MTHEL131 Lecture Notes Erin Edward
1583, London, England
Successful business, successful among the people (politically popular)
Owner of successful manufacturing company
Enjoyed spending time at his country club and got along well with the members
Most members came from money, but Richard Martin was a self-made man
“How can you run such a successful business, yet spend so much time away from the business?”
o Organization, built up business, time management
William Gibbons–assistant manager (partner)
Has the authority to make decisions in the absence of Richard Martin
Paid very well, owns a stock percentage of the firm (employment stability, employer security)
Negative effect of his death:
o Responsible for sales: sales might drop or plummet
o Customers will get worried if sales drop
o Profits would have a corresponding drop
o Stock prices might drop
o Cost of replacing and training a new employee
o Total: L383 ($0.5M-1M in today’s money)
Country club guys (16 partcipants)
place a bet (wager) on whether or not William Gibbons will survive the year (12 months)
o dies within the next 12 months: the country club members pay him to offset the loss
o lives passed the next 12 months: Richard Martin will owe 8% of the L383 paid up front
Risk for Martin: Lack of documentation, expiry date on the policy
11 month: William Gibbons died, Richard Martin was devastated
Refuse to pay Richard Martin, so he sued them
o Judge upheld the terms of the contract, ensured Martin was paid
First example of a life insurance policy
INSURER: Country club guys
INSURED: Richard Martin
LIFE INSURED: William Gibbons
(These are the terms and players in the life insurance contract) MTHEL131 Lecture Notes Erin Edward
1757, London, England
Petition was put before the house of parliament
“Great numbers of subjects that depend on income payable to them are very desirous for ensuring the
lives of each other in order to procure this income after their death to their family and benefices that
otherwise would be reduced poverty.”
DENIED, could not secure enough votes in parliament
Asking for the opportunity to form a life insurance company so that individuals who wanted to protect
their dependents could buy a policy. No other strategies to protect their families in case of their death.
Life insurance goals are no different in 2013: protect the surviving spouse and children
People are still living pay check to pay check
Legislation was passed and first insurance company was formed
The Old Equitable
1. No insurance policies will ever expire, they are enforced for a person’s entire life (as long as
they continue to pay the premiums)
2. Prices will stay level. Policy will be based on level (always stays the same as initial premium,
regardless of inflation, the same for new and current customers), annual premium. (However all
prices goes up eventually)
3. Prices vary based on age of entry. (Life insurance policy sold to a 30 year old will be a higher
premium than a 25 year old.)
Most Valuable Assets: (for the company)
Ability to predict (knowledgeable, forward thinking - actuaries)
The ability to compete effectively (originally only team in town)
Motivation for consumers:
To secure the financial stability of their loved ones if they should perish
Fair, level premium
Promise that they will uphold their part of the bargain and pay when that day should come that
the policy will become active MTHEL131 Lecture Notes Erin Edward
Type of cooperative company where the policy holders are the owners.
Goal: Guide the company to a future where the financial responsibility can be met
Goal was met in the year 1800, in premiums and reserves (access the funds if they needed it)
Why did it take so long to launch life insurance that was available to the consumers?
1. The average person in that time could not get clear in their mind the difference between life
insurance and gambling (legitimacy) back then they gambled on everything. “wager high and
drink deep”, run down to the bookie and place bets, meanwhile gambling is a sin, although
preacher was betting too.
2. Lack of knowledge of death rates. An actuary needs a mortality table (likelihood of death at any
age-increasing) - not because they did not possess the mathematics to do so
3. Plague and pestilence. In recent years we’ve had great fear of serious epidemics (swine flu, bird
flu, SARS). Fortunately, death rates have been minimal. Back in the 1500s, the plague was
overwhelming. Two thirds of Europe was wiped out. Around 1750, death rates began to stabilize
(began to control the plague)
Life Insurance in Canada Today
Primary financial concerns of Canadians:
1. Pension: Having an income at retirement, fear that your savings will be depleted (expire) before
you die. Fear of living too long.
2. Life insurance: Dying too soon, before your time, dying when your family and children are young
and are relying on you for financial support. Most families have two sources of incomes, and
most need both to survive.
3. Disability/Serious Illness: Being in an accident or being seriously ill, so that you are unable to
work. Unable to provide for yourself.
Insurance can’t prevent, but can provide tools that can minimize financial consequences. Provide cash if
income is temporarily stopped because of accident/sickness, or permanently in case of death. Insurance
can provide solutions.
