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Definition of Replacement

Replacement Image 1

Replacement

This subject of replacement of existing policies is covered because sometimes existing life insurance policies are unnecessarily replaced with new coverage resulting in a loss of valuable benefits. If someone suggests replacing your existing coverage, insist on having a comparison disclosure statement completed.
The most important policies to examine in detail are those which were issued in Canada prior to December 2, 1982. If you have a policy of this vintage with a significant cash surrender value, you may want to consider keeping it. It has special tax advantages over policies issued after December 2, 1982.
Basically, the difference is this. The cash surrender value of a pre December, 1982 policy can be converted to an annuity in accordance with the settlement options in the policy and as a result, the tax on any policy gain can be spread over the duration of the annuity. Since only the interest element of the annuity payment will be taxed, there will be less of a tax impact on the annuitant. Policies issued after December 2, 1982 which have their cash surrender value annuitized trigger a disposition and the annuitant must pay tax on the total policy gain immediately. If you still decide to replace existing coverage, don't cancel what you have until the new coverage has been issued.



Related Terms:

Replacement cost

Cost to replace a firm's assets.


Replacement cycle

The frequency with which an asset is replaced by an equivalent asset.


Replacement value

Current cost of replacing the firm's assets.


Replacement-chain problem

Idea that future replacement decisions must be taken into account in selecting
among projects.


Stock replacement strategy

A strategy for enhancing a portfolio's return, employed when the futures
contract is expensive based on its theoretical price, involving a swap between the futures, treasury bills
portfolio and a stock portfolio.



Replacement Value

The amount necessary to duplicate a company's assets at current
market prices


replacement cost

an amount that a firm would pay to replace an asset or buy a new one that performs the same functions as an asset currently held


Replacement Image 2

Replacement cost

The cost that would be incurred to replace an existing asset with one having the same utility.


Replacement Capital Expenditures

Capital expenditures required to replace productive
capacity consumed during a reporting period.


Replacement parts

Parts requiring some modification before being substituted
for another part.


Replacement Value

Cost of acquiring a new asset to replace an existing asset with the same functional utility.


Q ratio or Tobin's Q ratio

Market value of a firm's assets divided by replacement value of the firm's assets.
Quadratic programming Variant of linear programming whereby the equations are quadratic rather than linear.


Securitization

The process of creating a passthrough, such as the mortgage pass-through security, by which
the pooled assets become standard securities backed by those assets. Also, refers to the replacement of
nonmarketable loans and/or cash flows provided by financial intermediaries with negotiable securities issued
in the public capital markets.


Tobin's Q

Market value of assets divided by replacement value of assets. A Tobin's Q ratio greater than 1
indicates the firm has done well with its investment decisions.


mark to market

Refers to the accounting method that records increases
and decreases in assets based on changes in their market values. For
example, mutual funds revalue their securities portfolios every day based
on closing prices on the New York Stock Exchange and Nasdaq. Generally
speaking, however, businesses do not use the mark-to-market method
to write up the value of their assets. A business, for instance, does not
revalue its fixed assets (buildings, machines, equipment, etc.) at the end
of each period—even though the replacement values of these assets fluctuate
over time. Having made this general comment, I should mention
that accounts receivable are written down to recognize bad debts, and a
business’s inventories asset account is written down to recognize stolen
and damaged goods as well as products that will be sold below cost. If
certain of a business’s long-term operating assets become impaired and
will not have productive utility in the future consistent with their book
values, then the assets are written off or written down, which can result
in recording a large extraordinary loss in the period.


Salvage Value

The value of a capital asset at end of a specified period. It is the current market price of an asset being considered for replacement in capital budgeting.



 

 

 

 

 

 

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