Insurance Calculations
You have learned many formulas and calculations throughout the LLQP course of study. This is an
opportunity to review and practise what you have learned. Answers with detailed rationale are provided
following all questions.
It is imperative you answer the questions in this module correctly before proceeding to the Certification
Exam. If your answers are incorrect, repeat the questions until you answer them correctly.
 REVIEW: Policy Benefits when Age Has Been Misstated
 REVIEW: Amount of Insurance Required: Human-Life Approach
 REVIEW: Amount of Insurance Required: Capital-Needs Approach
(Capital-Retention Approach)
 REVIEW: Capital Gains and Capital Losses
 REVIEW: Residual Disability Benefits
 REVIEW: Coordination of Benefits
 REVIEW: Seg Fund Maturity and Death Benefit Guarantees
 REVIEW: Seg Fund Resets
 REVIEW: Seg Fund Withdrawals
 REVIEW: Market Value Adjustments to Annuities
 REVIEW: CPP with Early or Late Retirement Options
 REVIEW: RRSP Withdrawals
 REVIEW: RRSP Withdrawals for the Home Buyers’ Plan and
Lifelong Learning Plan
 REVIEW: Pension Adjustments on RRSP Contribution Limits
 REVIEW: RRIF Withdrawals
 REVIEW: Splitting CPP Benefits
 ANSWERS
Copyright © 2011 Oliver Publishing Inc. All rights reserved. 371
LLQP
REVIEW: Policy Benefits When Age Has Been Misstated
Misstatement of the age of the insured (whether deliberate or not) does not allow the insurer to void the
insurance contract. However, the liability of the insurer is adjusted so that the benefit in the policy is
changed to the amount that would have been paid based on the premium received and the true age of the
insured.
The basic calculation is: Premium charged, divided by the premium that should have been charged,
multiplied by the face value of the policy.
Example: Jacques Bennie decided that, so far as the outside world is concerned, he would remain 39
forever. When he turned 42, he applied for and received a standard-rated $100,000 whole life insurance
policy, in which he named his trusted employee, Rochester, as beneficiary. His application stated his age
as 39. When Jacques died at age 70, the insurer became aware of the misstatement of age. When the
policy was issued, Jacques, assessed as 39-year-old, was charged a premium of $25 per $1,000 of
insurance. Had he been assessed as a 42-year-old, his premium would have been $27 per $1,000 of
insurance. Therefore, Rochester will receive: 25 27 x $100,000 = $92,592.59
Question: The premiums charged by ABC Insurers Inc. (ABC) for a single non-smoking
female, aged 32 and 35 respectively, are $22 and $24 per thousand of insurance. Your
client, Shanu, inadvertently misstated her age as 32, instead of her correct age of 35,
when she purchased a $60,000 life policy from ABC. At her death, the insurer is made
aware of the error, and the beneficiary of the policy wants to know the value of the
insurance. What will the death benefit be?
REVIEW: Amount of Insurance Required: Human-Life Approach
The economic value of a human life depends on spending priorities, level of income, obligations to
dependents, and the value judgements of the members of the family. However, the only value that the
agent can predict with certainty is the level of income. If there is an estimate of the amount of income
required by the family in the event of the death of the primary breadwinner, that value may be used
instead. Therefore, the amount of annual income required by the family and the prevailing rate of interest
form the basis on which this calculation is made. The value can be further refined by considering the
effect of inflation.
The basic calculation is: Amount of income required, divided by the prevailing rate of interest, equals
amount of insurance needed.
Example: If a family needs the $30,000 annual income of the primary wage earner, the total amount of
insurance needed to replace the economic value of his or her life would be: $30,000 ÷ 0.05 = $600,000.
Therefore, $600,000 of life insurance is required.
The basic calculation, including inflation: Determine the real rate of interest by assuming a nominal
rate of interest and subtracting the long-term inflation rate to equal the real rate of interest.
Example: The nominal rate of interest of 8% and the long-term inflation rate is 3%, therefore the real rate
of interest is 8% – 3% = 5%.
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Insurance Calculations
Question: How much life insurance is required for a family whose primary wage earner
currently has a term life policy with a $200,000 death benefit? The annual income
required by the family is $50,000. Assume a nominal interest rate of 7% and long-term
inflation of 3%.
REVIEW: Amount of Insurance Required: Capital-Needs Approach
(Capital-Retention Approach)
This type of needs analysis calculates the capital needed to provide sufficient annual cash requirements
for the surviving members of the family unit.
The process begins by determining the Final expenses-needed to meet the bills of the deceased to
ensure that the remaining members of the family unit are not put to hardships. The final expenses needs
is the difference between the assets of the family, less or minus final expenses.
The next stage requires the calculation of the dependency-period needs of the remaining family
members, which determines the amount of money that the family unit requires for annual living expenses.
The dependency-period needs are shown in the difference between the continuing income sources of the
family, less or minus the family’s continuing expenses.
Determining the total insurance needs of the family using this approach depends in part on the
capitalization of the deceased’s life; that is, valuing the amount of money that must be invested at an
expected rate of return in order to earn the amount of money that the remaining family members require
on an annual basis. Dividing the shortfall of the continuing income needs of the family by an expected
rate of return, produces this figure.
The final calculation of the insurance needs of the family is arrived at by adding the Final expense needs
and the dependency-period needs.
Example
John and Nancy Weiss want to know the amount of insurance they require to provide for the family in the
event of John’s death.
John’s salary at the time is $65,000. Nancy is employed as a clerk in a flower shop. Her annual salary is
$22,000. They have two children, ages 4 and 7. John is 35 years old, and Nancy is 31. John currently has
life insurance from his work, covering one year’s salary ($65,000). John is entitled to a CPP death benefit
of $2,500.