When you buy a warrantee for an expensive product, you expect the company you be in business in the
event that the policy should become active, to be able to follow through on the promise. Insurance
policies must be for 100+ years minimum. They must keep these promises to keep their reputation.
Most valuable asset is the ability to keep their promise.
What could go wrong (risks)
Economic crisis: Take those premiums collected and put them in investments, calculate a
projected return. The projected return might not materialize.
Disastrous events (natural disaster, terrorist attack, epidemic, etc.)
How to protect the most valuable asset (promise)?
Cash reserves from investors and investments
Pay it back in installments (keep our promise while premiums continue to come in) MTHEL131 Lecture Notes Erin Edward
What will we do in the presence of a disastrous event?
1. May have to raise future premiums in the presence of a disastrous event.
2. May have to raise current premiums and reduce the sums payable to benefices in order to meet
payments in a disastrous event (either temporarily or permanently) (only if necessary, for the
good of everyone)
Insurance is a financial arrangement where if you encounter any loss you will be covered. It is not
intended to put the person in a better financial before the loss, only to be put in an equal position.
Social benefit: keeps spouse and children provided for.
Gambling is a deliberate wager of money or something of value, where the primary goal is to win more
money. No social benefit.
Main Canadian Providers:
1. Canada life-1847
2. Mutual Life-1870 (Waterloo)
3. Sun Life and London Life-1871 ???
4. Manulife, North American ???
Huge growth in the industry (1870s and 1880s)
Life Insurance provides a large amount of cash immediately when (arguably) a family needs it more than
ever. When we die, all our debts, everything we owe, goes into the Estate. The Estate pays all the bills,
then the remainder goes to the will (beneficiaries). This can take time (6 months to a year). Anytime
funds travel through the Estate there are fees.
1. Probate (1-2%)
2. Legal (1-2%)
In total 2-4%
Advantages of Life Insurance:
The proceeds will bypass the Estate (save the fees) and go directly to the beneficiary.
A will, once it’s been settled, becomes public record. Life insurance is NOT on record,
Protected from creditors. Will not go towards debt.
Certain types of policies, with cash value, can be borrowed against (up to 90%) (You can take a
loan from the life insurance company.)
Death benefits are received by the beneficiaries tax free
Life insurance companies are unparalleled in safety (for themselves, they continue to prosper).
Every single dollar in all history has been paid in the face of the claim (in the absence of fraud).
Available to most people MTHEL131 Lecture Notes Erin Edward
Disadvantages to Life Insurance:
Not available to individuals in poor health, denied
If a person lies on their application, the claims will be denied. (Ex: illness not mentioned)
Complicated, not easy to understand. (Actuaries must explain)
The cost of Life Insurance premiums limit the amount of available funds for current
consumptions (living and leisure costs) and investments
Contract: binding agreement between two parties (Beneficiary is not part of the contract because they
have no rights and they can be changed at any time.)
Third party contracts: When the insured and the life insured are two different people (inured, life
Insured: person who takes out the policy (policy owner)
Life insured: person whose life will be compensated for
Life insurance contract is a unilateral contract, which means one party can back out of the contract at
any time (not the insurer, only the policy owner).
3 features of a life insurance policy:
1. Enforced for the whole of life (can never expire)
2. Level annual premiums for life
3. Premiums vary based on the age of entry
Precautions taken: (by the old equitable)
In the case of some public epidemic or calamity, some substantial increases to the amount
payable may be made temporarily
Ensure its reputation, keep its ability to keep its promise (most valuable asset)
Reserve the right to raise premiums for a certain class of people (ex: all males between 30 and
Life and Health Insurance Industry in Canada Today
Insurance products include a wide range of financial products such as:
Health (ie. Dental, prescription medication, long-term care, critical illness, etc.)
Investment products (Mortgages, RESPs, annuities, segregated funds, etc.)
Living benefit products (benefits where the life insured can be reimbursed without dying)
57% of the Canadian market is controlled by 3 firms
1. Great-West Group (Great West Life, Canada Life, London Life)
2. Manulife Financial
3. Sunlife Financial MTHEL131 Lecture Notes Erin Edward
CLHIA (Canadian life and health insurance association) did a study in 1997 of Canadians who died that
What does the average policy holder (life insured) look like? (What characteristics?)
o 70% were male
o 70% were over 65
o 88% were over 50
Who were the beneficiaries?
