Contents

1. RISK................................................................................................................................................................................ 2
2. TERM LIFE INSURANCE.................................................................................................................................................... 3
3. WHOLE LIFE INSURANCE.................................................................................................................................................. 6
 1. RISK

1. Permanent life insurance offers both a death benefit and a cash-value amount but on death, beneficiaries
only receive the death benefit. Any remaining cash value goes back to the insurance company.
 2. TERM LIFE INSURANCE

1. Permanent life insurance offers both a death benefit and a cash-value amount but on death, beneficiaries
only receive the death benefit. Any remaining cash value goes back to the insurance company.

2. Sometimes the policyholder is referred to as “the insured,” which is not the same thing as “the life insured.”
A policyholder is referred to as “the insured” because he bought protection from the financial loss that
would otherwise result if the life insured dies.

3. Term life insurance is pure insurance, meaning that its value relates solely to the benefit that is paid out
upon death. The premiums are simply a combination of the mortality costs experienced by the insurance
company, and the expenses (including the company’s profits) incurred in providing that insurance.

4. “Proof of insurability” refers to providing sufficient evidence of good health to the insurer, so they are
willing to undertake the risk of providing the desired coverage. Essentially it means undergoing some form of
the underwriting process.

5. Joint life insurance should not be confused with combined insurance, which is a marketing concept. Some
insurance companies allow two individual policies to be purchased under a single insurance contract. The
advantage is that only a single administration fee is charged, and a small discount on the premiums may also
apply. A combined insurance contract will pay out two separate death benefits if the lives insured die at the
same time during the term of the contract. If only one of the lives insured dies, the coverage will continue
for the other life insured at single person rates.

6. Joint last-to-die life insurance policies are most appropriate when the risk being insured against does not
arise until the death of the last person covered by the policy. One such risk is the tax liability that can arise
upon the death of the second spouse.

When a person dies, he is deemed to have disposed of all of his capital property for its fair market value just
before he died, and this can result in a significant taxable capital gain for his estate. An exception to this rule
occurs if the property passes to his spouse or common-law partner. In this case, there is no deemed
disposition of the property until the spouse disposes of the property or dies, which is when the large tax bill
can arise. Couples therefore often use joint last-to-die life insurance to pay the tax bill on the death of the
second spouse, particularly with respect to property such as a cottage or a business that they want to pass
on intact to their children

However, because term life insurance is usually not available past age 65 or 70, except at great cost, joint
last-to-die life term insurance policies more commonly take the form of permanent life insurance policies.

7. Decreasing term insurance is most often used by people who have mortgages, because the amount at risk
(i.e., the outstanding mortgage) decreases over time. In fact, banks commonly encourage their mortgage
customers to buy “mortgage insurance,” which essentially is decreasing term insurance, sold as group
insurance by a company affiliated with the bank.

8. Increasing term insurance is useful in situations where the amount at risk is expected to increase over time,
perhaps due to inflation, investment returns or salary increases. The increase in the death benefit can take
the form of a fixed euro amount [e.g., €50,000 every fifth year or a fixed percentage (e.g., 5% annually)]. Less
commonly, it can also be tied to inflation e.g., increased annually by the Consumer Price Index - CPI.

One of the benefits of increasing term insurance is that the coverage increases even if the life insured
experiences a decline in his health. The death benefit will continue to increase, up to the cap specified by the
 policy, as long as the policyholder pays the increased premiums, and the premium increases are known in
advance.

Connor is a business executive who is driven to succeed, and he expects his income to continue to
increase at about 10% per year. If he dies, he would like to ensure that his wife receives a lump sum that
equals ten times his annual salary. Connor could buy increasing term insurance with an indexing factor of
10%, with an initial face amount equal to 10 times his current salary.