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LLQP
Needs Analysis for Nancy and John Weiss,
Assets at Death
Death Benefit of life
insurance
Death Benefit of CPP
Investments
Readjustment Period
Last or Final Expenses
$
65,000 Funeral
2,500 Legal and Accounting Fees
5,000 Income Tax and capital
gains tax
800 Debts (credit cards, car loan)
Cash on Hand (bank
balances)
Total Assets
$
$
Emergency Fund (based on
John’s salary x 3 months)
Mortgage
73,300 Total Final Expenses
6,000
1,500
500
21,200
16,250
300,000
$ 345,450
Cash Need is the difference between assets and final expenses.
Total Expenses – Total Assets = $272,150
Continuing Income
Nancy’s Salary
Government Benefits
Total Income
Dependency Period
Continuing Expenses
$
22,000 Housing
2,600 Food
Clothing
Telephone
Medical and Dental
Car (insurance, gas,
maintenance)
Childcare
Entertainment and vacation
Education Fund (for both
children
$
24,600 Total Continuing Expenses
$
15,000
4,500
2,000
800
2,000
6,300
4,000
2,100
6,000
$
42,700
Dependency Need is the amount that will be needed to cover living expenses.
(Total Continuing Expenses – Total continuing Income) ÷ Rate of Return (given interest rate of 3.25%) =
$556,923
Total Insurance Requirement is the combination of immediate and ongoing needs for the survivors.
Cash Need + Dependency Need = $829,073
Question: Using the capital-needs approach, calculate the insurance needs of this family
in the event of the death of the major income-earner. The major income-earner presently
has a term life policy with a face value of $20,000. An examination of the affairs of the
family reveals the following data: family assets total $200,000; final expenses are
calculated at $250,000; continuing yearly income sources total $20,000, while continuing
expenses are estimated at $35,000; and, the expected rate of return is 4%.
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Insurance Calculations
REVIEW: Capital Gains and Capital Losses
Capital gains are incurred when investments classified as capital property are sold for more than their
purchase price. The government taxes 50% of the increase of the value of the asset at the marginal tax rate
of the owner. Some investments that produce capital gains are stocks, mutual funds, and segregated funds.
Capital losses arise when the value of a capital property is worth less than its purchase price. They can be
used to reduce capital gains. Capital losses may be applied against capital gains in the tax year in which
they are received or in the three immediately prior tax years. They can also be carried forward indefinitely
and used to reduce future taxable capital gains.
The basic calculation is: Amount of capital gain, multiplied by 50%, multiplied by the taxpayer’s
marginal tax rate, equals the capital-gains tax.
Example: John’s marginal tax rate is 38%. If the price of shares he owned increased since he bought
them, and he earned $1,000 more than he paid, he will have to pay tax on a taxable capital gain of $1000
x 50% = $500. Tax to be paid = $500 x 38% = $190. He will pay $190 in capital-gains tax.
Question: When Prue Hubris was swept up into the high-tech stock-market boom three
years ago, she bought 1,000 shares in Techie Dot Calm. When she finally sold these
shares, she had a capital loss of $3,245. This year, she sold a portion of her bank stocks
and realized a $5,250 capital gain. Prue wants to know what her tax liability will be on the
sale of the bank stock, with or without factoring in the sale of the Techie Dot Calm stock.
She is in the 30% marginal tax bracket.
REVIEW: Residual Disability Benefits
The residual disability benefit concept calculates the disability benefits required to make up the difference
between the individual’s total lost income and any partial income that can be earned while the individual
is disabled. A residual benefit “tops-up” the income earned at work by a proportion of the full monthly
benefit.
The basic calculation to determine the percentage of the benefit that will be received is:
Pre-disability income – post-disability income
pre-disability income
Example
Jack Drill, a dentist, earns an average income of $20,000 a month from his practice. His professional
disability policy provides $10,000 as a monthly benefit. While on a ski trip, he falls and breaks both
wrists: one is a clean break and the other is a multiple fracture. The clean break heals in eight weeks and
Jack returns to his practice on a part-time basis, working about 60% of his pre-accident hours.
Jack is able to earn $12,000 a month working part-time. The formula for his benefit is:
20,000 (pre-disability income) – 12,000 (post-disability income) = 8,000 = 40%
20,000 (pre-disability income)
20,000
Since Jack’s monthly benefit is $10,000, he will receive 40% of $10,000 = $4,000 as a residual benefit.
Copyright © 2011 Oliver Publishing Inc. All rights reserved. 375
LLQP
Question: Your client, Joan, is a policy owner of a disability policy that provides a
monthly benefit of $3,000. Her monthly income is $8,000. After being disabled, Joan
returns to work and earns 50% of her pre-disability income. How much money will she
receive as a residual benefit now that she is back to work at 50% capacity?
REVIEW: Coordination of Benefits
Coordination of Benefits coordinates extended health care and dental benefits paid under group plans to
ensure that benefits do not exceed total eligible expenses. In other words, an insured with multiple plans
will not show a profit through multiple claims for the same expenses.
The primary carrier is the insurer of the plan that determines the benefits first and then calculates the
benefits as though duplicate coverage does not exist. The secondary carrier is the insurer of the plan that
determines the benefits second, and then limits its benefits coverage to the lesser of:
the amount that it would have paid had it been the primary carrier, or
100% of all eligible expenses reduced by all other benefits payable for the same expenses by the
primary carrier.