How big were these policies?
o 83% of these policies were less than $25, 000
How long had these policies been enforced?
o 72% had been enforced for more than 20 years
What types of policies?
o 74% were permanent
Many other cases with insurers had policies for less than a year and high payouts
Ex: In 1997, 36 year old had $100, 000 policy who had a 9 month policy, paid $245 in premium
who died of heart attack. Many claims to young widowers of a few hundred thousand dollars
The Importance of Life Insurance:
The industry pays out over $ 1.1 billion every week
2. Improve the quality of life of Canadians
90% of this is paid to the living.
3. The life and health insurance plays an important role in meeting the financing needs of all
levels of government.
When a person makes an expensive purchase, they take out a loan. The federal government borrows
money from the insurance companies using bonds (like a promise), then sells the bonds. Institutional
investors are the ones that buy government bonds (Ex: pension funds, banks, and life and health
20 years to maturity
Insurance does a background check to minimise the risk
Interest rate is 1.8% (relatively low, compare to Greece – 24%)
Life and health insurance companies make very safe investments: ie. Government of Canada bonds.
Nearly 20% of all industry assets held by Canadian insurance companies are government of Canada
4. Financially strong industry
Other industry assets: MTHEL131 Lecture Notes Erin Edward
Corporate bonds and stock – 40%
Mutual funds – 20%
Mortgages – 15%
Other – 5%
These reserves are for the payment of future claims.
5. Internationally successful
One of the most secure capital industries in the country, Canadian insurance companies are well known
around the world. (Sunlife, Manulife) About 50% of insurance company’s revenue come from
6. Highly competitive domestic industry
Over a hundred different companies in Canada, not many other industries centered in Canada successful
in Canada. The percentage of health insurance policies taken from Canadian companies is 87% of the
7. Contribute to the success of small businesses
Mortgage financing can be provided by health and life insurance companies to small businesses. Provide
important products to attract, retain and motivate employees. Agents provide consulting services, to
demonstrate how the products can benefit the business owner.
8. Life and health insurance industry is a major employer
132, 000 Canadians derive their incomes from the life and health insurance companies
Types of Insurance
55% of coverage in Canada
Either term or permanent
The contract is between the insurer and the insured (policy owner)
Rights are clearly defined as a policy owner
Must go through the underwriting process (used by insurance companies to decide if they are
going to accept that risk)
Risk is based on factors such as age, health, lifestyle history and choices, etc.
Underwriting process and the contractual relationship are very important
45% of coverage in Canada
1 of 3 channels: Employer, creditor, or association group
o Employer group: 62%, a package
o Creditor insurance: 31%, is often through the lending institutions
o Association group: 7%, alumni or union MTHEL131 Lecture Notes Erin Edward
Contract between the insurer and the employer
Doesn’t payout very often, for example if individual commits a criminal act at time of death (ex:
drinking and driving) or has pre-existing conditions (health problems either known or unknown
to the individual)
Underwritten or issued coverage through a large group. A lot less intensive than individual
policies because they do their underwriting at death (or time of potential payout), which means
that some individuals may not qualify after they die.
$49, 000 is the average amount of group insurance
The same companies offer both policies. Group insurance is almost the same price as individual
insurance. The average Canadian who has an average combined coverage of $165, 000
How much coverage is the right amount of coverage for the individual?
Once you establish the proper amount of coverage, what kind of coverage is best?
Underwriting process: process the insurer follows in determining whether to accept or deny the request
(issue the policy or not)
To pay out policies insurance companies must invest the premiums efficiently.
Life expectancies are always changing (currently increasing)
Life expectancies vary by age: the older you are, the older your expectancy is (If you lose some
early, then later on the rest are more likely to live longer)
Banks and Insurance
Government restricts banks from offering life insurance policies. Banks can however own a life insurance
company, but they cannot sell individual life insurance products in their branches and cannot use their
client databases to market their life insurance products.
Banks have a lot of knowledge about the individuals in their database:
Payments and bills
Know where you spend your money (debit + credit)
Banks can however offer group insurance with other products (ie. mortgage) or own separate
insurance companies. These insurance companies are often small and must sell their products
completely independently from the bank counters.
All insurance companies need actuaries. Some insurers are too small for their own actuaries, so
there exists actuarial firms.
Financial Independents and Insurance
What does financial independence mean to the individual?
