YourInsuranceBrokers.com

[page 2]

[Page 3]

[page 4]

This glossary is arranged in alphabetical order. Click on a letter or scroll to search.

Fiat Money:

Fiat Money is paper currency made legal tender by law or fiat. It is not backed by gold or silver and is not necessarily redeemable in coin. This practice has had widespread use for about the last 70 years. If governments produce too much of it, there is a loss of confidence. Even so, governments print it routinely when they need it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada's currency falls into this category.

Financial Planner:

Be careful in choosing a financial planner. Some of them are simply life insurance salespeople with extra credentials and spreadsheets. On the other hand, many financial planners are truly in business to help you. Usually, these are "fee-only" financial planners. Unlike "commission-based" planners, they make their living by charging you directly - either by the hour or by a completed financial plan. Don't confuse "fee-based planners" or "fee-offset" with "fee-only" planners. "Fee-based" and "fee-offset" planners are ambi-remunerative, which means they charge you for their time and then collect a commission from the company that issued your new life insurance policy, investment, annuity or tax shelter.

How, then, do you decide on a financial planner who's right for you? Make sure that anyone you hire is a Certified Financial Planner [CFP]. For a qualified, fee-only Certified Financial Planner to examine your finances and prepare a financial plan, expect to pay $150 to $300 an hour. Look for someone with at least five or six years of experience and ask for references.

First To Die Coverage:

This means that there are two or more life insured on the same policy but the death benefit is paid out on the first death only. If two or more persons at the same address are purchasing life insurance at the same time, it is wise to compare the cost of this kind of coverage with individual policies which some insurance companies issue with a multiple policy discount.

Grace Period:

A specific period of time after a premium payment is due during which the policy owner may make a payment, and during which, the protection of the policy continues. The grace period usually ends in 30 days.

Group Life Insurance:

This is a very common form of life insurance which is found in employee benefit plans and bank mortgage insurance. In employee benefit plans the form of this insurance is usually one year renewable term insurance. The cost of this coverage is based on the average age of everyone in the group. Therefore a group of young people would have inexpensive rates and an older group would have more expensive rates.

Some people rely on this kind of insurance as their primary coverage forgetting that group life insurance is a condition of employment with a specific employer. The coverage is not portable and cannot be taken with you if you change jobs. If you have a change in health, you may not qualify for new coverage at the new place of employment.

Bank mortgage insurance is also usually group insurance and you can tell this by virtue of the fact that you only receive a certificate of insurance, not a complete policy. The form that bank mortgage insurance takes is reducing term insurance, matching the declining mortgage balance. The only beneficiary that can be chosen for this kind of insurance is the bank. In both cases, employee benefit plan group insurance and bank mortgage insurance, the coverage is not guaranteed. This means that coverage can be cancelled by the insurance company underwriting that particular plan, if they are experiencing excessive claims.

Incontestable Clause:

This clause in regular life insurance policy provides for voiding the contract of insurance for up to two years from the date of issue of the coverage if the life insured has failed to disclose important information or if there has been a misrepresentation of a material fact which would have prevented the coverage from being issued in the first place. After the end of two years from issue, a misrepresentation of smoking habits or age can still void or change the policy.

Income Splitting:

This is a tax planning strategy of arranging for income to be transferred to family members who are in lower tax brackets than the one earning the income, thus reducing taxes. Even though attribution rules limit income splitting, there are still a number of legitimate ways to do so, such as through the use of spousal RRSPs.

Independent Broker:

This is a provincial government licensed independent business person who usually represents five or more life insurance companies in a sales and service capacity and who is paid a commission by those life insurance companies for sales and service of life insurance products. We for example, have been in business for 12 years and regularly place new business with over twenty different life insurance companies.

Insurable Interest:

In England in the 1700's it was popular to bet on the date of death of certain prominent public figures. Anyone could buy life insurance on another's life, even without their consent. Unfortunately, some died before it was their time, dispatched prematurely in order that the life insurance proceeds could be collected. In 1774, English Parliament passed a law which restricted the right to be a beneficiary on a life insurance contract to those who would suffer an economic loss when the life insured died. The law also provided that a person has an unlimited insurable interest in his own life. Generally, therefore, a person has an insurable interest in his or her own life and in his or her child or grandchild; spouse; any person upon whom he is wholly or in part dependent for, or from whom he is receiving support or education; employee; and any person in the duration of whose life he has a pecuniary interest. It is still a legal stipulation that an insurance contract is not valid unless insurable interest exists at the time the policy is issued. Life Insurance companies will not issue unlimited amounts of coverage to an individual. The amount of life insurance which will be approved has to approximate the loss caused by the death of the individual and must not result in a windfall for the beneficiary.

Inspection Report:

This is a telephone interview of the person applying for life insurance conducted by someone from the underwriting department of the insurance company. Some insurance companies only sporadically contact applicants and some contact every applicant. On average the interview lasts between 15 to 30 minutes. The questions asked relate to personal habits (like smoking and alcohol consumption) and finances, including income and net worth, confirmation of employment, duties and the nature of the applicant's business. In addition, there are questions about driving, sports, aviation and currently held insurance. All information obtained is strictly confidential and is submitted solely to the underwriter for review.

Insured:

This is the person covered by the life insurance policy. Upon this person's death, a tax free benefit will be paid to that person's estate or a named beneficiary.

Insured Mortgage:

An insured mortgage protects only the mortgage lender in case you do not make your mortgage payments. This coverage is provided by CMHC [Canada Mortgage and Housing Corporation] and is required if a person has a high-ratio mortgage. [A mortgage is high-ratio if the amount borrowed is more than 75% of the purchase price or appraised value, whichever is less.]

Insured Retirement Plan:

This is a recently coined phrase describing the concept of using Universal Life Insurance to tax shelter earnings which can be used to generate tax-free income in retirement. The concept has been described by some as "the most effective tax-neutralization strategy that exists in Canada today."

In addition to life insurance, a Universal Life Policy includes a tax-sheltered cash value fund that cannot exceed the policy's face value. Deposits made into the policy are partially used to fund the life insurance and partially grow tax sheltered inside the policy. It should be pointed out that in order for this to work, you must make deposits into this kind of policy well in excess of the cost of the underlying insurance. Investment of the cash value inside the policy are commonly mutual fund type investments. Upon retirement, the policy owner can draw on the accumulated capital in his/her policy by using the policy as collateral for a series of demand loans at the bank. The loans are structured so the sum of money borrowed plus interest never exceeds 75% of the accumulated investment account. The loans are only repaid with the tax free death benefit at the death of the policy holder. Any remaining funds are paid out tax free to named beneficiaries.

Recognizing the value to policy holders of this use of Universal Life Insurance, insurance companies are reworking features of their products to allow the policy holder to ask to have the relationship of insurance to investment growth tracked so that investment growth inside the policy may be maximized. The only potential downside of this strategy is the possibility of the government changing the tax rules to prohibit using a life insurance product in this manner.

Intestate:

This means dying without a will, in which case the provincial laws of the province in which the death occurred apply to the manner in which assets will be distributed. In other words, if you don't write your own will, the government will do it for you after your death and it may not be as you would have wished.

[page 2]

[top]

[page 4]