A plan that has no coordination-of-benefits provision, either in the contract or in the plan document, is the
plan that determines benefits first (the primary carrier). For plans that contain coordination-of-benefit
provisions, priority is determined by the relationship of the claimant to the plan. The primary carrier is the
plan where the claimant is a member/employee, and the secondary carrier is the plan where the claimant
is a spouse or a dependent child.
Example: Amita Saenz suffers from a variety of skin ailments that require numerous prescriptions. Each
month she files her prescription receipts, together with the necessary paperwork, with her employer to
forward to their group plan insurer. She has an extended health plan that has a $25 annual deductible and
a co-insurance factor that pays 80%. Her husband’s plan has a $100 annual deductible and no coinsurance factor. Here is what she is reimbursed over the first three months of the year:
January:
Amita’s plan
Receipts $185.00
$185 submitted
$25 deductible
Plan pays 80% x (185 – 25)=
$128 paid
$32 co-insurance
Husband’s plan
$185 submitted
$100 deductible
$85 could be paid, but since $128 was already paid under Amita’s plan,
husband’s plan will pay $57 ($185 – $128)
February:
Amita’s plan
Receipts $185.00
$185 submitted
$0 deductible
Plan pays 80% x $185 =
$148 paid
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Insurance Calculations
Husband’s plan
$185 submitted
$0 deductible
$185 could be paid, but since $148 was already paid under Amita’s plan,
husband’s plan will pay $37 ($185 – $148)
March receipts $185.00; payments will be the same as February, since deductibles are already
paid.
Question: Jack is a diabetic who self-administers insulin on a daily basis as needed. He
is a member of a group extended health care and prescription drug plan through his
employer. The plan has a $100 annual deductible, and a co-insurance factor of 80%. Jack
submits monthly receipts to his employer for reimbursement in the following amounts:
month 1 - $235; month 2 - $285; and month three - $135.
His wife, Jill, is also a member of a group extended health care and prescription drug
plan that has a $75 annual deductible, but no co-insurance factor. Jack is covered under
Jill’s plan, as a dependent spouse.
Jill has two group dental plans; both pay 80% of eligible expenses. Plan A does not
contain any co-ordination-of-benefits provisions, while Plan B covers orthodontic
procedures with a maximum annual benefit of $2,500, and co-insurance factor of 60% for
orthodontic work only. Jill has eligible dental expenses of $437.50 and orthodontics’ bill
of $4,500.
Calculate the amount that will be reimbursed by Jack’s group plan in month 1, and the
amount that will be reimbursed by Jill’s group plan in month 1.
REVIEW: Seg Fund Maturity and Death-Benefit Guarantees
The maturity guarantee provides for the return of, 75% — at least — of the initial deposit, less any
withdrawals, either:
10 years after the date on which the contract is signed by the investor; or
10 years after the end of the year for deposits made during each year.
Some companies offer up to a 100% guarantee.
Thus, if the value of the contract is less than the initial deposit, the investor receives the guaranteed
amount. If the value of the contract is greater than the guarantee, the investor receives whatever that
greater amount is. Withdrawals reduce the guaranteed amount.
The death benefit specifies that the beneficiary of the contract will receive, at a minimum, the amount
specified as the maturity guarantee.
The basic calculation is: deposit, multiplied by 75% or whatever is the guarantee percentage, equals the
minimum amount received on maturity.
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LLQP
Question: What is the minimum amount that an investor will receive on a seg fund
contract with a 75% guarantee, purchased with a deposit of $20,000, when the value of
the fund on maturity is $14,345?
REVIEW: Seg Fund Resets
Some segregated funds allow their values to be locked in. This is called the reset feature. The investor tells
the insurer that he or she wants to reset (some companies will accept verbal instructions; others need these
instructions in writing) and the investor gets the end-of-day close price on the day the reset request was
received.
The number of resets is limited; two to four a year is usual. The reset feature sets the new guaranteed
value at a higher level, based on the higher market value of the contract. As the fund continues to grow,
the reset feature allows the investor to increase the guaranteed value at death or maturity.
When the contract is reset, the maturity date is adjusted to 10 years from the reset date. The death and
maturity guarantee benefits will immediately be based on the reset amount, and so will be higher than
when the contract was purchased.
There is no calculation required to determine the reset; it is simply the value of the contract as of the date
of reset.
Example: A client opened an account on June 1, 1995, with $100,000 and a 100% maturity guarantee.
On November 2, 1998, she saw that the account value was $125,000, and she chose to reset. The maturity
date of the contract changed from June 1, 2005, to November 2, 2008. The maturity guarantee changed
from $100,000 to $125,000.
Question: Alf Little opened a seg-fund account on January 1, 2010, with $50,000, and a
maturity guarantee of 75%. Alf tracked its decline to a low of $47,200 by June of that year,
and then its recovery and rise to a value of $51,500 by the fall. On November 17, 2011,
relieved at the recovery, and nervous about the future, Alf reset his fund. When will the
fund mature? What will be the value of the death benefit, and the maturity guarantee on
that date?
REVIEW: Seg-Fund Withdrawals
When a withdrawal is made from a seg fund, the maturity and death-benefit guarantees must be adjusted
accordingly, since the value of the contract has been reduced. This adjustment is made by either the
linear-reduction method (which reduces the principal by the dollar amount withdrawn) or the
proportional-reduction method (which reduces proportionally the principal and the growth in the
account according to the number of units surrendered compared to the number of units in the contract
prior to withdrawal. The proportional method thus considers that Fair Market Value (FMV) of the
contract at the time of withdrawal).
The basic calculation is: deposit, multiplied by 75% or whatever is the guarantee percentage multiplied
by the percentage that represents the amount of withdrawal, equals the amount received on maturity.
