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Category: LLQP – Life Insurance

3.1 Concept of Permanent Insurance

Permanent life insurance provides coverage for the entire lifetime of the life insured. As long as the required premiums are paid, the coverage does not expire and does not need to be renewed.

Permanent insurance is designed to address risks that do not have an end date, such as estate planning, tax liabilities at death, or lifelong financial protection.

3.1.1 How Permanent Insurance Differs from Term Insurance

A key limitation of term insurance is that coverage ends at the end of the term, unless it is renewed or converted. Most insurers do not offer term insurance beyond a certain age, typically 75 or 80. As a result, term insurance cannot provide protection against the risk of death at very advanced ages.

Permanent life insurance overcomes this limitation by providing lifetime coverage, making it suitable for risks that continue until death.

Another major difference is premium structure:

  • Term insurance premiums generally increase with age, especially at older ages
  • At advanced ages, term premiums can become prohibitively expensive

Permanent insurance premiums typically:

  • Remain level for life
  • Eliminate the risk of sharply increasing premiums later in life

The trade-off is that permanent insurance requires higher premiums in the early years compared to an equivalent amount of term insurance.

Unlike term insurance, permanent insurance also builds up a reserve. This reserve:

  • Helps fund the higher cost of insurance at older ages
  • Provides additional policyholder benefits, depending on the policy type

3.1.2 Types of Permanent Insurance

There are three main types of permanent life insurance:

  • Whole life
  • Term-100 (T-100)
  • Universal life (UL)

Whole life and term-100 are discussed in detail in this chapter. Universal life is covered in the following chapter.

3.1.2.1 Whole Life

Whole life insurance provides lifetime coverage with premiums that typically remain level for the duration of the policy.

Key features:

  • Builds a cash reserve over time
  • The reserve gives rise to a cash surrender value (CSV)

If the policyholder surrenders the policy before death, they may receive part of the CSV. The cash surrender value is discussed later in this chapter.

3.1.2.2 Term-100 (T-100)

Term-100 (T-100) insurance also provides lifetime coverage with level premiums.

Key features:

  • Policy matures at age 100
  • Premiums stop at maturity
  • Typically no cash surrender value

This product is also commonly referred to as “term-to-100.”

3.1.2.3 Universal Life (UL)

Universal life (UL) insurance provides lifetime coverage with a flexible premium structure.

Key characteristics:

  • A minimum premium is required
  • Policyholders may pay more than the minimum
  • Excess premiums create a savings component

Within certain limits:

  • Savings forming part of the death benefit are tax-sheltered
  • Withdrawals before death are generally tax-deferred

UL insurance is known for its flexibility, making it suitable for clients with changing financial needs.

3.2 Overview of Whole Life Insurance

Whole life insurance is a form of permanent life insurance that typically provides guaranteed premiums, a guaranteed death benefit, and a guaranteed minimum cash surrender value (CSV). It is sometimes called straight life or ordinary life insurance.

Whole life insurance is designed to provide lifetime protection and long-term financial certainty.

3.2.1 Coverage Term

Whole life insurance provides coverage for the entire lifetime of the life insured.

Key points:

  • Coverage does not expire
  • No renewal is required
  • Protection continues as long as required premiums are paid

This makes whole life insurance suitable for risks that last until death.

3.2.2 Policy Reserve

Whole life premiums typically remain level for the life of the policy.

In the early years, premiums are higher than the actual cost of insurance. This excess creates a policy reserve, which the insurer invests.

In the later years, the cost of insurance exceeds the level premium. At that point:

  • The policy reserve is used to subsidize higher mortality costs
  • This allows premiums to remain level for life

The policy reserve is a fundamental feature of whole life insurance.

3.2.3 How Premiums Are Set

Whole life insurance premiums are based on long-term assumptions, including:

  • Mortality
  • Expenses
  • Investment returns

Because policies may last 50 to 70 years or more, insurers use conservative assumptions. Conservative assumptions result in higher premiums, ensuring sufficient funds to meet future obligations.

3.2.3.1 Mortality Costs

Mortality costs represent the insurer’s cost of paying death benefits.

With term insurance:

  • The insurer may never pay a death benefit if the policy expires

With whole life insurance:

  • The insurer knows it will eventually pay the death benefit (unless the policy is surrendered)

As a result, the insurer spreads the cumulative mortality costs over the expected duration of the policy when determining premiums.

3.2.3.2 Expenses

Whole life premiums must cover long-term expenses, including:

  • Marketing and agent compensation
  • Underwriting and medical exams
  • Policy issuance and administration
  • Income taxes
  • Claims investigation
  • Business overhead
  • Death benefit payments
  • Dividends to shareholders (if applicable)

Because these costs extend far into the future, insurers must estimate them conservatively.

3.2.3.3 Investment Returns

Insurers invest policy reserves to generate returns that help fund future benefits.

Typical investments include:

  • Bonds
  • Interest-bearing assets
  • Stable equities

Insurers are legally required to maintain minimum capital surplus reserves, measured under the Life Insurance Capital Adequacy Test (LICAT), to ensure they can meet all policy obligations.

3.2.3.4 Impact of Modal Factor

Premiums are quoted annually and payable in advance.

Paying annually allows the insurer to:

  • Invest premiums earlier
  • Earn higher investment returns

When premiums are paid semi-annually, quarterly, or monthly, insurers apply a modal factor to compensate for lost investment income.

As a result:

  • The annualized premium is higher than the quoted annual premium
  • More frequent payment = higher total annual cost

3.2.4 Premium Options

Whole life policies may offer several premium payment options:

  • Ongoing premiums
  • Single premium
  • Limited payment

3.2.4.1 Ongoing Premiums

Also known as a lifetime-pay policy.

Characteristics:

  • Fixed premiums payable for life
  • Coverage remains in force until death or surrender

3.2.4.2 Single Premium

The policyholder pays one lump-sum premium.

