INSURANCE ASSIGNMENT

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School

Humber College *

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Course

213

Subject

Finance

Date

Jan 9, 2024

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docx

Pages

Uploaded by ProfessorKnowledgeLeopard73

1. When considering Bertrand and Elaines requirements for the Life Insurance they are considering to cover, amongst other things the costs of their children until they finish post-secondary studies, what type of coverage would best fit their needs, and why? (3 marks) When considering Bertrand and Elaine's requirements for life insurance, especially with the goal of covering costs for their children until they finish post-secondary studies, a few key factors need to be considered. The policy should cover the period until the children complete their post-secondary education. Given the ages of Bertrand and Elaine's children (5 and 7), coverage might be needed for approximately 15-20 years. Term Life Insurance is likely the most suitable option. Term life insurance provides coverage for a specific period, which aligns well with the defined time frame they are planning for (until the children finish their education). It's generally more affordable than permanent life insurance, allowing for a larger coverage amount at a lower cost. Permanent Life Insurance (Whole or Universal Life) provides lifelong coverage and includes a savings component, it tends to be more expensive. It might be more suitable for their long-term estate planning needs but could be overkill for the specific goal of covering children's education and living expenses. Term insurance offers high coverage for lower premiums, fitting their need for substantial coverage during a specific period. It provides straightforward protection without the complexities of investment components, which aligns with their primary goal of safeguarding their children's future education and living expenses. After the term ends and their children are financially independent, Bertrand and Elaine can reassess their insurance needs, which might be significantly different at that stage. In summary, a term life insurance policy appears to be the best fit for Bertrand and Elaine’s current needs, focusing on the critical period of their children's education and upbringing. 2. Bertrand’s additional Life Insurance coverage amount (accounting for any existing coverage) that is needed to cover only his Wishes / Needs would be (show your work) ? (2 marks) 3. When considering the income in Bertrand and Elaine’s household after Bertrand’s death, how much life insurance coverage (considering only the gap in after-tax income) would be needed to ensure the monthly expenses are met using 4% return on the funds going forward (show your work) ? (3 marks)

4. When considering the concerns of Bertrand and Ernest in terms of having to be in business with the other’s spouse should business partner pass away. What is the legal mechanism that business partners use in situations like this to deal with this unfortunate circumstance where one business partner passes away? What type of Life Insurance coverage would you recommend and how would you structure the ownership and other considerations under the plan? (3 marks) In situations where business partners, like Bertrand and Ernest, want to avoid having to be in business with the other's spouse should one of them pass away, they typically use a "buy-sell agreement" in combination with life insurance. A buy-sell agreement is a legally binding contract that stipulates how a partner's share of a business may be reassigned if that partner dies or otherwise leaves the business. It ensures that the business continues smoothly, and the departing partner's share is dealt with in a way that is agreeable to all parties. Besides death, these agreements often cover other events like disability, retirement, or voluntary departure from the business. Ownership and Organisation of Beneficiaries: Each partner purchases a life insurance policy on the other partner or partners under a cross-purchase agreement. When one of the partners passes away, the remaining partner(s) uses the death benefit to purchase the dead partner's ownership stake in the company. Permanent Life Insurance is more appropriate for long-term needs, especially if the business is expected to continue indefinitely and can also be used, offering additional benefits like cash value accumulation. 5. Elaine with regards to their Life Insurance coverage being discussed, which Rider(s) would be a top priority for them, and why? (2 marks) Here are a few riders that might be a top priority for Elaine: Waiver of Premium Rider This rider ensures that if Elaine becomes disabled and unable to work, the insurance premiums will be waived, but the coverage continues. It provides financial relief during difficult times, ensuring that life insurance protection remains in place even if Elaine loses her income due to disability. Guaranteed Insurability Rider: Allows Elaine to purchase additional insurance coverage at specific times without having to provide evidence of insurability. It's beneficial if Elaine anticipates future changes in her insurance needs but is concerned about possible changes in health that could affect insurability. Spousal Rider: Offers term life insurance coverage for Elaine's spouse, which can be added to Elaine's policy. This is beneficial if insuring her spouse independently is not cost-effective or if the spouse has health issues that make individual insurance costly or difficult to obtain. Long-Term Care Rider: Allows Elaine to use some of the death benefit for long-term care expenses if she becomes chronically ill. Given the high cost of long-term care, this rider can provide financial support if Elaine requires such care. Critical Illness Rider: Provides a lump-sum benefit if Elaine is diagnosed with one of the specific critical illnesses listed in the policy, such as cancer, heart attack, or stroke. This can be crucial for covering out-of-pocket medical expenses or lost income during recovery from a serious illness.

