Risk management is a transaction with the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.
Insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium.
Life insurance provides coverage against the risk of death of a particular person (the life insured). If the life insured dies while the policy is in force, the insurance company (the insurer) will pay the death benefit to the beneficiary named in the insurance policy.
Term Life insurance pays a death benefit if the life insured dies within a specified term or period. If the life insured survives the term, the policy expires without value. It is also known astemporary insurance because it is suited to cover risks that only exist for a specified period.
Permanent life insurance provides coverage for the entire lifetime of the life insured, rather than for a specific term. The policyowner pays premiums in excess of actual mortality costs in the early years, which results in the accumulation of a policy reserve. This reserve helps supplement the premiums in later years when the mortality costs exceed the premiums. Whole life, term-100, and universal life are all types of permanent life insurance.
Term-100 insurance is like a stripped-down whole life policy. Premiums are lower than premiums for a comparable whole life policy, and continue at a level rate until age 100. At age 100, the insurer either pays the death benefit even if the life insured is still living, or the policy is paid up, so no additional premiums need to be paid. It typically does not have a cash surrender value and has few, if any, non-forfeiture benefits. Term-100 can be a good option if coverage needs are unlikely to change and non-forfeiture benefits are not required.
Universal life (UL) insurance is a type of permanent life insurance. As long as there are sufficient funds in the policy reserve fund to pay mortality and administrative costs, the policyowner can change the face amount; the number and identity of lives insured (subject to insurability); the amount, frequency, and timing of deposits; and the types of investments in ther reserve fund. UL policies can offer tax-deferred savings and favourable tax treatment for beneficiaries.
Whole life insurance is a form of permanent life insurance that provides protection for the whole life of the life insured. Premiums typically stay the same over the life of the contract, and can be paid over varying lengths of time, from a single lump sum to over a lifetime. Premiums in excess of the mortality cost and administration expenses create a policy reserve fund with a cash surrender value (CSV). Also known as straight life insurance or ordinary life insurance.
Buy-sell life insurance is insurance on the life of an owner of a business, designed to fund a buy-sell agreement associated with that individual. A buy-sell agreement is a contract that specifies how a business ownership interest will be dealt with if the owner dies, becomes disabled or retires. Generally, it provides for the mandatory purchase of the business interest at the time of the specified event.
Business continuity insurance can protect a business from a severe loss of value, or even bankruptcy, if an important partner or employee dies or becomes disabled. The company can use the insurance proceeds to pay off current debts, hire replacement employees, or buy out the interest of the dead or disabled owner.
Key person insurance is when a business buys key person life insurance on the death of a key person in the company if the death of that person would result in a significant loss to the company; or when the business buys key person disability insurance to cover the loss of key employee on disability.
Critical illness insurance pays a lump-sum tax-free benefit to the insured if he or she is diagnosed with an illness specified in the policy, such as a heart attack or cancer.
Disability insurance policy provides monthly benefits if the insured suffers a loss of income because he or she is unable to work due to accident or sickness.
Long-term disability (LTD) insurance policy provides monthly benefits if the insured suffers a prolonged loss of income because he or she cannot work due to accident, sickness, or mental illness. Benefits are often structured to commence when short-term disability (STD) coverage ends. Benefit periods are typically 2 years, 5 years or to age 65. LTD often pays a lower benefit than STD.
Short-term disability insurance pays benefits to claimants who are disabled for a term between six months and two years, after a short elimination period. STD insurance is designed to provide a disabled person with time to recuperate or to train for another occupation; it is not meant to provide permanent income replacement.
Group medical or health plans generally supplement coverage provided under provincial and territorial plans. They pay for services that are not covered fully or at all by government plans, including the cost of semi-private hospital rooms, prescription drugs, eyeglasses, emergency medical care outside Canada, or dental care.
Group life insurance is personal life insurance coverage that is available to members of a specified group. Group life insurance usually provides a death benefit that is a multiple of the employee’s earnings. The life insured usually does not need a medical exam for basic coverage. Group life premiums reflect the average age and sex of the group, rather than the specified age, sex or health of the individual plan members.