Key points:

  • Policy becomes paid-up immediately
  • No further premiums required
  • Coverage lasts for the lifetime of the life insured

3.2.4.3 Limited Payment

Premiums are paid for:

  • A fixed period (e.g., 10 or 20 years), or
  • Until a specific age (e.g., age 65 or 100)

After the payment period:

  • The policy becomes paid-up
  • Coverage continues for life

3.2.5 Death Benefit Options

Whole life insurance policies may offer different death benefit structures:

  • Guaranteed whole life
  • Adjustable whole life

3.2.5.1 Guaranteed Whole Life

A guaranteed whole life policy provides:

  • Guaranteed premiums
  • Guaranteed death benefit

These guarantees do not change regardless of:

  • Mortality experience
  • Investment performance
  • Expense fluctuations

The insurer assumes pricing risk; the policyholder benefits from certainty.

3.2.5.2 Adjustable Whole Life

An adjustable whole life policy allows the insurer to:

  • Periodically adjust premiums and/or death benefits

Typically:

  • Guarantees apply for an initial period (e.g., 5 years)
  • Adjustments are based on actual experience versus assumptions

This exposes the policyholder to uncertainty, which is not present in guaranteed whole life policies.

3.3 Non-Participating vs. Participating Whole Life Policies

Whole life insurance policies are classified as either non-participating (non-par) or participating (par) policies, depending on whether policyholders have the potential to receive policy dividends.

  • Non-participating policies do not allow policyholders to share in the insurance company’s surplus revenues.
  • Participating policies may allow policyholders to receive a portion of surplus revenues in the form of policy dividends.

3.3.1 How Shortfalls or Surpluses Occur

Insurance companies set whole life insurance premiums based on assumptions regarding:

  • Mortality costs
  • Expenses
  • Investment returns

These assumptions are typically conservative, which can result in surplus revenues if:

  • Fewer people die than expected
  • Investment returns exceed projections
  • Expenses are lower than anticipated

Insurance companies retain part of any surplus to strengthen policy reserves, as required by regulators. These reserves protect the company against future revenue shortfalls.

Surplus revenues may also:

  • Increase retained earnings
  • Be paid to shareholders as corporate dividends (for shareholder-owned insurers)

3.3.2 Non-Participating Policies

With non-participating whole life policies:

  • Policyholders do not share in company surplus revenues
  • Premiums and death benefits are guaranteed as stated in the policy

If the insurer experiences a revenue shortfall, the insurance company alone bears the risk. The policyholder:

  • Will not pay higher premiums
  • Will not experience a reduction in benefits

Policyholders can only benefit indirectly from company success by becoming shareholders and receiving stock dividends, which is separate from their insurance contract.

3.3.3 Participating Policies

With participating whole life policies, surplus revenues may be:

  • Used to maintain required reserves
  • Distributed to policyholders as policy dividends, at the insurer’s discretion

Policy dividends:

  • Are not guaranteed
  • Are paid annually, usually on the policy anniversary
  • Increase with larger policy face amounts
  • Represent a return of a portion of premiums, not investment income

Policy dividends should not be confused with corporate stock dividends, which are paid to shareholders and represent a distribution of company profits.

Participating policyholders:

  • Do not bear the risk of revenue shortfalls
  • Will not be asked to pay additional premiums
  • Will not have their death benefits reduced

Because participating policies offer the potential to share in surplus, their premiums are typically higher than those of comparable non-participating policies.

3.3.3.1 Identifying the Difference

Participating whole life policies can usually be identified by:

  • The word “participating” in the product name
  • Policy wording that explains how and when dividends may be paid

Policy contracts clearly state that dividends:

  • Are not guaranteed
  • Are paid at the discretion of the insurer’s Board of Directors

3.4 Dividend Payment Options for Participating Policies

Depending on the insurance company and the participating whole life policy, the policyholder may choose from several dividend payment options. This choice is usually made at policy issue, but most policies allow the option to be changed later.

Common dividend options include:

  • Cash
  • Premium reduction
  • Accumulation
  • Paid-up additions (PUA)
  • Term insurance

3.4.1 Cash

Under the cash option, policy dividends are paid directly to the policyholder, typically by cheque or direct deposit, on an annual basis.

Key points:

  • Policyholder may spend or invest the money freely
  • Dividends are not guaranteed
  • Cash dividends do not affect the policy’s death benefit or cash values

3.4.2 Premium Reduction

With the premium reduction option, dividends are applied to reduce the premium payable for the coming year.

Key points:

  • Early in the policy, dividends are usually less than the premium
  • Over time, dividends may equal or exceed the annual premium
  • If dividends exceed the premium, the excess can be paid out or directed to another dividend option

This option is sometimes called premium offset.

3.4.3 Accumulation

Under the accumulation option, dividends are deposited into a separate accumulation account (also known as a side account), which earns investment income.

Key points:

  • Investment income earned in the account is taxable
  • Policyholder may withdraw funds at any time
  • Accumulated dividends may increase the total death benefit if left on deposit

3.4.3.1 Investment Options

Funds in the accumulation account usually earn interest. Some insurers also allow dividends to be invested in segregated funds.

The number of fund units acquired depends on:

  • Dividend amount
  • Unit value at time of purchase

3.4.3.2 Upon Death

Any funds remaining in the accumulation account at death are typically:

  • Paid to the policy beneficiary
  • Added to the overall death benefit

3.4.4 Paid-Up Additions (PUA)

Under the paid-up additions (PUA) option, dividends are used as a single premium to purchase additional whole life insurance that is fully paid-up.

Key points:

  • No further premiums required for the additional coverage
  • Additional insurance has its own death benefit and cash surrender value (CSV)
  • PUAs can usually be surrendered independently of the base policy
  • No evidence of insurability required

PUAs are the most popular dividend option, used in the majority of participating whole life policies.