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Insurance Calculations
Example of Proportional Reduction: Client A begins an IVIC contract on January 15, 2002, with a
deposit of $10,000. If the deposit guarantee is 75%, on January 15, 2012, the client will receive a
minimum of $7,500. If the client had withdrawn $1,000 prior to that date, when the value in the contract
was $12,000, the new guarantee by the proportional method would be calculated as (FMV –
Withdrawal)/FMV multiplied by the original guarantee. Thus the new guarantee after the withdrawal will
be calculated as:
New Guarantee = (FMV – Withdrawal amount) x Original Guarantee
FMV
= (12,000 – 1,000) x 7,500
12,000
= 11,000 x 7,500 = $6,875
12,000
Example of Linear and Proportional Reduction: Sarah bought 500 units in a seg fund with a guarantee
of 100% at $20 per unit, for a total value of $10,000. Two years later, the value of the units has increased
to $25 per unit; the total value of her investment has increased to $12,500. She withdraws $1,000 by
surrendering 40 units ($1,000 $25 = 40). The balance of units in the fund is reduced to 460 (500 – 40 =
460).
The proportional-reduction method indicates that the value in the fund on which the guarantee is based
is reduced by 8% to $9,200 (460 500 = 0.92; $10,000 x 0.92 = $9,200).
Or Proportional Method (Alternate to calculation by units using FMV and withdrawal amount)
New Guarantee = (FMV – Withdrawal amount) x Original Guarantee
FMV
= (12,500 – 1000) x 10,000 = 11,500 x 10,000 = $9,200
12,500
12,500
If the guarantee in her contract calls for 100% return of her initial deposit, the linear-reduction method
indicates a new balance in her contract of $9,000 ($10,000 – $1,000 = $9,000.) So the new guarantee is
$9,000.
Alternate method (Linear Method)
New Guarantee = (Original Investment – Withdrawal amount) x Original Guarantee
Original Investment
= (10,000 – 1,000) x 10,000 = 9,000 x 10,000 = $9,000
1,000
10,000
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LLQP
All policy withdrawals are deemed to be partial dispositions with tax consequences, and they will
decrease the ACB of the contract. The withdrawal must be reported for tax purposes and tax paid on it
when appropriate.
Example: Jan’s policy has a fair market value of $150,000 and an ACB of $140,000. She withdraws
$30,000; thus she is deemed to have disposed of 20% of the contract ($30,000 $150,000 = 20%). She
must therefore report a capital gain of 20% on the difference between the ACB and the fair market value
of the policy of $2,000 ($150,000 – $140,000 =$10,000 x 20% = $2,000).
Question: Danny Warbachs bought 1,200 units in a seg fund at $30 per unit. The fund
guarantees a 75% return on the initial deposit. In less than two full years, the increase on
a per-unit basis in the seg fund was $8.00. Following the increase, Danny withdrew
$15,200 from the contract.
a) How many units in the fund did Danny surrender to make the withdrawal?
b) Using the linear-reduction method, what is the value of the guarantee in the
contract following the withdrawal?
c) Using the proportional-reduction method, what is the value of the guarantee in the
contract following the withdrawal?
d) Assuming the ACB of the contract was $36,000, what capital gain, if any, must
Danny report as a result of his withdrawal of funds from the contract?
REVIEW: Market Value Adjustments to Annuities
When an annuity contract is surrendered, or an early withdrawal is made, an adjustment will be made to
the interest rate on which the annuity is based. This is termed a market value adjustment.
The calculation will be one of three possible adjustments:
1. The interest rate credited to the premium is changed to the rate that would have applied for the
number of years of the annuity.
Example: A 10-year annuity with an interest rate of 5.7%, which was withdrawn three years early,
would have its original interest rate changed to 5.2%, the interest rate that would have applied had the
contract been for seven years.
2. The interest rate credited to the deposit may be changed as a result of a change in interest rates from
the date of the premium and the date of the early withdrawal.
Example: If interest rates are higher (e.g., 7%) on withdrawal than on deposit (e.g., 5%), the policy
owner might have to pay an additional penalty (e.g., $150) for the early withdrawal in order to reflect
current market conditions.
3. The interest rate used to calculate either of the two changes above may be reduced by an additional
amount (e.g., ¼ of 1%) as a penalty for early withdrawal.
Example: A 10-year annuity with an interest rate of 5.7%, which was withdrawn three years early,
would have its original interest rate changed to 5.2%, the interest rate that would have applied had the
contract been for seven years, and further reduced to 4.9% as a result of the penalty.
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Insurance Calculations
Question: Annuities Anonymous Inc. (AA) charges a 0.6% penalty in addition to its
standard policy of interest adjustment for early withdrawal from all annuities that it sells.
When Robert Cratchet bought a 10-year annuity, the interest rate on it was 5.2%, while 3year annuities had an interest rate payable at 4.1%; 4-year annuities paid 4.25%; and 5year annuities paid 4.65%. Robert cancelled the annuity in its third year to pay the
medical bills for his son Tim. What interest rate will AA pay?
REVIEW: CPP with Early or Late Retirement Options
A CPP recipient can elect to begin receiving his or her pension as early as age 60 and as late as age 70.
For an early entitlement, the pension is reduced by 0.5% for each month the recipient is younger than age
65. The recipient must prove that he or she is no longer employed or has employment income lower than
the amount of CPP that would be received.
When the pension is delayed, it is increased by 0.5% for each month the recipient is above the age of 65.
Benefits are capped at age 70.
