Reference Notes for use with Spread Sheet Policy Analysis

Year: The commencement year is year 1 and subsequent years are numbered until the insured reaches age 99.

Age: The Insured's age at commencement of policy, however corresponding data represents results and rates applicable for full year of that age.

Base Return Rate: The rate of return (before bonus) assumed for calculation of growth of the Sheltered Investment Fund. The term "Return Rate" actually refers to a rate derived from the behaviour of a selected index or combination of indices such as bond or stock indices designated for such measurement within the policy's options. This "return amount" is calculated and credited daily on indexed investment accounts and compounded daily to be credited monthly on fixed rate investment accounts. The sum of the value of the investment accounts within the tax sheltered Investment Accumulation Fund determine its value and together constitute the Accumulation Fund. Funds from premium deposits and the existing value at credit to the Accumulation Fund are reduced by insurance cost and administration expenses which are charged monthly. On most indexed accounts, the daily percent change in the index is reduced by 1.30 basis (hundredths of a percentage) points which constitutes the MER (Management Expense Ratio) for the index investment selected. (e.g.: assume a 2% change one day, then (.0200 - .0013 = .0187) - 1.87% will determine the rate of return for credit that day. To annualize the MER of .0013 based on 250 business days in Canada then, 250 x .0013= 0.325 or 3.25% per annum. The basis rate reductions actually vary from 1 to 1.40 basis points, depending upon the index or fixed rate option(s) selected.

Premium  (Annual Deposit): This is the annual policy premium deposit and is assumed to be paid at commencement of each year. The amount is allocated to pay for actual insurance coverage, administration fees and premium tax with balance being credited to a tax sheltered investment account, the Accumulation Fund.

Prov. Premium Tax:Constitutes a tax paid to the Province (Ontario) by the insurance company and is deducted from the premium deposit.  

Risk & Admin. Charges: The cost of pure insurance ( see Net Amount of Risk - the actual insurance amount alone) plus annual administration charge which is $10 / month = $120 / Ann and $20 / month for joint policies.

Total Return Rate:Total Return Rate: Includes the addition to the base rate of an additional "bonus rate" which can range from .5% to 1.5% depending whether the determinate Base Return Rate applicable is derived from a deposit interest rate or from one or more securities market Indices such as the S & P 500 Index.

Net Investment Return: Is the amount credited to the tax sheltered investment Accumulation Fund (the investment segment of policy), based on accumulated balance in this tax sheltered investment account after deduction of insurance cost provincial premium tax nd administration expenses during the course of the policy year and is calculated at the Total Return Rate (see above).

Tax Sheltered Accumulation Fund The investment segment of the insurance policy which is able to compound tax free (tax exempt). Its return can be derived from the daily return represented by price change any one or combination of a fixed rate investment with a minimum guaranteed rate up to 3%, Scotia Capital Universe Bond total return, S&P/TSX60, The S&P 500, The NASDQ 100, The Dow Jones Euro Stoxx 50, The Nikkei 225 indices.
(To preserve its tax exempt status the Fund must not exceed the MTAR ceiling after deducting maximum allowable insurance costs. In the early policy years, for this policy, insurance costs deducted are in fact lower than the legislated costs allowable. This results a higher balance than the ceiling but nevertheless remaining in compliance with MTAR requirements to the Fund's long term benefit.)

MTAR Exempt Ceiling  This is the prescribed calculation of the maximum allowable investment segment (Accumulation Fund) within the policy for the policy to retain its ‘tax exempt' status within the confines of MTAR (Maximum Taxable Acturial Reserve) legislation. Due to the manner of the MTAR calculation, the balance may not correspond to the actual Accumulation Fund balance exhibited in the early years.
In the first 8 years an Early Liquidation Amount (ELA), determined in large part by adjusting the insurance cost to the higher rate applicable on a level for life policy (rather than yearly renewable term applied in this illustration) is levied and is deductable from the Accumulation Fund in determination of its balance for compliance with the MTAR Exempt Ceiling. The ELA is applicable to the prior year end balance of the Accumulation Fund. Thus, 61,888 less 2,010 = 59878 = MTAR Ceiling for year 4.
  In general, the maximum permissable under any given policy is a function of the age of the life insured, the amount of coverage on that individual and the duration of the policy. The MTAR test may be summarized as the value of a sinking fund growing at an assumed interest rate minus the cost of insurance that would be required to equal the face amount of the policy at age 85.
  The object of this illustration is to maximize the allowable investment segment and diminish the insurance segment over the life of the policy with the effect of taking full advantage of the tax exempt investment feature available within the Accumulation Fund and spending as little as possible for the insurance segment. Accordingly, the capital accumulation objective, while initially secured (in the event of early death) by the insurance component, is ultimately achieved by the tax sheltered investment Accumulation Fund through the efficiency of tax free compounding of its investment return within the confines of MTAR.
 legislative ref: MTAR stands for Maximum Tax Actuarial Reserve and relates to the tax exempt earnings derived from the required reserves an insurance company must maintain to secure its ability to honour its commitments under outstanding insurance policies. MTAR is defined in the Income Tax Act as: "maximum tax actuarial reserve for a particular class of life insurance policy for a taxation year of a life insurer means, except as otherwise expressly prescribed, the maximum amount allowable under subparagraph138(3)(a)(i) as a policy reserve for the year in respect of policies of that class". 138(3)(a)(i) reads: "(i) any amount that the insurer claims as a policy reserve for the year in respect of its life insurance policies, not exceeding the total of amounts that the insurer is allowed by regulation to deduct in respect of the policies." )