The amount of additional coverage depends on:

  • Size of the dividend
  • Attained age of the life insured

Death benefits from PUAs are paid tax-free to beneficiaries.

3.4.5 Term Insurance

Under the term insurance option, dividends are used as a single premium to purchase one-year term insurance.

Key points:

  • No evidence of insurability required
  • Coverage lasts only for one year
  • Amount of coverage depends on dividend size and attained age

This option provides temporary increases in coverage.

3.4.6 Impact on Death Benefits and Cash Values

Dividend options can affect the policy’s death benefit and CSV:

  • Paid-up additions (PUA) → increase both CSV and death benefit
  • Accumulation → may increase death benefit if funds are not withdrawn
  • Term insurance → temporarily increases death benefit only

3.4.6.1 Dividend Illustrations

Agents often provide dividend illustrations to show how CSV and death benefits might change over time.

Important exam points:

  • Illustrations are based on a dividend scale, not guarantees
  • Dividend scales may change over time
  • Illustrations often show multiple scenarios
  • Results shown are not guaranteed

Policyholders must understand that dividend illustrations are hypothetical, not promises.

3.5 Non-Forfeiture Benefits

When a term life insurance policy is cancelled or expires, the policyholder is left with no remaining value.
A whole life insurance policy, however, typically provides non-forfeiture benefits — benefits that the policyholder does not lose, even if premium payments stop.

💡 Key idea:
Non-forfeiture benefits exist because whole life policies build cash surrender value (CSV) over time.

Important characteristics:

  • Benefits grow the longer the policy is in force
  • In early years, benefits are small or nonexistent
  • If CSV is reduced (e.g., withdrawals or loans), non-forfeiture benefits are also reduced

3.5.1 Cash Surrender Value (CSV) 💰

When a policyholder cancels a whole life policy, the policy is surrendered.

The cash surrender value (CSV) is:

  • The amount paid by the insurer upon surrender
  • Received in exchange for ending future life insurance coverage

🔹 A portion of the CSV may be taxable when received.

How CSV develops:

  • Early years → premiums mainly cover expenses → little or no CSV
  • Later years → premiums exceed costs → policy reserve builds
  • CSV represents part of:
    • The policy reserve
    • Any paid-up additions (PUAs), if applicable

3.5.1.1 Surrender Charges ⚠️

Issuing a life insurance policy involves significant upfront costs, including:

  • Underwriting
  • Administration
  • Agent commissions

To recover these costs, insurers apply surrender charges.

Key points:

  • Surrender charges reduce CSV in early years
  • Charges decline over time
  • Eventually, surrender charges disappear

📌 For many whole life policies, guaranteed CSV may show $0 for the first 3–10 years, depending on the contract.

3.5.1.2 Policy Loans 🏦

A policyholder can usually borrow against the CSV.

Key features:

  • Loan amount typically up to 90% of CSV
  • No fixed repayment schedule
  • Interest accrues on the loan balance

Impact of unpaid loans:

  • On surrender → CSV reduced by loan + interest
  • On death → death benefit reduced by loan + interest

3.5.2 Automatic Premium Loans (APL) 🔄

Most whole life policies include an automatic premium loan (APL) feature once sufficient CSV exists.

How APL works:

  • If a premium is missed, the insurer:
    • Automatically loans the premium amount from CSV
    • Charges interest on the loan

Benefits:

  • Prevents accidental policy lapse
  • Useful during temporary cash-flow challenges

APL can be applied repeatedly until:

  • Total loans + interest reach 90–100% of CSV

Once this limit is reached:

  • After the 30-day grace period, the policy terminates
  • Any remaining CSV is paid to the policyholder

3.5.3 Reduced Paid-Up Insurance 🔒

This option allows the policyholder to:

  • Stop paying premiums permanently
  • Keep some lifetime insurance coverage

How it works:

  • CSV is used as a single premium
  • Purchases a reduced amount of paid-up whole life insurance

Key features:

  • Coverage lasts for life
  • Lower death benefit than original policy
  • No medical evidence of insurability required

3.5.4 Extended Term Insurance ⏳

Under this option, the policyholder:

  • Stops paying premiums
  • Keeps the same death benefit, but:
    • Coverage converts to term insurance, not permanent

The length of coverage depends on:

  • Amount of CSV
  • Attained age of the life insured

⚠️ Important distinction:

  • Same coverage amount
  • Limited duration, not lifetime protection

🧠 Quick Visual Summary

  • 💰 CSV → cash if policy is surrendered
  • 🏦 Policy loan → borrow against CSV
  • 🔄 APL → premiums paid automatically via loans
  • 🔒 Reduced paid-up → less coverage, lifetime, no premiums
  • ⏳ Extended term → same coverage, limited time

3.6 Limited Payment Whole Life

Limited payment whole life insurance is a type of whole life insurance that provides lifelong coverage, while requiring premium payments for only a specified period of time.

Once the required premiums have been fully paid, the policy becomes paid-up, meaning:

  • 🔒 Coverage continues for life
  • 💸 No further premiums are required

⏳ Premium Payment Period

Instead of paying premiums for life, limited payment policies require premiums:

  • For a set number of years, or
  • Up to a specific age (for example, to age 65)

When premium payments end, the policy is said to endow, even though the life insured is still alive and coverage remains in force.

💰 Premium Level

Premiums for a limited payment whole life policy are higher than those for a whole life policy with premiums payable for life.

This is because:

  • The insurer must collect the full cost of lifetime coverage in a shorter time frame
  • Coverage continues even after premium payments stop

To determine these premiums, the insurer:

  1. Estimates the total premiums it would have collected if premiums were paid for life
  2. Compresses that total amount into the limited payment period to achieve the same financial result

🌟 Benefits to the Policyholder

Although premiums are higher, limited payment whole life insurance offers several important advantages:

  • 🗓️ Certainty
    The policyholder knows exactly when premiums will end, often aligning with retirement when income may be lower.
  • 🧓 Elimination of longevity risk
    Longevity risk is the risk of living longer than expected and continuing to pay premiums indefinitely. Limited payment policies remove this risk entirely.
  • ⏱️ Time-value-of-money advantage
    By paying premiums earlier, the insurer can invest the funds sooner. This reduces the overall long-term cost compared to paying smaller premiums over a lifetime.

