Answer these questions.
(a) (2 points) With respect to Prescribed Annuity Contracts (PACs): Identify the categories. (ii) Briefly describe the taxation of PACs. (b) (2.5 points) You are given the following information for two annuity contracts issued January 1, 2015: Annuitant 1 Annuitant 2 Accumulating Fund, previous anniversary 10,000 10,000 Accumulating Fund, current anniversary 9,800 Mortality Gain/Loss 200 Gain 9,600 Loss Assume: The contracts are in the payout period. Annual annuity payment = 1,000 . . . The Accrual Method is used to calculate the taxable income. Annuitant 1 survives the year Annuitant 2 dies just before the end of the policy year, with no further amounts payable. For each contract: (i) Calculate the taxable amount of income in the current policy year and the adjusted cost basis (ACB) at the beginning of next policy year. (ii) Describe the benefit of electing PAC treatment. (c) (1.5 points) You are given the following information for two Canadian life insurance policies: Date policy acquired CSV Policy Loan ACB Tax Rate 01-Jul-83 10,000 5,000 6,000 35% 01-Jul-82 20,000 0 12,000 40% Calculate the tax payable on each policy for a full surrender. 5. (7 points) (a) (5 points) Evaluate the appropriateness of the following CALM valuation expense assumptions for a life insurance block of business: A. The best estimate annual maintenance expense assumption is 60 per policy. This is based on the most recent expense study of the company. This includes expenses incurred to sell and underwrite policies, to perform the administration of the policies, and to pay claims. It does not include any overhead expenses or expenses associated with policyholder dividends. B. The maintenance expense inflation rate is 3% per year. C. Commissions and premium taxes are included separately in the valuation and are not subject to inflation. D. A margin for adverse deviation of 15% is applied to all expenses. E. Investment expenses for the assets supporting the liability are not included in the valuation. (b) (2 points) The company is implementing an initiative that is expected to reduce the annual maintenance expense by 5 per policy. Describe four considerations in updating the valuation expense assumption.7. (7 points) (a) (2 points) (i) Outline the terms of the IFRS 17 Standard that indicate when discounting can be used in the determination of coverage units. (ii) Explain the impact that the use of discounting coverage units would have on the pattern of income in future time periods. (b) (I point) You are given the following statement with respect to IFRS 17: For a UL Policy where the death benefit is the Face Amount plus the Account Value, we recommend using the face amount to determine coverage units for this type of contract because the future Account Values are uncertain. Evaluate the appropriateness of this recommendation. Justify your response. (c) (4 points) You are given the following information for a UL insurance contract valued under IFRS 17: Contract terminates at the end of year 3. . Death benefit is the sum of the Face Amount and the Account Value. . Locked in discount rate at contract issue is 3%. . Current interest rate is 4%. q, = 50/1000 for all ages and durations. . Contractual service margin at issue is 100. Coverage units are not discounted. Beginning of Year 1 2 Face Amount 1000 1000 1000 Account Value 200 210 221 Calculate the contractual service margin at the end of year 2. Show all work