9. Sample annual premiums of term insurance

Notice how the premiums do not change very much between ages 20 to 35 for the 10-year term, but they
start increasing significantly at about age 40, with very dramatic increases from age 55 onwards. This
suggests that clients who opt for term life insurance should purchase it sooner rather than later. Also, the
annual premium does not vary significantly between the 10-year and 20-year terms until about age 35,
making the longer term more attractive for younger clients.

10. Convertible term insurance is more expensive than term insurance that does not include a conversion
option, because it exposes the insurance company to additional risk beyond the original term. In fact, the
people who are most likely to convert the policy are those who have experienced a decline in their health,
which would make a new life insurance policy too expensive or even impossible to get.

11. A material fact is any piece of information that would have influenced the insurance company’s decision
about providing the insurance coverage (e.g., smoking status, known health issues, age), had it known about
it during the underwriting process. Under the mandatory incontestability limitation, an insurance company
only has two years after it issues the policy to void the policy if it discovers an error in a material fact in the
application. This two-year period is called the “contestability period.” Once the contestability period has
 passed, the policy becomes incontestable and the insurance company can only void the policy if it can prove
that the policyholder committed fraud when applying for the policy.

By exercising the conversion option of a convertible term life insurance policy, the policyholder acquires a
permanent policy without being subject to a new two-year contestability period or suicide exclusion period.

Therefore, the new policy issued as a result of the conversion is usually treated as an extension of the
original policy for contractual purposes. This means that the clock is not reset for the purposes of applying
important legal provisions, such as the incontestability limitation and suicide limitation.

12. Term insurance is particularly suited for short-term risks of known duration. If there is a possibility that the
risk could extend beyond the anticipated duration, the policyholder should choose a renewable policy.

As the owner of a new business, Felix was able to get a €100,000 loan from a private investor. The loan is
interest only for 5 years, when it is payable in full. As a condition of the loan, Felix is required to obtain
life insurance with a minimum death benefit of €100,000, with the lender named as the beneficiary. A
€100,000 5-year term insurance policy would be the most cost-effective option for Felix and it is ideal for
covering a 5-year risk.

13. Decreasing term insurance may be well suited for covering risks that diminish over time, such as mortgages
or other loans that are repaid over a known amortization period. Examples of other risks that diminish over
time are given below.

When Rob and Gabriella divorced, the court ordered that Rob must provide Gabriella with child support
of €50,000 per year until their twin boys finish university or reach age 23, whichever comes first. The boys
are currently 13 years old. Rob can purchase a 10-year, €500,000 decreasing term policy to meet this
obligation in the event of his death.

John left his position as vice-president of ABC Ltd. at age 55, and he will receive a full pension starting at
age 60. The pension will continue undiminished, payable to his spouse Helena, if he dies while receiving
the pension. In the meantime, John is self-employed as a consultant, earning €100,000 per year and he
plans to retire at age 60, when his pension from ABC Ltd. starts. Because he no longer works for ABC
Ltd., he is no longer covered by their group life insurance plan. John wants to protect Helena from the
loss of his income if he should die prior to retirement. John can purchase a 5-year, €500,000 decreasing
term policy to address this risk.

14. Perhaps one of the most common reasons people opt for term insurance over a permanent policy, is that
they simply do not have the cash flow to put towards a permanent policy. Depending on their
circumstances, they could opt for an convertible term policy.

Angela and Doug are in their late twenties. They have been married for three years and just bought
their first house. While they both have promising careers, they have just had their first child and Angela
is home on maternity leave. With Angela’s reduced income while on leave, together with a new
mortgage, a car loan, and student loans, cash flow is very tight, and yet they realize that their young
family needs life insurance protection. At this time, term insurance provides them with the most viable
option. Because their finances are expected to improve over time, they should consider a convertible
term policy, because it will give them the more affordable term insurance coverage now, while giving
 3. WHOLE LIFE INSURANCE

1. Two primary functions of financial accounting are to measure activities of a company and communicate
those measurements to investors and other people for making decisions. The measurement process involves
recording transactions into accounts. The balances of these accounts are used to communicate information
in the four primary financial statements.