✨ Key Takeaway

  • 🔒 Coverage: Lifetime
  • 💸 Premiums: Temporary
  • 🎯 Ideal for: Those who want permanent protection without paying premiums forever

3.7 Premium Offset Policies

🔄 Offset means to cancel or balance out.
In life insurance, a premium offset policy is a participating whole life policy where policy dividends are used to reduce or eventually cover premiums.

Two dividend options can help offset premiums over time:

💸 Premium Reduction Option

  • Policy dividends are applied directly against the premium due
  • Over time, dividends may significantly reduce the out-of-pocket premium
  • In some cases, dividends may cover most or all of the premium

➕ Paid-Up Additions (PUA) Option

  • Dividends buy additional paid-up insurance
  • These additions build their own cash surrender values (CSV)
  • Over time, PUAs and dividends together can help pay premiums

✅ Both approaches can reduce or even eliminate required premium payments.
⚠️ However, policy dividends are not guaranteed, so results can vary.

3.7.1 Illustrations and Disclosure

📊 In the past, some policies were marketed as:

  • “Quick pay”
  • “Vanishing premium”

These projections were based on high dividend scales and strong interest rate environments.

When interest rates later declined:

  • Dividend scales dropped
  • Policy dividends decreased
  • Premiums did not vanish as expected
  • Many policyholders had to pay premiums much longer than anticipated

⚠️ Key Understanding

Policy illustrations:

  • Are based on the current dividend scale
  • Are not guarantees
  • Can change if interest rates or insurer performance change

Even small changes in dividend scales can lead to:

  • Very different long-term outcomes
  • Longer premium payment periods

🧾 Good Practice in Using Illustrations

Clear communication should include:

  • Dividends are not guaranteed
  • Dividend scales can change
  • Projections are only estimates
  • Lower-scale scenarios may be shown for comparison

Some insurers provide:

  • A primary illustration (current scale)
  • A reduced illustration (lower dividend scale)

✨ Key Takeaway

  • Premium offset relies on dividends
  • Dividends are not guaranteed
  • Illustrations are projections, not promises
  • Long-term results can change with economic conditions

3.8 Advantages and Disadvantages of Whole Life Insurance

Whole life insurance provides lifetime coverage and guaranteed features, but it also requires a long-term financial commitment. Understanding both advantages and disadvantages helps in choosing when this type of insurance is appropriate.

✅ Advantages of Whole Life Insurance

🔒 Premiums guaranteed for life

  • Premiums do not increase with age

🛡️ Lifetime coverage

  • Protection continues regardless of age or health changes

💰 Potential policy dividends (participating policies)

  • May be taken as cash
  • May accumulate in a side account
  • May buy paid-up additions (PUA)
  • May buy one-year term insurance

📈 Cash Surrender Value (CSV) growth

  • Builds over time
  • Can be accessed if the policy is surrendered

⚖️ Cost advantage at older ages

  • Later in life, whole life premiums may be lower than equivalent term insurance at older ages

🔄 Non-forfeiture benefits

  • Automatic premium loans (APL)
  • Reduced paid-up insurance
  • Extended term insurance

🏦 Policy loans available

  • Borrow against CSV without cancelling coverage

📊 Historically lower volatility

  • Participating policy dividend scales have shown lower volatility compared to many traditional investments

⚠️ Disadvantages of Whole Life Insurance

💸 Higher premiums than term insurance

  • Can be difficult for people with limited cash flow

⏳ Lifelong financial commitment

  • Premiums are designed for long-term funding

🎛️ Limited investment control

  • Policyholder has little or no say in how reserves are invested

📉 Dividends not guaranteed (participating policies)

  • Small dividend scale changes can greatly affect results

🔍 Limited transparency

  • Reserve management and investment details are not fully visible to the public

✨ Key Takeaway

Whole life insurance offers:

  • Lifetime protection
  • Guaranteed structure
  • Long-term value features

But it requires:

  • Higher premiums
  • Long-term commitment
  • Comfort with lower flexibility and transparency

3.9 Comparing Term and Whole Life Insurance

Term and whole life insurance are designed for different goals.
One focuses on temporary protection, while the other focuses on lifetime protection and value accumulation.

Below is a clear side-by-side comparison.

🛡️ Coverage

Term Life Insurance

  • ⏳ Covers a specific period (term)
  • 🚫 Usually not available past a certain age (e.g., 75–80)
  • 🎯 Term length can match temporary needs

Whole Life Insurance

  • 🔒 Coverage lasts for life
  • ✅ Available regardless of age (as long as premiums are paid)
  • 📈 Non-forfeiture benefits can help maintain coverage

💰 Premiums

Term Life Insurance

  • 📉 Lower at younger ages
  • 📈 Increase as the insured ages
  • 💸 Can become costly later in life

Whole Life Insurance

  • 📊 Higher at younger ages
  • 🔒 Remain level for life
  • ✅ Eventually lower than term at older ages

🔄 Renewability

Term Life Insurance

  • 🔁 May require renewal
  • 🩺 Renewal may require medical evidence
  • 🔄 Convertible policies allow conversion without new medical evidence

Whole Life Insurance

  • ♻️ No renewal required
  • 🛡️ Stays in force even if health declines

💵 Cash Surrender Value (CSV)

Term Life Insurance

  • ❌ No cash value
  • ❌ No value at expiry

Whole Life Insurance

  • 💰 Builds CSV over time
  • 💵 CSV available upon surrender

📈 Investment & Dividends

Term Life Insurance

  • 🚫 No dividends
  • 🚫 No policy loans

Whole Life Insurance

  • 💵 Participating policies may pay dividends (not guaranteed)
  • 🏦 Policy loans available against CSV