The basic calculation for early retirement is: benefit payable, minus no. of months of early retirement
multiplied by 0.5%, equals early retirement benefit.
The basic calculation for late retirement is: benefit payable, plus no. of months of late retirement
multiplied by 0.5%, equals late retirement benefit.
Example: If James Brown retires at age 65, his benefit payable is $875. However, if he retires at age 64,
his benefit payable is reduced by 0.5% per month (12 months x 0.5% = 6%). His benefit payable at age
64 is therefore $875 – 6% = $822.50.
If he decides to retire at age 66, his benefit payable is increased by 0.5% per month. His benefit payable at
age 66 is therefore $875 + 6% = $927.50
Question: Lois Lane’s benefit payable at age 65 is $650. What will she receive as a
pension if she retires at age 63, or at age 68?
REVIEW: Registered Retirement Savings Plan (RRSP) Withdrawals
There are four ways in which funds may be removed from an RRSP:
As cash, subject to a withholding tax (details below);
Transferred to an annuity;
Transferred to a Registered Retirement Income Fund (RRIF);
Transferred to another RRSP, as long as this is done prior to December 31 of the year in which
the plan holder turns 71 years of age. At age 71, the RRSP must be converted to one of the above
options.
All funds must be either withdrawn or transferred from the RRSP by the end of the calendar year in which
the plan owner reaches the age of 71.
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LLQP
When funds are withdrawn, the financial institution is required to deduct a withholding tax on the amount
withdrawn. The withholding tax for residents of Canada is as follows:
Withdrawals
up to $5,000
$5,001 to $15,000
$15,000 +
All provinces except Quebec
10%
20%
30%
Quebec
21%
26%
31%
The gross amount withdrawn (including the amount of the withholding tax) is added to the plan holder’s
taxable income for that tax year, and is taxed at the individual’s marginal tax rate. Double taxation is
avoided, since the plan holder “gets credit” for the tax that was withheld when the withdrawal was
originally made.
The basic calculation is: amount of withdrawal, minus withholding tax, equals funds received by plan
holder.
Example: Vijay, a resident of Calgary, wants to withdraw $7,000 from his bank, the administrator of his
RRSP. The bank will be obliged to deduct a 20% withholding fee before advancing the balance of the
funds. Vijay will receive the sum of $5,600 ($7,000 – $1,400), and must declare $7,000 as taxable income
for the year of the withdrawal, but will receive a tax credit in the amount of the funds held back ($1,400).
Question: Amy Dextrous needs cash immediately in the amount of $6,000, to take
advantage of a once-in-a- lifetime deal on a diamond ring. She currently has $18,000 in an
RRSP from which to draw the funds. What amount of income must she declare in the
year in which she takes the money from her RRSP? What tax credit, if any, will she
receive in the same year?
REVIEW: RRSP Withdrawals for the Home Buyers’ Plan and Lifelong
Learning Plan
Home Buyers’ Plan
The Home Buyers’ Plan allows an RRSP plan holder to withdraw up to $25,000 from his or her RRSP to
buy or build a qualifying home if neither spouse has been a homeowner for five years, including the year
of withdrawal. This condition will be waived for disabled persons. The home must be in Canada, can be
new or used, and the purchaser must occupy it as his or her principal residence by October 1 of the year
after the withdrawal is made.
If both spouses have RRSPs, they can borrow up to $25,000 each, provided they take joint ownership of
the property.
The funds withdrawn are not taxable, but must be repaid in equal annual instalments over a 15-year
period. If the amount repaid exceeds the minimum annual amount, the amount payable in subsequent
years is reduced. If an amount less than the minimum is repaid, the shortfall must be included in the plan
holder’s taxable income for that year. Since repayment cannot be made after the year the plan holder
reaches 71 years of age, any remaining payments must be included in the plan holder’s income in each
year they become due. There is no interest charged on the loan.
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Insurance Calculations
Plan holders may be restricted from deducting their contribution to an RRSP if the same funds are
withdrawn within 90 days. If a contribution is made in excess of that to be withdrawn, only the amount of
contribution greater than the withdrawal is deductible.
If the plan holder dies within this period, the outstanding amount of the loan is taxed.
The basic calculation is: amount of withdrawal, divided by 15, equals minimum annual repayment.
Example: Ozzie and Harriet, both aged 59, have been contributing to their RRSPs for years. Ozzie has
$46,000 in his, while Harriet has amassed $62,000. Content with apartment living and travelling, in
December they found a dream ski chalet, within easy commute to the city, and although they have
$15,000 in cash, it is insufficient for the $53,000 down payment they need. What can they do to raise the
cash and close the deal?
Since neither has been a house owner for the past five years, including the year of withdrawal, they can
each borrow $25,000 from their respective RRSPs as long as certain conditions are met. They must move
into the chalet by October of next year, and treat the chalet as their principal residence. They must
structure the repayment of the loans over a period of 12 years, not 15, since at age 71 they must terminate
their RRSPs.
Question: In December of this year, 59-year-old Bonnie, and Clyde, age 44, her husband
of three years, decided to buy a house. Although this would be a first (house and
marriage) for Bonnie, Clyde had both a previous wife, from whom he separated and then
divorced, and a home, his interest in which he conveyed to his ex-wife three years ago.
Clyde has $17,500 in his RRSP, while Bonnie just topped hers up to $23,000 when she
deposited a bonus cheque of $5,000 into her account on December 15.
How much can each withdraw from their respective RRSPs for a down payment on the
house, what limitations, if any, will apply to Bonnie’s contribution, when must the loan(s)
be repaid to avoid taxation, and what is the latest date on which they should close on the
house and take possession?