Financially self-sufficient (don’t rely on parents)
Free from debt MTHEL131 Lecture Notes Erin Edward
The ability to decide how you spend your money
Being able to financially support other family members
Most people, no matter what the background or age, have the same vision of financial independence
What is your most valuable asset?
Ability to earn an income
o Total earnings over a lifetime will be $4.3M+
o Only two thieves can rob you of this asset: death and disability
How you balance your income
o The loss of income (permanently or temporarily) = the loss of lifestyle
Insurance acts as an income replacement to prevent the loss of lifestyle
o Insurance is NOT an investment
The Ten Biggest Obstacles in Achieving Financial Independence:
1. Fail to plan – average Canadian spend more time planning summer vacation than their financial
2. Achieving financial independence doesn’t happen by accident. Only about 5% of Canadians
achieve financial independence as we defined it. Retire with debt and can’t have the quality of
life they dreamed of.
3. Failure to align yourself with a financial advisor
4. Goal setting – what do people who have extraordinary financial success have in common? Good
network, connections, good marks, good work ethic. Most important: developing the habit of
clearly defining your goals. Write them down and review them on a regular basis.
I. SMART goals (Specific, Measurable, Attainable, Reasonable, Time frame)
i. Time frame is most important – not a goal without this (only a dream)
II. Short term or long term
III. In all aspects of your life
5. Procrastination. Can wait a year or a few.
6. Financial independence is expensive. Should take a minimum of 10% of a person’s gross income.
Long term programs of investment and insurance
Setting aside enough money ensures that companies (banks, insurance) stay
competitive (but what is the motivation for individuals to do this?)
THEN vs. NOW
Starting working age 15 25
Retirement Age 65 60
Years worked 50 35
Age of death 72 87 MTHEL131 Lecture Notes Erin Edward
Retirement years 7 27
Vision of Retirement relaxing travel
People now have to put aside a lot more money to fund their future than people before.
7. Failure to protect and recognize their most valuable asset. (use insurance to protect it)
8. Failure to diversify your assets (diversify your investment portfolio)
9. Failure to manage health risk – more and more Canadians are recognizing that becoming
seriously ill can become very expensive. In the states they estimate you should have $200K set
aside for health necessities in retirement. (less in Canada) Financial institutions can help you
with meeting these needs:
10. Financial planning pyramid: prioritizing
I. Financial plan: strong base (follow the steps)
II. Non-controlled events: Insurance (by most important types, protect most valuable
III. Controlled priorities: quality of life (present and future)
IV. Growth opportunities: investments
Ex: invest $200 in next 24 months can turn into $4800+
Instead, take $200 and break down into $160 (investment) and $40 (insurance)
In 24 months, insurance can provide $400K
A Review of Bonds
A bond issued by the federal government is a promise to pay. They sell this for about $100K with an
interest rate of 1.8% (currently) - about $1800 every year or $900 every 6 months. These bonds are
enforced for 20 years before they mature. Insurance companies buy these bonds on a regular basis
because these investments are very safe. Some investments may be higher interest, but the risk is very
low for Canadian bonds. Canadian government uses the issue of bonds to raise money. Interest rates
fluctuate. Institutional investors choose to buy these bonds because of the fundamental principle of
Fundamental Principle of Investing: Investing is a trade-off. Risk vs. return (%)
Can be plotted on a graph (risk, return)
Highest Risk: Default – you lose all your money
There are two very important questions from a consumer’s perspective
1. How much coverage is right for you?
2. What kind of insurance is best for you?
How much Life Insurance is right for you? MTHEL131 Lecture Notes Erin Edward
Ex: If one spouse died, how much money would you need to offset the financial loss?
1. Immediate Expenses:
a. Funeral and associated costs - $15K
b. Mortgage (may lose home have to move, quality of life declines) - $200K
c. Debt (school loan, credit card loan, car loan) – all debt (no matter who’s debt it is)
d. Emergency fund (in case of tragic event) – 3-6 months of target income
e. Education fund (50%) - $40K
f. Other (ex: charity)
2. Living Expenses: (current situation, may be adjusted in the future)
Dead spouse was making $70K
Living spouse is making $50K – total $120K
Divided by 12 months = $10K/month
Target = $80K
o Some will come from living spouse, but they may take time off or work less to
compensate for other commitments (ie. Children)
o May only make $35K, need another $25K to compensate
Need $2500/month until youngest child turns 18 (ex: 15 years)
o Provides money for ongoing expenses (the money they are missing from the
dead spouses income for however long they need it)
o About $360K in total
o Will make monthly payments for this cost, including inflation
o Buying an annuity buys you a stream of income payments.