🔒 Non-Forfeiture Benefits

Term Life Insurance

  • ❌ None

Whole Life Insurance

  • ✅ May include:
    • Automatic premium loans (APL)
    • Reduced paid-up insurance
    • Extended term insurance

➕ Increasing Death Benefit

Term Life Insurance

  • 🩺 Usually requires medical proof
  • 💸 Requires higher premiums

Whole Life Insurance

  • ➕ Can increase through:
    • Paid-up additions (PUA)
    • Accumulated dividends
  • 🚫 No medical proof needed for these increases

✨ Quick Summary

⏳ Term Life

  • Best for temporary needs
  • Lower starting cost
  • No cash value

🔒 Whole Life

  • Lifetime protection
  • Builds value
  • More features and guarantees

3.10 Using Whole Life Insurance

Whole life insurance is generally more suitable than term insurance for long-term or lifelong needs.

When deciding if whole life insurance is appropriate, key considerations include:

  • ⏳ How long coverage is needed
  • 💰 Affordability of premiums
  • 📊 Overall financial situation
  • 💼 Income stability
  • 🔒 Willingness to pay premiums long term
  • 📈 Need for increasing coverage
  • 🎯 Investment objectives

Below are common situations where whole life insurance can be appropriate.

3.10.1 Taxes Upon Death 💼

One of the strongest uses of whole life insurance is to help manage income taxes at death.

This is especially relevant for people who own:

  • 🏡 Cottages or second properties
  • 🏢 Business shares
  • 📈 Investment assets expected to grow in value

Whole life insurance can provide funds to cover taxes so assets do not have to be sold and can be passed intact to children or beneficiaries.

3.10.2 Future Insurability 🔒

Whole life insurance provides lifetime protection at a guaranteed price.

Key benefits:

  • 📅 Predictable premiums help with budgeting
  • 👶 Buying at a younger age usually means lower premiums
  • ❤️ Coverage remains even if health declines later

This makes whole life insurance useful for securing protection before health issues arise.

3.10.3 Increasing Coverage 📈

Participating whole life insurance can allow coverage to grow over time.

This can happen through:

  • ➕ Paid-up additions (PUA)
  • 💵 Reinvested dividends

Important advantage:

  • Coverage can increase without new medical proof, even if health declines.

✨ Key Takeaway

Whole life insurance is often suitable when:

  • Protection is needed for life
  • Taxes or estate costs are expected
  • Health or insurability may change
  • Long-term financial planning is a priority

3.11 Term-100 (T-100) Life Insurance

Term-100 (T-100) life insurance, also called Term-to-100, blends features of both term and permanent insurance.

It is designed to provide lifetime coverage with level premiums, but typically without cash value growth.

T-100 policies are offered with level premiums by major insurers. Limited-payment versions exist but are less common in Canada today.

3.11.1 Duration of Coverage ⏳

T-100 provides coverage up to age 100, which for most people effectively means lifetime coverage.

Depending on the contract:

  • 💰 Some policies pay the death benefit at age 100
  • 🔒 Others stop premiums at age 100 but keep coverage in force until death

In both cases, the goal is lifelong protection.

3.11.2 Premiums 💰

  • Premiums stop at age 100
  • Death benefit may or may not be paid at that time depending on the contract

Most T-100 policies:

  • ❌ Do not build cash surrender value (CSV)
  • ❌ Do not provide non-forfeiture benefits

Because of this:

  • 💵 Premiums are lower than whole life
  • 📈 Premiums are higher than term insurance ending at age 75–80

⚠️ Important:

  • No CSV means no automatic premium loans (APL)
  • Missing a payment beyond the 30-day grace period can cause lapse
  • A lapsed policy can become worthless even after many years of payments

Some contracts allow reinstatement within a set period (often two years) if missed premiums are repaid.

3.11.2.1 Level Cost of Insurance (LCOI) 📊

Most T-100 policies use Level Cost of Insurance (LCOI):

  • Premiums stay level to age 100
  • No CSV or non-forfeiture benefits
  • Premiums depend on issue age
  • Younger issue age = lower lifetime premium

3.11.2.2 Limited Payment T-100 🧾

Limited-pay T-100:

  • Lifetime coverage
  • Premiums paid for a limited time (e.g., 10–20 years or to age 65)
  • Policy becomes paid-up after payment period

Key points:

  • Higher premiums than regular T-100
  • Premiums build reserves to offset later costs
  • Often creates CSV after some years
  • May offer APL to prevent lapse

These policies exist but are not widely sold today.

3.11.3 Death Benefit 🛡️

  • Death benefit remains fixed for the life of the policy
  • Does not increase automatically

3.11.4 Upon Age 100 🎂

What happens at age 100 depends on the contract:

Some policies:

  • 💰 Pay the death benefit at age 100

Others:

  • ⛔ Stop premiums
  • 🔒 Continue coverage until death

3.11.5 Using Term-100 🎯

T-100 may be suitable when:

  • 📌 A fixed amount of lifelong coverage is needed
  • 💵 The policyholder is comfortable paying to age 100
  • 🔒 There is no intention to surrender the policy
  • 🚫 A participating policy is not desired
  • 📈 Investment features of universal life are not needed

✨ Key Takeaway

T-100 offers:

  • Lifetime protection
  • Level premiums
  • Simplicity

But usually:

  • No cash value
  • No non-forfeiture safety net
  • Requires disciplined premium payments

  • 2 – TERM LIFE INSURANCE

    Table of Contents

    • 2.1 What “Term” Means

    Term life insurance is a contract between an insurance applicant and a life insurance company. In exchange for the payment of premiums, the insurer agrees to pay a death benefit to a named beneficiary if the life insured dies during a specified period of time, known as the term.