Lifelong Learning Plan
A Lifelong Learning Plan withdrawal can be made by an individual, or his or her spouse or common-law
partner, if the individual or his or her spouse is enrolled in a qualifying educational program at a
designated educational institution on a full-time basis.
A RRSP plan holder may withdraw a maximum of $10,000 per year, to an individual limit of $20,000
over a maximum period of four years. The loan must be repaid over a period no longer than 10 years.
Each year, a minimum of 10% of the total loan must be repaid. No interest is charged on the loan. If the
plan holder dies within this period, the outstanding amount of the loan is taxed.
The basic calculation is: amount of withdrawal, divided by 10%, equals the minimum amount of
repayment.
Example: John Dough has borrowed a total of $18,000 from his RRSP to pay tuition for the three-year
funeral director’s course at Mortal Community College. The course is “approved” and the college
“designated” within the meaning of the plan. John withdrew $9,000 His loan repayment in year one is
Copyright © 2011 Oliver Publishing Inc. All rights reserved. 383
LLQP
$1,800 per year for 10 years beginning the earlier of the year after he completes his studies or the fifth
year after the loan was initially taken.
Question: Paul Bunion enrolled in a forest-management program (an approved course),
at Timberlane College (a designated educational institution). He borrowed a total of
$17,000 from his RRSP for the three-year program, and had made four minimum annual
payments allowable under the Lifelong Learning Plan when he was struck and killed by a
falling tree. How much of the loan had Paul repaid at the time of his death, and how is the
balance of the outstanding loan treated for tax purposes?
REVIEW: Pension Adjustments on RRSP Contribution Limits
There are three factors that determine how much can be contributed annually to an RRSP:
1. The lesser of a dollar limit, or an annual deduction limit of 18% of the previous year’s earned
income
2. A pension adjustment, which represents the value of benefits accruing in the company-sponsored
Registered Pension Plan (RPP) or a Deferred Profit-Sharing Plan (DPSP). The pension
adjustment for any current year must be deducted when calculating the allowable RRSP
contribution for the subsequent year.
3. A past service pension adjustment — when contributions are made to an employee’s pension plan
for the years the employee worked for the employer previously, either because he was not a
member of the plan during those years or because the plan was upgraded and the plan permits
current members to make additional contributions for previous years of service. — will also
reduce the amount of RRSP contribution.
RRSP contributions are carefully monitored by the CRA, so that an individual does not exceed his or her
annual contribution maximum. Both pension adjustments (the value of benefits accruing in the companysponsored plan) and past service pension adjustments (contribution by the employer to a defined benefit
plan for the years of employment prior to the implementation of the company plan) will affect the RRSP
contribution, but in slightly different ways.
Example: Robert’s income and pension adjustments look like this:
Income
Pension adjustment
Past service pension adjustment
2008
$52,400
$1,200
$500
2009
$55,000
$2,200
$1,000
2010
$58,675
$3,200
$1,500
To calculate his maximum RRSP contribution for the year 2010, CRA calculates:
Robert’s income for 2009 x 0.18
$9,900
(lesser of 18% of previous
years salary or Dollar limit for 2010 which is $22,000)
pension adjustment for 2009
2,200
past service pension adjustment for 2010
1,500
Robert’s limit for 2010
$6,200
384 Copyright © 2011 Oliver Publishing Inc. All rights reserved.
Insurance Calculations
Question: Bill Bailey’s income, pension adjustment, and past service pension adjustment
for the year 2009 are respectively: $58,500, $2,200, and $1,300. In 2010, his income is
$62,750, his pension adjustment is $3,000 and his past service pension adjustment is
$3,600. Calculate Bill’s maximum RRSP contribution for the year 2010.
REVIEW: Registered Retirement Income Fund (RRIF) Withdrawals
A RRIF has an annual minimum withdrawal requirement. It is determined by the age of the plan holder,
the date on which the RRIF was established, and other factors, such as whether the plan has been changed
since it was first established. These factors are reflected in a table from the CRA that shows the minimum
withdrawals as a percentage of the value of the plan. The plan holder may withdraw more than the
minimum, in which case a graduated withholding tax (similar to that for RRSP withdrawals) will apply.
The basic calculation is: From age 71, the CRA table applies to the RRIF plan holder or his or her
spouse onward. If the plan holder or spouse is 70 or younger, the minimum withdrawal is calculated as:
the value of the plan at the first of the year, divided by 90 minus the age of the plan holder or spouse.
Example up to age 70: Rhonda, at age 67, has a plan valued at $100,000 at the beginning of the year.
She wishes to make the minimum withdrawal allowed, and is uncertain what this amount is.
The minimum amount is $100,000 ÷ (90 – 67) = $4,347.83
Example age 71 and older: Roger Elder is 70 years old. He established a RRIF in 1995 that has a current
value of $200,000. He needs to know what the minimum withdrawal will be.
Minimum RRIF withdrawals for those aged 71 or older are determined by a schedule in the Income Tax
Act that lists the minimum withdrawal amount.
The following illustrates how much Roger would receive at various ages according to the type of plan he
might have. For the sake of simplicity, it bases the yearly calculation on $200,000; in actual fact, the
$200,000 value of the plan would be reduced by the withdrawals, but would be increased by interest or
investment income.