Use tables of income factor (index of inflation)
o Takes investment and inflation into account
o Factor multiplied by monthly income to see the income replacement capital to
pay monthly requirement for specific time frame
o Always use +3 (interest rate-inflation rate has almost always been +3)
o Look at term certain income for required length of time they would need to be
compensated (in years)
o Look at life income if they want to be compensated for the rest of their life
(women live longer than men, women life income will be greater)
Add both together. Total = about $665K
Price tag on living spouse’s way of life
This is the amount of insurance the spouse needs if one dies
If they want to take out a greater policy, they can. Typically, a person should have ten times their
income in insurance. In addition to appropriate insurance, it is recommended to have a will. This should
include a guardian, an executor to manage your money, etc.
The average amount of coverage for the individual in Canada is $165K, which is not adequate to avoid
the loss of lifestyle.
To calculate the capital deficit or surplus, we use the Capital Needs Analysis MTHEL131 Lecture Notes Erin Edward
For life insurance there is always two questions:
1. How much coverage is necessary?
Funeral costs (ex: $1500)
Debt (ex: $80, 000)
Mortgage (ex: $200, 000)
Emergency fund 3 months of the new target income (ex: $15, 000)
Education fund (ex: $80, 000)
o Total Immediate coverage needed (ex: $390, 000)
Shortage per month for 15 years x factor
o The factor produces the amount of total money needed for 15 years (including
inflation) that would be provided at death
o This is the ongoing income (ex: $360, 000) and will normally be invested
o Risk is that the investment could do very well (money left over after 15 years) or
poorly (money runs out before 15 years)
Total for 15 years is $750, 000
If the customer is not comfortable with this risk, they may choose to purchase an annuity contract
instead. This contract would give them a guarantee from the insurance company to pay the shortage
every month (ex: 2500). Now the insurance company is taking on the risk of the investment instead of
the policy owner.
If the customer has external sources of insurance (ex: group insurance from en employer), the amount is
deducted off of the total required coverage.
The entire amount will be provided to the beneficiary and it is up to them to spread it out responsibly
according to the plan.
2. What type of coverage is necessary?
Term or permanent
What are the three variables considered in the pricing of policies? (Establishing the premium)
1. Mortality (age, life expectancy)
2. Investment returns (on the premiums)
3. Expenses of the company (cost of business)
*Buffer (in case they don’t have enough money)
Insurance companies take the premiums, and put the money into a reserve. The required amount of
money put into the reserve to ensure the payment of claims is calculated given the ages of the policy
owners and when they’re estimated to die (usually the amount is overestimated to be safe).
When the calculation was done 40 years after the opening of the company, the Old Equitable’s reserve
had an excess of $1M. MTHEL131 Lecture Notes Erin Edward
How did this excess occur? Possibilities:
The old equitable had over charged for the premiums to keep themselves safe.
Investments were more successful than predicted
Not as many people died as predicted
The expenses were lower than predicted
Because of the experience the company had with mortality, investment returns and
Today the surplus check for EXPERIENCE DIVIDENDS is done annually
How to give this back to the policy owners:
1. Lower the premiums for an extended amount of time. PRO (Premium Reduction Option)
2. Cash option
3. Accumulation option (on deposit) a little bit would be deposited to a person every year ?
4. PUA (Paid Up Additions) additional insurance with no premium payment to guarantee coverage
Why is it that the Experience Dividends of the company are paid back to the policy holders?
Owners of a mutual company are the policy holders
Participating (PAR) policy- PAR policy holders participate in any experience dividend distributed
Non-par policies: policy holders do not participate in the distribution of any surplus
Experience dividend is never guaranteed.
Ex: Accumulated option takes in portion of surplus every year. Policy owners can withdraw from that
account at any time. If untouched, this extra coverage will grow with interest.
Types of Companies:
Mutual company (non-stock company)
o The owners are the participating policy holders.
o No take-over possible - advantage
o Can’t sell stocks to raise funds - disadvantage
o Another company could come and take-over with a bidding war (own 51% of the shares)
o Can raise funds (for expansion) by issuing more shares (people will buy because they
expect a high investment return) – advantage
Raise capital ? MTHEL131 Lecture Notes Erin Edward
Four major insurance companies: (all mutual)
1. Mutual (first mutual company in Canada)
Were able to compete with banks, envisioned expansion. All mutual companies owned by the policy
owners. Want to become stock companies.