    The term is the length of time for which the coverage is guaranteed to remain in force, provided that premiums are paid as required. If the life insured dies after the term expires, no death benefit is paid.

    2.1.1 Typical Terms

    Term life insurance is available for a variety of fixed periods. The most common terms include:

    Some policies are also issued to a specific age, such as to age 60.

    Depending on the insurance company, additional terms may be available, such as:

    The choice of term is usually based on the length of time a financial obligation exists, such as a mortgage, income replacement need, or child dependency period.

    2.1.2 Age Limits

    Most insurance companies impose maximum age limits for term life insurance coverage due to the increased risk of death at older ages.

    Key points to remember:

    Age limits are an important consideration when selecting an appropriate term length and when planning long-term insurance strategies for clients.

    2.2 Policyholder vs. Life/Lives Insured

    The policyholder is the person who owns the life insurance contract. The policyholder may be the original purchaser of the policy or may acquire ownership later through gift or assignment.

    The policyholder has full control over the contract, including the authority to:

    The life insured is the person whose life is covered by the insurance policy. If the life insured dies during the term of the policy, the insurance company pays the death benefit to the beneficiary. Some insurance products may also refer to the life insured as the annuitant.

    The policyholder and the life insured can be the same person, but this is not required. The policyholder can also be both the life insured and the beneficiary. In this case, the death benefit is paid to the estate of the policyholder.

    The policyholder is sometimes referred to as “the insured”, which can be confusing. In this context, “the insured” refers to the person who purchased the policy, not necessarily the life insured.

    2.2.1 Single Life

    Most term life insurance policies are single life policies.

    Key characteristics:

    2.2.2 Joint First-to-Die

    A joint first-to-die life insurance policy covers two or more lives under a single amount of coverage.

    Key features:

    Common uses include:

    Some joint first-to-die policies allow the surviving life insured to:

    This option must usually be exercised within a short period (e.g., 30 days) after the first death and can be especially valuable if the survivor’s health has deteriorated.

    A joint first-to-die policy is typically less expensive than purchasing two separate single life policies with the same coverage amount, because the insurer is only exposed to one death benefit payout.

    Important distinction:
    Joint life insurance should not be confused with combined insurance, which is a marketing arrangement where two individual policies are issued under a single contract. Combined insurance:

    2.2.3 Joint Last-to-Die

    A joint last-to-die life insurance policy also covers two or more lives, but the death benefit is paid only upon the death of the last life insured.

    This type of policy is used when the financial risk does not arise until the second death, most commonly for estate planning purposes.

    A common application is funding the income tax liability that arises upon the death of the second spouse. While assets may transfer to a surviving spouse on a tax-deferred basis, taxes are typically triggered when the surviving spouse dies.

    Joint last-to-die insurance can provide liquidity to:

    Because estate planning needs usually arise later in life, and because term insurance is often unavailable or prohibitively expensive after age 65 or 70, joint last-to-die coverage is more commonly provided through permanent life insurance, such as:

    2.3 Death Benefit

    The death benefit is the amount paid by the insurance company to the beneficiary if the life insured dies while the policy is in force.

    Life insurance policies are issued with an initial amount of coverage called the face amount. Depending on the type of term policy, the death benefit may:

    The death benefit structure chosen should reflect how the insurance need is expected to change during the term.

    2.3.1 Level Term

    A level term policy provides a level death benefit, meaning the death benefit remains equal to the initial face amount throughout the entire term of coverage, regardless of when death occurs.

    Key points:

    A common issue is that policyholders may not reassess their needs. As a result, they may become:

    2.3.2 Decreasing Term

    Decreasing term insurance provides a death benefit that declines over the term, while the premium remains level.

    Key characteristics:

    Most common use:

    Mortgage insurance offered by banks is essentially decreasing term insurance, typically sold as group insurance through a bank-affiliated insurer.

    Few insurers now offer individual decreasing term policies; it is most commonly available through group arrangements.

    2.3.3 Increasing Term

    Increasing term insurance provides a death benefit that increases over the term of the policy.

    The increase may be:

    Premiums usually increase proportionately with the death benefit. For example, a 10% increase in coverage typically results in a 10% increase in premium.

    Restrictions usually apply, such as:

    Increasing term insurance is now rare in Canada, but similar results can be achieved using riders, which are discussed in Chapter 5 – Riders and Supplementary Benefits.

    Increasing term insurance is useful when the insurance need is expected to grow over time, such as due to:

    A key advantage is that increases in coverage typically do not require proof of insurability, even if the life insured’s health has declined, provided premiums are paid.

    2.4 Term Insurance Premiums

    A premium is the amount the policyholder pays to the insurance company in exchange for the insurer’s promise to pay a death benefit if the life insured dies during the term of the policy. By paying premiums, the policyholder transfers the risk of premature death to the insurer.

    With the exception of increasing term insurance, term life insurance premiums are typically level throughout the term. Premiums are usually payable:

    Payments may be made by cheque or pre-authorized bank withdrawal.

    Most provinces and territories impose a premium tax on life insurance premiums, generally ranging from 2% to 5%. This tax is built into the premium charged to the policyholder and remitted by the insurance company to the provincial or territorial government.

    2.4.1 How Premiums Are Set

    Term life insurance is considered pure insurance, meaning its value is derived solely from the death benefit payable if the life insured dies. Premiums reflect:

    Premiums are typically classified as:

    Risk classification is determined during underwriting and is discussed further in risk classes and their impact on premiums.

    2.4.1.1 Cost of Insurance (COI)

    The cost of insurance (COI), also called mortality cost, represents the insurer’s expected cost of paying death benefits.

    On a per-policy basis, the annual COI is estimated by:

    The probability of death depends on factors such as:

    During underwriting, insurers estimate this probability by grouping individuals with similar characteristics and known mortality experience.

