attractive alternative for the cautious
and/or long term investor. On the other hand, with regular mutual funds,
it is possible to have little or nothing left at death or plan maturity.
Historically, damages paid out during settlement of personal physical injury cases were distributed in the form of a lump-sum cash payment to the plaintiff. This windfall was intended to provide for a lifetime of medical and income needs. The claimant or his/her family was then forced into the position of becoming the manager of a large sum of money.
In an effort to create a more financially stable arrangement for the claimant, the Structured Settlement was developed.
A Structured Settlement is an alternative to a lump sum cash payment in the resolution of personal physical injury, wrongful death, or workers’ compensation cases. The settlement usually consists of two components: an up-front cash payment to provide for immediate needs and a series of future periodic payments which are funded by the defendant’s purchase of one or more annuity policies. Those payors make payments directly to the claimant. In the unfortunate event of the claimant’s death, a guaranteed portion of the settlement may be directed to a beneficiary or his/her estate.
A Structured Settlement is a guaranteed source of funds paid to the claimant or his/her family on a tax-free basis.
Conditional payments may be made by an insurance company to a disability insurance claimant who has a loss of income claim against a third party who caused or contributed to their disability, however, the insurance company has a right to seek reimbursement of any payments they made to the claimant either from the third party or from any judgement or settlement received by the claimant from the third party.
Generally, a suicide clause in a regular life insurance policy provides
for voiding the contract of insurance if the life insured commits suicide
within two years of the date of issue of the coverage.
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