T demutualize, they first, valued the company (ie. Assets)
Mutual life was worth $2B, with 1M par policy owners
When the mutual company becomes a stock company, the par policy owners will become shareholders
or they’ll get the money from the surplus (eligible for any surplus=par). The par policy owners were
participating in an experience dividend every year. The demutualization will create a greater surplus
than all other prior experience dividends. Dividends will be distributed to the par policy owners based
on the size and type of their policy, the premium paid (face value) and cash value of the policy, as well as
the length of time as a policy owner.
In transition from mutual to stock period you could receive your part in cash or shares.
The worth is in buildings, infrastructures, in the future promise that this will be a profitable company,
not physically $2B in cash. Must sell shares to pay the par policy holders who chose cash.
Life insurance policies will stay the same after the transition
Before you were an owner and policy holder in a mutual company. Both advantages, but
couldn’t separate benefits.
To become a stock company they must raise the capital.
Mutual life was no longer a mutual company, must change name (Clarica)
The Canadian government decided to protect the new company by preventing anyone from owning
more than 10% in the next 2 years. The government protects banks from being taken over by foreign
competitors because the banks should be owned by the country (Canadian resource). Insurance
companies above a certain size have the same protection as banks. Sunlife and Manulife were above this
size requirement and therefore protected.
Great-west life (already stock company) bought Canada life after demutualization
Sunlife bought Clarica after demutualization and protection period
All now stock companies
Can still buy participating policy, but new par policy owners are no longer shareholders
Can still receive experience dividends MTHEL131 Lecture Notes Erin Edward
Mutual insurance Company
Controversy: want to demutualize – why can’t follow the same process?
The overwhelming policy holder base is non-par (over 95%), other companies before were more majorly
par policy owners.
It was difficult to obtain a par policy from economical insurance. The amount of policy holders who will
receive the surplus is very small. The average par policy holder is estimated to receive $1M each,
compared to $2000 for other companies. Non-par policy holders want some gain, but never received
anything in the passed during other demutualizations.
Non-par policies are guaranteed fixed premiums and fixed benefits and costs a little bit more
than par policies
Par policies are given flexible premiums and flexible benefits that are based on experience
Customer cannot switch from par to non-par without cancelling and re-issuing their policy
Term vs. Permanent Insurance
Ex: Renting vs. Owning
Renting: (universal truths)
1. Every year your rent will increase
2. Must pay as long as you stay
3. As long as you rent you’re not building
any type of equity
Owning: (universal truths)
1. Level monthly mortgage payments
2. When paid for, no more payments
(mortgage is paid off)
3. Equity builds on the value of the home MTHEL131 Lecture Notes Erin Edward
Reasons not to own:
Prices too high, not affordable
Not ready to settle down long-term
EX: Let’s say Bob (30 year old male, non-smoker) needs $500K of extra coverage:
Premium starts out at $30 a month –guaranteed for 10 years
o Goes up to $100 a month at the renewal point for another 10 years
o Goes up again to $250 a month at the second renewal point after 10 years
o $625 after another 10 years
Keeps going up in intervals of x years (ie. 5, 10, or 20 years – called term5 insurance policy) until
bob is 80 and his policy expires
Might cancel at a renewal point (can cancel at any time)
Most term policies don’t pay out
ADVANTAGE: cheap at the beginning (a lot of coverage for not a lot of money)
After time it becomes the most expensive
Universal … ?
Automatically renews every year, only have to prove health and insurability at the beginning
Convertible-can convert from term up to permanent at any time without any extra requirement
Premiums vary with age, therefore when you convert to permanent at a later age, the premium is more
$200/month policy, level premiums for life long coverage. Guaranteed to be paid out and only
expires at death.