    2.4.1.2 Expenses

    Premiums must also cover the insurer’s operating expenses, including:

    Insurance companies may be:

    Regardless of ownership structure, insurers invest premium income (after expenses and reserve requirements). Investment income helps offset expenses and contributes to overall financial stability.

    2.4.2 Sample Premiums

    Sample premium tables show that age is a major driver of term insurance premiums.

    Key observations:

    This highlights two important planning considerations:

    2.5 Renewable vs. Non-Renewable Term Insurance

    Term life insurance policies can be either renewable or non-renewable.

    A renewable term insurance policy guarantees the policyholder the right to renew coverage at the end of the term without providing proof of insurability. This right is usually limited to a maximum age, such as age 70.

    A non-renewable term insurance policy ends at the conclusion of the term. If the policyholder still requires coverage, a new application must be submitted. If the life insured’s health has declined, premiums may be higher or coverage may be denied altogether.

    Renewable policies generally have higher premiums than non-renewable policies because the insurer assumes the risk of continuing coverage even if the life insured’s health deteriorates.

    2.5.1 Renewal Provisions

    The premium payable upon renewal depends on the renewal provisions set out in the policy.

    2.5.1.1 Renewable with Guaranteed Rates

    With a renewable policy, the policyholder is guaranteed the right to renew, but the premium at renewal is based on the attained age of the life insured.

    Most renewable policies include a guaranteed schedule of renewal rates that is provided at issue. This allows the policyholder to know in advance how premiums will increase at each renewal.

    2.5.1.2 Re-Entry Term with Adjustable Rates

    Some insurers offer re-entry term insurance, which is a form of renewable term insurance with two possible renewal rates:

    At renewal, the insurer reassesses the life insured’s health:

    Because the policyholder retains some of the risk, initial premiums are usually lower than for standard renewable term insurance.

    Re-entry policies may be appropriate when:

    If long-term renewability is important, a standard renewable term policy may involve less risk for the policyholder.

    2.6 Convertible Term Insurance

    Convertible term insurance allows the policyholder to convert a term life insurance policy into a form of permanent life insurance (such as whole life, term-100, or universal life insurance) at a future date.

    A key feature of convertible term insurance is that conversion does not require proof of continued insurability. This allows the policyholder to obtain lifetime coverage even if the life insured’s health has deteriorated and new insurance would otherwise be unavailable or unaffordable.

    Because the conversion option exposes the insurer to additional risk, convertible term insurance premiums are higher than those for non-convertible term policies. This is largely because individuals who experience declining health are the most likely to exercise the conversion option.

    Insurance companies may also impose age limits on when conversion can occur.

    2.6.1 Incontestability and Suicide Provisions

    When a term policy is converted, the new permanent policy is usually treated as an extension of the original policy, rather than a brand-new contract.

    As a result:

    Under the mandatory incontestability provision, the insurer has two years from issue to void a policy due to a misrepresentation of a material fact (e.g., smoking status, health condition, age). After this two-year period, the policy becomes incontestable unless fraud can be proven.

    Most policies also contain a suicide exclusion clause, which states that the death benefit will not be paid if death by suicide occurs within a specified period (typically two years) after issue.

    By converting a term policy:

    This is a major advantage of convertible term insurance.

    2.6.2 Attained-Age vs. Original-Age Conversions

    Attained age refers to the age used to calculate premiums. Depending on the insurer, it may be based on:

    With an attained-age conversion, premiums for the permanent policy are based on the life insured’s age at the time of conversion.

    With an original-age conversion (also called a retroactive conversion), premiums for the permanent policy are based on the life insured’s age at the time the original term policy was issued.

    Original-age conversions result in lower permanent insurance premiums, but:

    This lump sum may represent:

    Due to the cost and complexity, most insurers:

    2.7 Advantages and Disadvantages of Term Life Insurance

    Term life insurance provides temporary coverage for a defined period of time. Understanding its advantages and disadvantages helps an agent determine when term insurance is appropriate and how it compares to permanent life insurance.

    2.7.1 Advantages of Term Life Insurance

    Term life insurance offers several important benefits:

    2.7.2 Disadvantages of Term Life Insurance

    Despite its advantages, term life insurance has several limitations:

    2.8 Using Term Insurance

    As a general rule, term life insurance is intended to be temporary coverage. It is best suited for risks that are expected to end before the life insured reaches age 60 or 70. If a risk is expected to continue for life, some form of permanent life insurance should be considered instead.

    This section outlines common situations in which term insurance is appropriate.

    2.8.1 Short-Term Risks

    Term insurance is well suited for short-term risks with a known duration.

    Examples include:

    If there is a possibility that the risk may extend beyond the expected time frame, the policyholder should consider a renewable term policy to maintain flexibility.

    2.8.2 Decreasing Risks

    Term insurance is also appropriate for risks that decline over time.

    Common examples include:

    In these situations, decreasing term insurance may be used to match the declining financial exposure.

    2.8.3 Limited Cash Flow

    One of the most common reasons individuals choose term insurance over permanent insurance is limited cash flow. Term insurance provides a higher amount of coverage at a lower initial cost, making it accessible during periods of tight budgets.

    Some individuals prefer term insurance because they plan to invest the premium savings compared to permanent insurance. This strategy is commonly referred to as “buy term and invest the difference.”

    This approach can be effective if:

    However, it requires financial discipline and does not provide the guarantees associated with permanent life insurance.

  • 1 – INTRODUCTION TO LIFE INSURANCE MODULE

    Table of Contents

    • 1.1 Risk of Death

    One of the main reasons people delay purchasing life insurance is their reluctance to think about their own death. Many believe death is too far in the future to be a current concern. However, the reality is that everyone is continuously exposed to the risk of death, regardless of age. While the likelihood of dying at a younger age is lower than at an older age, the risk is never zero and must be addressed.

    In insurance terminology, the probability of dying at a specific age is known as the mortality rate.

