Definition of Contribution Principle

Contribution Principle

This is the principle which specifies the factors that must be taken into account when calculating dividends. At Canada Life, the key factors are: interest earnings, mortality, and operating expense.

Compound Interest

interest earned on an investment at periodic intervals and added to principal and previous interest earned. Each time new interest earned is calculated it is on a combined total of principal and previous interest earned. Essentially, interest is paid on top of interest.

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 their 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 your 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, and not a complete policy. The only form in which bank mortgage insurance is sold 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.

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. 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, however, 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.

Level Premium Life Insurance

This is a type of insurance for which the cost is distributed evenly over the premium payment period. The premium remains the same from year to year and is more than actual cost of protection in the earlier years of the policy and less than the actual cost of protection in the later years. The excess paid in the early years builds up a reserve to cover the higher cost in the later years.

Life Expectancy

The average number of years of Life remaining for a group of people of a given age and gender according to a particular mortality table.

Life Income Fund

Commonly known as a LIF, This is one of the options available to locked in Registered Pension Plan (RPP) holders for income payout as opposed to Registered Retirement Savings Plan (RRSP) holders choice of payout through Registered Retirement Income Funds (RRIF). A LIF must be converted to a unisex annuity by the time the holder reaches age 80.

Mortality Tables

This is a statistical table used by Life insurance companies showing the probability of death of male and females at all ages.

Registered Retirement Savings Plan (Canada)

Commonly referred to as an RRSP, This is a tax sheltered and tax deferred savings plan recognized by the Federal and Provincial tax authorities, whereby deposits are fully tax deductable in the year of deposit and fully taxable in the year of receipt. The ability to defer taxes on RRSP earnings allows one to save much faster than is ordinarily possible. The new rules which apply to RRSP's are that the holder of such a plan must convert it into income by the end of the year in which the holder turns age 69. The choices for conversion are to simply cash it in an pay full tax in the year of receipt, convert it to a RRIF and take a varying stream of income, paying tax on the amount received annually until the income is exhausted, or converting it into an annuity with guaranteed payments for a chosen number of years, again paying tax each year on moneys received.
If you are currently 69 years of age, you may still contribute to your own RRSP until December 31st of This year and realize a tax deduction on This year's income. You must also, however, make provisions before December 31st of the year for converting your RRSP into either a RRIF or an annuity, otherwise, the full balance of your RRSP becomes taxable on January 1 of the following year. If you are older than age 69, still have earned income, and have a younger spouse, you may continue to contribute to a spousal RRSP until that spouse reaches 69 years of age. Contributions would be based on your own contribution level and are deducted from your taxable income.

Registered Retirement Income Fund (Canada)

Commonly referred to as a RRIF, This is one of the options available to RRSP holders to convert their tax sheltered savings into taxable income.

Split Dollar Life Insurance

The split dollar concept is usually associated with cash value Life insurance where there is a death benefit and an accumulation of cash value. The basic premise is the sharing of the costs and benefits of a Life insurance policy by two or more parties. Usually one party owns and pays for the insurance protection and the other owns and pays for the cash accumulation. There is no single way to structure a split dollar arrangement. The possible structures are limited only by the imagination of the parties involved.

Temporary Life Insurance

Temporary insurance coverage is available at time of application for a Life insurance policy if certain conditions are met. Normally, temporary coverage relates to free coverage while the insurance company which is underwriting the risk, goes through the process of deciding whether or not they will grant a contract of coverage. The qualifications for temporary coverage vary from insurance company to insurance company but generally applicants will qualify if they are between the ages of 18 and 65, have no knowledge or suspicions of ill health, have not been absent from work for more than 7 days within the prior 6 months because of sickness or injury and total coverage applied for from all sources does not exceed $500,000. Normally a cheque covering a minimum of one months premium is required to complete the conditions for This kind of coverage. The insurance company applies This deposit towards the cost of a policy at its issue date, which may be several weeks in the future.

Term Life Insurance

A plan of insurance which covers the insured for only a certain period of time and not necessarily for his or her entire Life. The policy pays a death benefit only if the insured dies during the term.

Account Value

The sum of all the interest options in your policy, including interest.

Canada Pension Plan (CPP)

A plan that provides retirement and long term disability income benefits to residents of Canadian provinces (excluding Quebec).

Canadian Life and Health Insurance Association (CLHIA)

An association of most of the Life and health insurance companies in Canada that conducts research and compiles information about the Life and health insurance industry in Canada.

Daily Interest Accumulation

account in which interest is accrued daily and credited to the account at the end of a specified time.

Guaranteed Interest Annuity (GIA)

interest bearing investment with fixed rate and term.

Guaranteed Interest Certificate (GIC)

interest bearing investment with fixed rate and term.

Interest Option

One of several investment accounts in which your premiums may be invested within your Life insurance policy.

Interest Rate

Rate charged or paid for the use of money, normally expressed as a percentage

Joint Policy Life

One insurance policy that covers two lives, and generally provides for payment at the time of the first insured's death. It could also be structured to pay on second death basis for estate planning purposes.

Life Insurance

Insurance that provides protection against an economic loss caused by death of the person insured.

Life Insurance (Credit Insurance)

Group Term Life insurance that pays or reduces the balance due on a loan if the borrower dies before the loan is repaid.

Life Insured

The person who's Life is protected by an individual policy.

Life Underwriter

Insurance Agent.

Mortality Rate

The death rates for various age groups of the population.

Mortgage Life insurance (Credit Insurance)

Decreasing term Life insurance that provides a death benefit amount corresponding to the decreasing amount owed on a mortgage.

Operating Expenses

The amount of money the company must spend on overhead, distribution, taxes, underwriting the risk and servicing the policy. It is a factor in calculating premium rates.

Term Life

A product that provides Life coverage for a specified duration typically not beyond the age of 75.

Universal Life

An unbundled Life product with a separate investment component. It typically does not participate in companies profits.

Whole Life

Component that provides Life coverage during the insured's Life.

Canada Mortgage and Housing Corporation (CMHC)

The National Housing Act (NHA) authorized Canada Mortgage and Housing Corporation (CMHC) to operate a Mortgage Insurance Fund which protects NHA Approved Lenders from losses resulting from borrower default.

Interest Rate Differential Amount (IRD)

An IRD amount is a compensation charge that may apply if you pay off your mortgage principal prior to the maturity date or pay the mortgage principal down beyond the prepayment privilege amount. The IRD amount is calculated on the amount being prepaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate that we can now charge when re-lending the funds for the remaining term of the mortgage. For more information, click on compensation amounts.

Mortgage Life Insurance

A form of reducing term insurance recommended for all mortgagors. If you die, have a terminal illness, or suffer an accident, the insurance can pay the balance owing on the mortgage. The intent is to protect survivors from the loss of their homes.

Escrow account

Most lenders set up This account that receives monthly payments from home buyers to pay for obligations such as insurance, taxes and assessments.

Turnkey

A term used when the subcontractor provides all materials (and labor) for a job.

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