Early Liquid. Amt.:If an owner decides to cancel the policy in the first 8 years of a Yearly Renewable Term (YRT) insurance cost option as in this exhibit, an Early Liquidation Amount (ELA) is levied. In the main, this ELA charge adjusts the insurance cost in relation to what it otherwise would be under the higher (in early years) ' level for life ' cost of insurance (LCOI).

Policy Cash Option: If an election to withdraw funds is requested, a proportionate amount of the refundable Investment Income Tax Credit (see I.I.T. Refund) will be added to determine the amount to be remitted from the policy. This amount less the proportionate adjusted cost base of pure insurance segment will be taxable as income to the owner of the policy.

I.I.Tax Refund: The Investment Income Tax Refund is equal to the amount by which the Company's liability for investment income tax imposed under section 211.1 of the Income Tax Act (Canada) is reduced as the result of a withdrawal under the Cash Option. Accordingly, the reduction is passed through to the policy owner by the insurer of this policy example. Section 211.1. (1) reads: "Every life insurer shall pay a tax under this Part for each taxation year equal to 15% of its taxable Canadian life investment income for the year."
This Investment Income Tax is paid by the Insurance Company from the proceeds of its MER (Management Expense Ratio). Since it thereby can be determined as a refundable policy expense, upon a withdrawal under the cash option the insurer will flow the refunded portion to the policy owner for withdrawals other than for tax free disability/critical illness draws and payments upon death to beneficiaries. Many insurers do not refund this Investment Income Tax as refunded to them, but simply retain it as a cost recovery for their own account.

Liquid Value: Value of tax sheltered investment Accumulation Fund plus Refundable Investment Income Tax credit ( I.I.T. Refund) is the amount available for withdrawal at any time prior to death for purposes other than as a Health Benefit (see above)
In the first 8 years of a policy based on a yearly renewable term insurance rate an Early Liquidation Amount (ELA) is deducted in determining Liquid Value (see Early Liquid. Amt.)

Adjusted Cost Basis (ACB): This is the cumulative cost of the Premium (Annual Deposits) less the cost of the actual insurance portion. Over time, the cost for the insurance portion itself diminishes as the insurance benefit portion declines toward zero. The ACB is intended to measure the cost amount of the investment portion of the policy represented by the tax sheltered investment Accumulation Fund..

Taxable Return on Surrender: Is the result of Liquid Value minus Adjusted Cost Base (see above). (LV-ACB). This is the amount against which the marginal tax rate (MTR) of the investor would be applied to determine net receipt after tax. (LV-ACB)x(1-MTR)+ACB= ATLV (After Tax Liquid Value).
Taxable Return in this context is taxable as ordinary income.)

After Tax Liquid Value (ATLV): Illustrates net after tax value estimated to be available upon a total withdrawal of the Sheltered Investment Fund for other than qualified health needs. Calculated as net of personal Marginal Tax Rate (MTR) applied to Liquid Value (LV) less ACB (Adjusted Cost Base of pure insurance portion.). (LV-ACB)x(1-MTR)+ACB= ATLV.

Actual Insurance Amount This is the actual insurance coverage in force during each policy year. Over time it reduces to zero as the value of the sheltered investment Accumulation Fund increases. The design of this policy illustration is to devote the least amount of funding for insurance (within the confines of the Federal Government's MTAR requirement) in order to maximize the tax sheltered investment portion to best enable capital accumulation; and, access to tax free Health Benefits should the need arise or to provide enhanced retirement income or other future funding needs on a cumulatively tax advantaged basis.

Total Life Benefit: Might otherwise be referred to as "Total Estate Value". This is the non-taxable amount to be received by the beneficiary(s) upon death of the insured. It is the sum of the insurance value (see column "Actual Insurance Amount") plus the tax sheltered investment Accumulation Fund. In this event the Investment Income Tax credit is not refundable because the payout is not on the basis of a cash option..

YRT COI Rate: This is the annual cost per $1,000 of the life insurance segment (Actual Insurance Amount) with cost adjusted each year based on the insured's age throughout the term of this illustration of a Universal Life insurance policy. Under this Yearly Renewable Term contract, the Cost Of Insurance is lower during the initial years and higher during the later years; as one might expect, given a term of one year renewed every year in recognition of the insured's age increase. However with the insurance amount structured to decrease yearly and eventually disapear as the Accumulation Fund ' takes over ', the insurance cost recedes significantly to easily offset the higher YRT annual rate.