    An individual’s risk of death is influenced by several factors, including:

    Life insurance companies use these factors to classify individuals into groups with similar risk profiles. Insurers then analyze historical mortality data for each group to estimate an individual’s likelihood of death. This classification process is a key part of underwriting and is discussed further in Chapter 9 – Application and Underwriting.

    There are two primary ways to measure and evaluate the risk of death: life expectancy and probability of death.

    Life expectancy is the average number of years a person of a specific age and group is expected to live. It is based on past mortality experience and assumes those patterns will continue in the future.
    For example, according to Statistics Canada data (2020–2022), Canadian males aged 65 have a median life expectancy of 19.3 additional years. This means that:

    Probability of death refers to the statistical likelihood that a person of a certain age and group will die before reaching their next birthday. Using the same Statistics Canada data, 1.116 out of every 100 Canadian males aged 65 will die before turning 66. This represents a 1.116% probability of death. Insurers rely heavily on this statistic when underwriting life insurance policies and determining premium rates.

    Life expectancy and probability of death data are commonly presented in life tables, also called mortality tables. These tables show how mortality risk changes with age. Generally, the probability of death:

    Life tables also demonstrate that females typically have a lower risk of death than males at the same age. As a result, gender is an important factor in underwriting and can influence life insurance premiums, as discussed further in Chapter 9.

    The practical use of this information depends on the client’s needs. When developing retirement savings or income plans, an agent focuses primarily on life expectancy to determine an appropriate planning horizon. When performing an insurance needs analysis, explaining the probability of death can help clients understand that the risk is real and that life insurance is a necessary risk-management tool.

    1.2 Potential Financial Impact of Death

    Death is always associated with loss, and when a loved one dies, that loss often includes significant financial consequences for survivors. These consequences may be negative or positive, depending on the situation, but they must always be considered when assessing the risk of death.

    This section introduces the main types of financial impacts an insurance agent considers when discussing life insurance with a client. It provides context for understanding why life insurance is needed. A more detailed analysis of these impacts is covered in Chapter 10 – Assessing the Client’s Needs and Situation.

    1.2.1 Loss of Income

    The death of an income earner can be one of the most financially devastating events for a family, especially when dependants rely on that income for:

    Life insurance can help replace lost income and allow survivors to maintain their standard of living.

    1.2.2 Loss of Caregiver

    Even if the deceased was not an income earner, their death can still create a major financial burden.

    If the deceased provided:

    the surviving family may need to pay for replacement services, increasing household expenses significantly.

    1.2.3 Debt Repayment

    Upon death, one of the executor’s primary responsibilities is to settle outstanding debts, such as:

    In some cases, lenders may allow a surviving spouse or beneficiary to assume the debt, but only if they can demonstrate sufficient income. If the lender believes the risk of default is too high, it may demand immediate repayment, potentially forcing the sale of assets.

    Life insurance can provide liquidity to ensure debts are paid without financial hardship.

    1.2.4 Income Taxes

    Income tax liabilities triggered at death can significantly reduce an estate.

    Key tax consequences at death include:

    Unless a rollover applies, the full value of registered plans becomes taxable in the year of death.

    The deceased’s marginal tax rate at death applies, which in 2024 ranges approximately from:

    If the estate lacks sufficient cash to pay these taxes, the executor may need to sell assets intended for beneficiaries.

    1.2.5 Estate Creation

    Many clients want to ensure that they leave something behind after death. For individuals with little or no accumulated wealth, life insurance may be the only practical way to create an estate.

    Common estate objectives include:

    1.2.5.1 Income Tax Owing

    Life insurance proceeds can be used to:

    1.2.5.2 Education Funds

    Parents may want to ensure that their children can:

    even if the parent dies prematurely.

    1.2.5.3 Legacies

    Some individuals wish to leave a financial gift to:

    1.2.5.4 Charitable Giving

    Many people want to support a charitable organization upon death, sometimes in amounts they could not afford during their lifetime. Charitable gifts may also provide tax benefits, which are discussed further in Chapter 7.

    1.2.6 Business Impacts

    The death of a key employee, partner, or shareholder can seriously harm a business and may even cause it to fail.

    Life insurance can be used to:

    This concept is explored further under key person life insurance.

    1.3 Risk Management Strategies

    Regardless of the type of risk, there are four general risk management strategies that can be used to deal with risk. These strategies may be used individually or in combination, depending on the client’s situation.

    The four strategies are:

    An insurance agent helps clients determine which strategies are most appropriate to manage the risk of death or the financial risks faced by beneficiaries when the life insured dies.

    1.3.1 Risk Avoidance

    Risk avoidance means choosing not to expose oneself to a risk at all.

    Example:

    However, risk avoidance is not possible for death. Simply by living, every person will eventually die. The real concern is whether death occurs earlier than expected.

    Death that occurs earlier than statistically predicted is called premature death. Because premature death cannot be avoided, other risk management strategies are required.

    1.3.2 Risk Reduction

    When a risk cannot be avoided entirely, it may be possible to reduce either its probability or its severity. This strategy is known as risk reduction.

    Example:

    Similarly, a person can reduce the risk of premature death by:

    Risk reduction lowers the probability of premature death but does not eliminate the risk entirely, so additional strategies are still necessary.

    1.3.3 Risk Retention

    Risk retention occurs when a person accepts the risk and its potential consequences.

    This strategy is most appropriate for risks with:

    Example:

    The risk of death, however, is considered a high-severity risk because of the potentially severe financial consequences for dependants and beneficiaries. Clients who lack sufficient financial resources to absorb this impact generally cannot rely solely on risk retention.

    1.3.4 Risk Transfer

    Risk transfer involves shifting the financial consequences of a risk to another party.

    Insurance is the primary method of risk transfer for the risk of death. By purchasing life insurance:

    Life insurance allows a person to trade:

    Insurance is sometimes referred to as risk sharing, because the financial losses of the few who die prematurely are spread among the many people who purchase insurance.