All permanent or whole life policy insurance policies pay out
Every permanent policy has a cash surrender value (CSV)
o Indicates an amount the policy owner will receive at cancellation based on age and
years committed to the policy.
o CSV gives choices
Cheaper at the beginning
Renewable at every term
Health information only required only at the beginning
Policy will expire after old age if they don’t die
Nothing builds up
Doesn’t expire MTHEL131 Lecture Notes Erin Edward
More expensive at the beginning
Builds up cash surrender value
o Allows you to borrow up to 90% of the cash value of your policy
o Any policy holder who has built up cash surrender value can take out a loan
o Not obliged to any specific repayment schedule
o They will deduct the outstanding loan and any interest from the death benefit
Will be covered for the whole of life
Permanent insurance vs. Whole of life insurance
Permanent insurance: Name given to the group of insurance policies designed to be enforced for the
whole of life (opposite of term insurance)
1. Whole Life insurance – CSV (cash surrender value)
a) Limited-pay whole life insurance (traditional)
Premiums are condensed over a shorter period (instead of your whole life)
Ex: limited-pay 20
Premiums much more expensive
CSV is normally very low at the beginning of the policy (first few years)
2. Term-100 (T-100)
Enforced for your entire life
o No cash builds up
o No flexibility
Lower premium, level for life
Least expensive form of permanent insurance (stripped down-no CSV)
o Don’t miss a premium!
3. Universal life insurance – (U-life) flexible
Premiums vs. deposits
o Insurance calculates how much insurance policy is valued per day.
o They have a reserve where the customer puts in lump sums or deposits, and the
insurance company just takes out money when they need to charge the
customer. Customer must make sure that there is money available to the
Coverage is very is flexible MTHEL131 Lecture Notes Erin Edward
o If he needs more coverage for whatever reason, the insurance company simply
raises the daily “premium” charge
o Customer can oversea how his reserve is being invested and what it is
generating. They can see the premium charge and the cost of insurance at any
Tax advantages – tax shelter
o If the customer has investments earning interest or dividends outside of the
insurance, then they are taxed.
o Any money earned on interest or dividends inside the reserve is tax free until
the money is removed (tax free earnings)
Choices in how the policy works
1. Death benefit:
a) Level death benefit (Regular): If he dies, he gets the cash value of the
coverage, not the reserve money.
o Ex: if his coverage is $500K, and he has $100K in the reserve,
they only charge him for $400K, which is why they would keep
the reserve money
b) Universal insurance PLUS: if he dies, he gets the cash value if the
coverage, PLUS the reserve money. But the insurance is costing him
more per premium.
Policy owner can change his mind between these policies at any time,
depending on insurability (amount of risk to the company)
2. Investment at reserve
3. Cost of Insurance:
Two people the same age, have the same amount of money in the reserve
a) YRT – yearly renewable term
cost of premium rises exponentially over the years. More money in the
at first, but later on the costs will be much more expensive
b) LCOI – (level cost of insurance)
the reserve will build up slower at beginning, but the premium will
never go up. In other policies, if the investments don’t do as well as
predicted, the insurance company is responsible for making up the
difference. In universal insurance policies, the customer is responsible
for the difference because they were overseeing the investments.
Benefits of whole life policy: Non-Forfeiture options MTHEL131 Lecture Notes Erin Edward
These defence mechanisms exist to make sure the policy stays IN FORCE (doesn’t lapse)
C CSV – cash value
A APL (automatic premium loan) loan is possible because of the presence of CSV. If premium
is not paid, the insurance company will pay the premium by taking a loan from the CSV.
R retired: use the CSV to be put on APL, cash in the surrender value
RPU (reduced paid up) Fully paid for, reduced coverage (won’t pay anymore premiums)
E ETI (extended term insurance) no more premiums, same coverage, but policy will now have
an expiry date
Ex: Insurance premium is due on the first of the month (oct. 1 ), the policy owner didn’t pay and they
died a few days later (the 9 ). The insurance company will still pay because they are bound by law to the
days of grace policy provision. This states that you have 30 days by law to get your premium paid for
your policy to stay enforced. If the premium is not paid and they die on November 5 , the claim will be
denied because the policy has lapsed.
If this policy had been a whole life policy and CSV had accumulated, the premium will be paid by
Within two years of lapse (cancellation or surrender), the policy can be re-instated (re-
instatement provision) , but
1. the customer must be insurable (healthy)
2. must catch up to date with all the premiums due with interest
3. must pay back the CSV interest.
After two years, reinstatement is not an option
Options- Riders Attachments
1. Waiver of Premium: If a person becomes disabled, they will pay the premiums for the first 6
months. After 6 months, if the person is still unable to return to work, the insurance will pay the
premiums. If they are never able to return to work, the 6 months of premium will be refunded