ACB NCPI Rate: This is the Net Cost of Pure Insurance per $1,000 calculated in accordance with the rules contained in Regulation 308 of the Tax Act and is included in calculation of the adjusted cost basis of the policy wherein the ACB is total premiums paid less the NCPI. Note that the Tax Act prescribed rate for NCPI is higher after a few years than the actual insurance cost charged this insurance policy (refer YRT COI Rate above). The prescribed NCPI is based on mortality factors obtained from the Canadian Institute of Actuaries 1969-1975 when life expectancies were lower. A lower ACB thus results than would be the case if the actual YRT COI Rate of this insurer was permitted by the Tax Act. A lower ACB, of course, increases the taxable portion of an investment.

Proposed Policy Withdrawals;(PPW): This is the ‘before tax' amount estimated to be required from the tax sheltered investment Accumulation Fund - determined in a manner such that the residual capital available as a tax free death benefit to the beneficiary(s) - would equal the capital maintained by an alternative unsheltered investment at age 99. It is worthwhile noting that the capital available from the policy exceeds the unsheltered capital until equality at age 99; notwithstanding the dramatically greater annual draw from the Accumulation Fund.
 The total before tax requirement on withdrawals will include the I.I.T. refund (see: Total W/D IIT Refund), (I.I.T.).
The taxable portion (see: Total W/D Taxable Portion), (TP) is less the proportionate Adjusted Cost Basis (ACB)- which can be determined by deducting the Taxable Portion from the sum of the first two amounts (PPW+IIT-TP=ACB). By multiplying the marginal tax rate MTR times the Taxable Portion (TP) the estimated tax (TAX) is determined; and so (PPW+IIT-TAX= Proposed After Tax Withdrawal (ATW) see below.)

Total W/D I.I.T. Refund (IIT): This column specifies the I.I.T. Refund applicable to the amount withdrawn. The IIT Refund represents in effect a refundable tax credit which accrues to the benefit of the owner to be refunded in whole or in part as the case may be upon policy surrender or upon a partial withdrawal respectively. It is not refundable on payment of an otherwise tax free Life or a Health Benefit, but only in the event of a fully taxable withdrawal under a cash option.

Total W/D Taxable Portion (TP): From the amount determined as "Proposed Policy Withdrawal" (see above) plus the proportionate IIT Refund (Investment Income Tax Refund) is deducted a proportionate corresponding Adjusted Cost Base amount to define the Taxable Portion of the Total Withdrawal. After deducting the tax determined by the marginal tax rate of the recipient the after tax withdrawal amount is so estimated.

Proposed After Tax Withdrawals (ATW): This represents an estimated net amount that would be realized from within the policy after the recipient, i.e. the owner, will have incurred liability for a corresponding income tax cost at his or her marginal tax rate. The net amount thus estimated is determined such that the capital available at age 99 would equal the capital maintained by an alternative unsheltered investment. It is worthwhile noting that the capital available from the policy exceeds the unsheltered capital until equality at age 99.

Health Benefits: Represents the amount that can be drawn free from tax as a policy benefit if insured is diagnosed as having a qualified Disability, Critical Illness or Critical Condition which implies the need for Care Facility Residence and/ or Home Care. ( The Investment Income Tax Refund (see above) is not applicable to this otherwise tax free draw.) Also included as a potential Health Benefit is the ability of the survivor within a joint policy to receive a one time ‘Optional Life Benefit' up to the tax sheltered investment Accumulation Fund value if requested within 90 days of the other's death.

( - Not illustrated - ) LCOI Life Benefit: This is the actual Life Insurance portion possible on a level basis with a level cost of insurance preference given the current premium and allowable sheltered investment portion within the confines of MTAR. As noted earlier, in this policy example, the insurance segment is structured to diminish in order to allow for maximizing of the Sheltered Investment Fund. It is worthwhile comparing with a policy calculation using a level insurance amount corresponding to the end amount on an unsheltered investment. I some cases the tax free compounding of an investment portion will not measure up to the level insurance amount.

( - Not illustrated - ) Level for Life COI Rate: This is the annual cost per $1,000 of life insurance segment assuming the level amount of insurance as stipulated and that the cost be maintained at a constant level throughout the term of the policy. The plan involves the accumulation of reserves arising out of the excess premiums paid in the earlier years and the depletion of those reserves to supplement inadequate premiums in the later years.

Joint, last to die policy In a joint 'last to die' policy the age used for determining the cost of insurance is normally a few years lower than the lowest age of those insured. Life expectancy ages are based on one half of the living will live beyond their life expectancy age. Accordingly allowance is given that one of the insureds will likely do so, given the probability equation for two is .50 x.50 = 25% likelyhood that neither will live beyond their life expectancy.