Roger’s Age
71
72
73
74
75
80
84
89
90
91
92
93
94+
Pre-March 1986 plan
$10,520 (5.26%)
$11,120 (5.56%)
$11,760 (5.88%)
$12,500 (6.25%)
$13,340 (6.67%)
$20,000 (10.00%)
$33,340 (16.67%)
$200,000 (100%)
0 (0%)
0 (0%)
0 (0%)
0 (0%)
0 (0%)
Qualifying plan
$10,520 (5.26%)
$11,120 (5.56%)
$11,760 (5.88%)
$12,500 (6.25%)
$13,340 (6.67%)
$17,500 (8.75%)
$19,860 (9.93%)
$25,420 (12.71%)
$27,240 (13.62%)
$29,460 (14.73%)
$32,240 (16.12%)
$35,840 (17.92%)
$40,000 (20.00%)
All other RRIFs
$14,760 (7.38%)
$14,960 (7.48%)
$15,180 (7.59%)
$15,420 (7.71%)
$15,700 (7.85%)
$17,500 (8.75%)
$19,860 (9.93%)
$25,420 (12.71%)
$27,240 (13.62%)
$29,460 (14.73%)
$32,240 (16.12%)
$35,840 (17.92%)
$40,000 (20.00%)
Copyright © 2011 Oliver Publishing Inc. All rights reserved. 385
LLQP
Roger decides to withdraw $15,000 from his qualifying plan when he is 71, which in addition to his other
income will put his marginal tax rate at 23%. What are the immediate and yearly tax implications
attributable to this withdrawal?
The minimum withdrawal is $10,520. A withholding tax applies to withdrawals in excess of the minimum
withdrawal.
Since Roger’s withdrawal is $4,480 above the minimum, a withholding tax of 10% will be withheld on
the additional amount. Therefore, Roger receives $14,552 ($4,480 x 10% = $448; $15,000 – $448 =
$14,552).
As Roger’s marginal tax rate is 23%, the amount of tax payable on the total withdrawal is calculated as:
$15,000 x 23% = $3,450.
However, the $448 that was withheld when the funds were withdrawn, must be deducted: $3,450 –
$448 = $3,002. Therefore, Roger’s tax liability for his withdrawal is $3,450, of which $448 has been
deducted at source.
Question: Rhoda at age 70, has a plan valued at $200,000 at the beginning of the year.
She wishes to withdraw only $12,000. Does this sum meet the minimum withdrawal that
is required, and assuming a withholding tax of 10% on the first $5,000 in excess of the
minimum amount, what is the actual cash that Rhoda will receive when making the
withdrawal?
REVIEW: Splitting CPP Benefits
As a strategy for tax saving through income-splitting, the higher-income spouse can direct up to 50% of
his or her CPP benefits to the lower-income-earning spouse .. This may be done provided both spouses
are over age 60. However, if this is done, a portion of the recipient spouse’s CPP is automatically
transferred back to the first spouse.
If the transferring spouse has high CPP benefits and the recipient spouse has low, or no, CPP benefits, the
assignment can effectively transfer up to half of the CPP income to the lower-income spouse. The amount
that can be transferred, up to a maximum of 50%, depends on the length of time the spouses lived
together as a proportion of their total contributory period.
Example: Andrew and Sylvia, aged 64 and 62 respectively, have retired from show business and are
receiving CPP benefits. Andrew, whose benefits are $4,800 per year, is taxed at the rate of 23%, while
Sylvia, taxed at the rate of 39%, has yearly CPP benefits of $6,560.
They decide to consider splitting their income by assigning 50% of their CPP benefits to the other. What,
if any, tax benefits will arise from this strategy?
Andrew’s tax liability on his pre-split benefit ($4,800 x 23%) =
Sylvia’s tax liability on her pre-split benefit ($6,560 x 39%) =
Total tax payable
$1,104
2,558
$3,662
Total benefits
Individual benefit after splitting
($11,360 2)
Andrew’s tax liability on split benefit ($5,680 x 23%)
$11,360.00
5,680.00
1,306.40
386 Copyright © 2011 Oliver Publishing Inc. All rights reserved.
Insurance Calculations
Sylvia’s tax liability on split benefit
Total tax payable
Tax savings ($3,662 – $3,521.60)
($5,680 x 39%)
2,215.20
$3,521.60
$140.40
Splitting their income through the assignment of 50% of their CPP benefits will save them $140.40 in
taxes.
Question: Brenda and Marty, aged 63 and 64, have been married for 35 years. Marty,
taxed at the rate of 36%, has CPP benefits of $6,700 per year, while Brenda, taxed at the
rate of 21%, has CPP benefits of $4,800 per year. Assuming that they can and do split
50% of their CPP benefits, calculate their combined tax savings, if any.
Copyright © 2011 Oliver Publishing Inc. All rights reserved. 387
LLQP
Answers
Policy Benefits when Age Has Been Misstated
Premium charged premium that should have been charged x face value of the policy is:
22 24 x $60,000 = $55,000
Insurance needs: Human-Life Approach
Real interest rate is 7 – 3 = 4%
Amount of insurance required = $50,000 ÷ 0.04 =
Insurance in place
Additional requirement
$1,250,000
200,000
1,050,000
Insurance needs: Capital-Needs Approach
The family will require additional insurance on the major income earner in the amount of $405,000
Cash needs: assets – final expenses $200,000 – $250,000 = ($50,000) shortfall.
Continuing income needs as yearly income sources – yearly income needs $20,000 – $35,000 = ($15,000)
shortfall.
Capitalized value of deceased’s life as continuing income needs shortfall divided by the expected rate of
return $15,000 4% = $375,000
Add to his shortfall of cash needs $375,000 + $50,000 = $425,000
Death benefit of term policy $20,000
Additional insurance $405,000
Capital Gains and Losses
Tax liability without factoring in the capital loss on the Techie stock is:
Capital gain of $5,250 x 50% = $2,625 is the taxable gain on the sale, which when, taxed at her marginal
rate of 30%, means a tax liability of $2,625 x .30 = $787.50
Tax liability when factoring in the capital loss on the Techie stock is:
Net Capital Gain = Capital gains on the sale of the bank stock, less capital losses on the Techie stock
$5,250 – $3,245 = $2,005.