6. Bertrand has an existing Life Insurance policy. If for some reason after all these years he failed to make the monthly premium and wanted to keep the policy in place, what options would he have after 30 days of missed premium payments? (3 marks) If Bertrand misses a monthly premium payment on his life insurance policy, he generally has a few options to keep the policy in place, even after 30 days of missed payment. The specific options available can vary depending on the terms of his policy and the insurance provider, but typically include: Policy Reinstatement: If the policy lapses after the grace period, Bertrand may have the option to reinstate it. Reinstatement usually requires payment of all overdue premiums, possibly with interest. He may also have to provide evidence of insurability (such as undergoing a medical exam or answering health-related questions) to prove that his health status has not significantly changed. Nonforfeiture Options: If Bertrand's policy has accumulated cash value (common in whole life or universal life policies), he can use nonforfeiture options: Automatic Premium Loan: If this feature is active, missed premiums are automatically covered by a loan against the policy's cash value. Cash Surrender: Bertrand could choose to surrender the policy and receive the cash value. Reduced Paid-Up Insurance: This option allows Bertrand to stop paying premiums and receive a reduced death benefit amount, based on the policy's cash value. Policy Modification: Adjusting the policy's coverage amount or terms can lower the premium, making it more affordable. However, this would result in reduced benefits. 7. Bertrand and Ernest agree that they should look into Disability Insurance, and based on their primary concern indicated, what Rider should the coverage have and why ? (3 marks) For Bertrand and Ernest, considering their primary concern and the role of disability insurance in their financial planning, the selection of appropriate riders is important. Some key disability insurance riders that are generally beneficial and explain why they might be important: Own-Occupation Rider: This rider ensures that the policyholder is considered disabled if they are unable to perform the duties of their own occupation, even if they could work in a different occupation. For professionals with specialized skills or occupations, like Bertrand and Ernest, this rider is crucial. It allows them to receive benefits if they are unable to perform their specific job, even if they're capable of working in another field. Residual Disability Rider: Provides partial disability benefits if the policyholder can still work but has lost a part of their income due to a disability. This is essential if Bertrand and Ernest experience a situation where they can still work in some capacity but with reduced hours or efficiency, leading to a loss in earnings. Cost of Living Adjustment (COLA) Rider: Adjusts disability benefits over time to keep up with inflation. Given that disability benefits might be needed for a long period, this rider ensures that the benefit amount maintains its purchasing power over time. Partial or Short-Term Disability Rider:

