LIFE INSURANCE GLOSSARY

Accumulating fund: Also called a reserve fund, in most cases, it refers to the equivalent of the cash surrender value of the policy. Where there is no cash surrender it would equal the insurers' reserves in respect to that policy.

Adjusted cost base (ACB): Like mutual funds, insurance contracts have an adjusted cost base. It's the net sum of the total premiums minus the insurer's cost of insurance (including mortality charges) and expenses.

Alter-ego trust: A trust in which the settlor or person establishing the trust is the only beneficiary, unlike the joint partner trust below. The alter-ego trust provides tax savings because it allows the settlor to transfer in assets and bequeath them to a beneficiary without paying probate tax on death. The settlor will usually be able to transfer in the assets without triggering a deemed disposition and capital gains exposure.

Anti-dumping rule: Also known as the 250% rule, it's CCRA's way of determining whether an insurance policy remains tax exempt. Over any three-year period, the value of a policy can increase by no more than 250%.

Buy-sell policy: This type of policy provides cash — usually tax-free — to fund the terms of a death or disability buyout as provided in a legal buy-sell agreement.

Capital dividend account: An account that holds distributions, often the proceeds of an insurance policy, which can be transmitted to shareholders of a corporation tax-free.

Capital property: In the context of estate planning, it often refers to the physical assets of the testator, or person who has made up a will.

Critical illness insurance: A type of insurance that pays a one-time lump-sum benefit when the client is diagnosed with one of a list of illnesses stated in the policy.

Combined ratio: In the context of property and casualty insurance, combined ratio refers to the comparison of total premiums flowing into the insurance company against the same company's total claims and expenses. At a combined ratio of 100, the insurer is breaking even. Above 100, the insurer is losing money. A combined ratio of 105 means the insurer is paying $1.05 in claims and expenses for every dollar coming in.

COMP CORP: The insurance equivalent of the Canadian Deposit Insurance Corporation (CDIC) for bank accounts. Like the CDIC, the Canadian Life and Health Insurance Compensation Corporation covers up to $60,000 of savings should an insurance company go under, as well as $200,000 of life insurance.

Contingent beneficiary: Refers to the beneficiary who stands second in line after the designated beneficiary to receive life insurance proceeds if the original beneficiary has died. See also irrevocable beneficiary.

Cost of insurance: The cost of insurance is actually three things: the amount needed to fund the death benefit, deposit loads to cover provincial premium taxes and administrative charges or policy fees.

Disability insurance: Disability benefits extend to periods from two years to age 65, depending on the policy. Different policies also have a variety of elimination periods. Benefits are tax-free if premiums are paid in after-tax dollars

Estate freeze: An estate planning strategy sometimes used with shares in a closely held Canadian corporation to "freeze" the extent of capital gains liability and transfer future growth — and therefore tax liability to the next generation of owners.

Elimination period: Disability and long term care policies are not payable immediately, but after an elimination period for 30 to 90 days. The longer the elimination period, the lower the premiums.

Guaranteed issue: Policies that don't require a medical exam.

Inside buildup: In the context of tax-deferred insurance, this refers to the buildup of cash reserves inside the investment account. It typically applies to participating and universal life insurance.

Investment account: In the context of tax-deferred insurance, this account holds the money actually invested and the returns on that money after the insurer's deductions.

Irrevocable beneficiary: In the case of an irrevocable beneficiary, the beneficiary of an insurance policy cannot be changed without the consent of the original beneficiary.

Joint partner trust: A joint partner trust provides for assets to pass inside the trust to a surviving spouse upon the death of the settlor or person setting up the trust.

Key person insurance: This type of policy provides cash, usually tax-free where a partnership or business has to cover the cost of replacing a key executive or employee who dies or becomes disabled.

Lapse assumption: Actuaries assume that a proportion of policyholders will let their policies lapse before maturity. The insurers therefore do not have to pay benefits, which reduces their risk and potential costs, therefore allowing them to factor in lower premiums.

Level premium: A premium that stays constant for a predetermined number of years, possibly for the life of the policy. See also yearly renewable term.

Long term care insurance: Insurance that's set up to cover medical costs for ill and elderly clients, including home visits by medical personnel and nursing home care not covered through other plans.

Maximum taxable actuarial reserve: The Income Tax Act stipulates an annual maximum interest rate of 8% for the accumulating fund to keep a universal life policy from becoming over-funded — in other words, from becoming primarily a taxable investment vehicle.

Participating whole life: Along with universal life, whole life qualifies as a tax-exempt product under CCRA regulations. It provides coverage for the "whole of life," hence the name. Unlike universal life, the policyholder has little choice over the investment options. Non-participating policies do not pay policy dividends.

Permanent insurance: It normally refers to universal and whole life policies, which are meant to provide coverage till death. Lately, some include term to 100 as a permanent policy, even though it has no savings component.

Policy dividend: Policy dividends are not to be confused with ordinary dividends. They are instead a refund of premium. Such refunds result from better investment results, higher than expected lapses or reduced mortality payouts. The dividend is not guaranteed.

Policy loan: Insurance companies can make loans to policyholders, using the cash value of a policy as collateral.

Premium offset: Also known as a "vanishing premium." The idea is that cash values building up in a policy's reserve fund or investment component can, after a certain point, pay for the premiums.

Rated: A rated policy has higher premiums than normal, to cover existing health risks (smoking, being overweight) or familial medical history.

Rider: A rider to a policy adds benefit coverage, at the client's option and at a cost. For example, a universal life policy may have a disability rider, or a long-term care contract may have a return of premium option, should the long-term care never be needed.

Reverse split-dollar insurance: This type of policy literally reverses the payment procedure from split-dollar insurance. Like split-dollar insurance, reverse split-dollar insurance allows for two entities — usually an individual and his or her company — and the employer to split the cost and benefits of the insurance policy. A reverse split-dollar insurance policy provides for the individual to receive the proceeds of the investment account while the corporation gets the death benefits payout.

Split-dollar insurance: An insurance policy that permits two entities — usually a person and his or her employer — to split both the costs and benefits of a life insurance policy. In split-dollar insurance, the employee pays for and receives the tax-free death benefits through his or her estate while the corporation receives the proceeds from the policy's investment account.

Term 10: A term insurance policy that expires in 10 years or renews every 10 years to a predetermined maximum age such as 75 years.

Term to 100: Like Term 10, there is no cash surrender value built up in a term to 100 policy; however coverage lasts till age 100. Most insurance companies stop writing policies at age 75 to 80.

Yearly renewable term: YRT calculates the cost of insurance inside a universal life policy. Group life, long-term disability and health insurance premiums are sometimes referred to as yearly renewable.

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