Taxable Capital gain of $2,005 x 50% = $1,002.50, when taxed at her marginal tax rate of 30%, means a
tax liability of $1,002.50 x 0.30 = $300.75
Residual Disability Benefits
8,000 (pre-disability income) – 4,000 (post-disability income) = 4,000 = 50%
8,000 (pre-disability income)
8,000
Joan’s monthly benefit under the policy is $3,000; she will receive 50% of $3,000 = $1,500 as a residual
benefit.
Coordination of Benefits
$108 will be reimbursed by Jack’s group plan in the first month because:
$235 submitted
less $100 deductible
co-insurance $135 x 0.8 = $108
388 Copyright © 2011 Oliver Publishing Inc. All rights reserved.
Insurance Calculations
$127 will be reimbursed by Jill’s group plan in the first month, because Jack is covered by more than one
plan for his expenses. Since he is a dependent spouse under Jill’s plan, her plan is second in priority. It
therefore pays the lesser of what it would have paid had it been the primary carrier, or 100% of the
eligible expenses, reduced by the benefits paid for the same expenses by the primary carrier.
$235 submitted
less $75 deductible
$160 would have been paid if Jill’s plan was the primary carrier, but since Jack’s plan already paid $108,
Jill’s plan will pay the lesser of ($160 or $235 – $108) = $127
Seg Fund Maturity and Death Benefit Guarantees
The guarantee on the original deposit was $20,000 x 0.75 = $15,000. The maturity guarantee will provide
a benefit of $655 (the difference between the value of the fund at maturity and the maturity guarantee) to
provide the investor with $15,000.
Seg Fund Resets
The fund will mature on November 17, 2021, with a death benefit and a maturity guarantee of $38,625
($51,500 x 75% = $38,625)
Seg Fund Withdrawals
Danny surrendered 400 units from the fund ($15,200 $38 = 400)
Using the linear method of reduction, the new guaranteed value in his contract is: $36,000 – $15,200 =
$20,800 x 0.75 = $15,600
Using the proportional method of reduction, the new guaranteed value in his contract is the balance of
units in the fund which is reduced to 800 (1,200 400). The value in the fund is reduced to $24,000 (800
1,200 x $36,000). The guarantee is therefore $24,000 x 75% = $18,000.
Alternate Method (Proportional):
Original Guarantee = 75% x 36,000 = 27,000
FMV of fund at withdrawal = $38 x 1,200 = 45,600
New Guarantee = (FMV – Withdrawal amount) x Original Guarantee
FMV
= (45,600 – 15,200) x 27,000 = 30,400 x 27,000 = $18,000
45,600
45,600
Since Danny disposed of one-third of the contract ($15,200 $45,600 = 0.333), he must report a capital
gain of $3,196.80, which is one-third of the difference between the ACB of the contract and its market
value at the time of the withdrawal [($45,600 – $36,000) x 0.333 = $3,196.80].
Market Value Adjustment to Annuities
His annuity rate will be reduced to the three-year rate of 4.1%, and further reduced by the penalty of 0.6%
to 3.5%.
CPP with Early or Late Retirement Options
At age 63, her pension will be reduced by 0.5% x 24 months = 12%. Benefit payable is therefore $650 –
12% = $572. At age 68, her pension will be increased by 0.5% x 36 months = 18%.
The benefit payable is therefore $650 + 18% = $767.
Copyright © 2011 Oliver Publishing Inc. All rights reserved. 389
LLQP
RRSP Withdrawals
A one-time withdrawal from her RRSP sufficient to net $6,000 would need to be $7,500 because of the
20% holdback on the funds ($7,500 – 20% = $6,000). She must declare $7,500 as her income and she will
get a credit of $1,500.
RRSP Home Buyers’ Plan Withdrawal
Neither Clyde nor Bonnie can make a withdrawal under HBP as Clyde owned a home within the last four
years.
RRSP Lifelong Learning Plan Withdrawal
Paul had repaid $6,800 at the time of his death (4 x $17,000 ÷ 10 = $6,800). The outstanding amount of
the loan ($10,200) is taxed as income to Paul in the year in which he died.
Pension Adjustments on RRSP Contribution Limits
2009 income $58,500 x 0.18
$10,530
Pension adjustment for 2009
$2,200
Past service pension adjustment for 2010
$3,600
Maximum contribution is $4,730, which is the lesser of $22,000 or $4,730.
RRIF Withdrawals
Minimum amount required is $200,000 ÷ (90 – 70) = $10,000. The additional $2,000 is subject to a 10%
withholding tax of $200. The net amount that Rhoda will receive is $11,800 ($10,000 + $1,800).
Splitting CPP Benefits
Marty’s pre-split tax liability on the CPP income $6,700 x 36% = $2,412
Brenda’s pre-split tax liability on the CPP income $4,800 x 21% = $1,008
Total tax payable by both: $3,420
Post-split benefits $6,700 + $4,800 ÷ 2 = $5,750 each
Marty’s post-split tax liability on CPP income $5,750 x 36% = $2,070
Brenda’s post-split tax liability on CPP income $5,750 x 21% = $1,207.50
Total tax payable by both: $3,277.50
Tax saved $3,420 – $3,277.50 = $142.50
390 Copyright © 2011 Oliver Publishing Inc. All rights reserved.