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Offers benefits for short-term or partial disabilities, which may not completely prevent the policyholder from working. Useful for covering periods of limited disability, which might not qualify for full disability benefits. 8. If Bertrand decided to Surrender his Whole Life Insurance policy what amount of the proceeds would be taxable (show your work) ? (2 marks) Income = Cash Surrender Value – Adjusted Cost base 10,000 – 12,000 = -2,000 9. When going through the underwriting process and upon reviewing Bertrand’s application, it is discovered that Bertrand has a medical history that results in the Insurance Carrier approving the application, but requiring a higher premium than originally quoted. As a result of this it can be said that the Life Insurance Policy was issued with a what ? (1 mark) When an insurance carrier approves an application for life insurance but requires a higher premium than originally quoted due to the applicant's medical history, it is typically said that the policy was issued with a "rating" or "rated policy." Here's a brief explanation: Rated Policy: A rated policy is one where the insurer considers the applicant to be at a higher risk than the average policyholder. This increased risk is often due to health issues, a risky lifestyle, or a hazardous occupation. As a result of the increased risk, the insurer charges higher premiums to offset the potential cost of insuring the individual. Implications for Bertrand: The rated policy means that Bertrand will pay more for his life insurance coverage than someone who is of average risk. In conclusion, the term for a life insurance policy issued at a higher premium due to the applicant's increased risk is a "rated policy." This reflects the insurance company's assessment of higher risk associated with insuring the individual. 10. When looking at individual Disability coverage Bertrand and Ernest learn that there is a period of time, which could be considered a self-insurance period, that must be completed before they can make a claim. Please explain this, and include the usual options that are available, as well as the impact on the premiums that each would provide. (4 marks) The period Bertrand and Ernest are learning about in the context of individual disability insurance is known as the "Elimination Period" or "Waiting Period." It is a critical aspect of disability insurance policies, essentially functioning as a deductible in time rather than in dollars. Elimination Period: The elimination period is the time between the onset of a disability and the point when the insured can start receiving disability benefits. During this period, the insured must be continuously disabled. Purpose: This period acts as a form of self-insurance. It's like a deductible in other types of insurance, where the policyholder bears some initial cost or risk. It helps reduce the cost of the insurance policy by eliminating claims for very short-term disabilities and reducing the administrative costs of handling these claims. Common Options for Elimination Periods: Shorter Periods (e.g., 30, 60, or 90 days): Shorter elimination periods result in higher premiums, as the insurance company assumes risk sooner. These are suitable for individuals who cannot afford to be without income for a long period but can afford the higher premiums.

Longer Periods (e.g., 180 days, 1 year): Longer elimination periods result in lower premiums, as the insurance company is at risk for a shorter overall period during the policy's life. These are suitable for individuals who have sufficient emergency savings to cover expenses during the longer waiting period and are looking to lower their premium costs. Impact on Premiums: There is a direct relationship between the length of the elimination period and the cost of the premium. A longer elimination period generally leads to lower premiums, and vice versa. Considerations for Bertrand and Ernest: Financial Reserves: They should assess their savings and ability to withstand a period without income. If they have substantial savings, they might opt for a longer elimination period to save on premiums. Cash Flow Needs: If they have high monthly expenses or little savings, a shorter elimination period might be necessary despite the higher premiums. Nature of their Jobs: The decision might also be influenced by the nature of their work and the likelihood of experiencing a disability. In conclusion, the elimination period is a key factor in disability insurance that affects both the timing of benefits and the cost of the policy. Bertrand and Ernest should carefully consider their financial situation and risk tolerance when choosing the length of this period. Consulting with a financial advisor or insurance specialist can provide more personalized advice. 11. What did you learn from completing this Assignment? (1 mark) Complexity of Insurance Planning: The assignment highlights the intricate nature of insurance planning, especially when considering different types of insurance (life, disability, etc.) and their various components (riders, elimination periods, etc.). Importance of Tailored Solutions: It demonstrates the need for insurance solutions to be tailored to individual circumstances, like family situation, health status, and specific financial goals. Role of Legal Mechanisms in Business: Understanding legal tools like Buy-Sell Agreements in the context of business partnerships is crucial for continuity planning and risk management. Impact of Health on Insurance Costs: The assignment shows how health conditions can affect insurance underwriting and premiums, emphasizing the importance of considering these factors when selecting or advising on insurance policies. Financial Literacy and Decision Making: It reinforces the importance of financial literacy, especially in making informed decisions about insurance products and understanding their long-term implications. Risk Management Strategies: The assignment provides insights into different risk management strategies, including how to balance insurance costs with coverage needs. Reflective Learning: Finally, the assignment encourages reflective learning, pushing students to think critically about the information, analyse various scenarios, and apply theoretical knowledge to practical situations. This assignment is an excellent opportunity for students to deepen their understanding of insurance and financial planning, and to develop skills that are critical for personal and professional financial decision-making.