The Case for Life Insurance

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When it comes to most forms of insurance, many people understand the importance of having coverage. Whether it’s your car, your home, or other valuable possessions, having insurance means that you’re financially protected should disaster strike. One of the first things you do when you buy a new car is to make sure it is protected before you drive it off the lot. Why? Because if you are involved in an accident chances are good you would suffer financially.

But, what about life insurance?

Although this form of protection works the same way as all other types of insurance, many are reluctant to open the conversation. Perhaps one reason is that life insurance involves the planning for the worst-case scenario – your death. The truth remains however, that if someone, your family or your business for example, would suffer a financial loss due to your death, life insurance is the answer. In fact, life insurance is one of the smartest ways to provide for both yourself and your loved ones.

For today, take stock of your current situation and consider these important reasons why life insurance is needed:

Protect your future insurability

Even if you are just starting out, perhaps single, with no immediate dependents, life insurance should still be considered. If your future includes having a family and all the obligations that go with that then your continuing insurability is important. Selecting an insurance plan now that guarantees your ability to purchase more coverage in the future regardless of your insurability will go a long way in protecting your future family. For young people, the cost of life insurance is minimal and could also provide a long-term saving plan growing tax-free that could be utilized later.

Insure your debts

Unfortunately, debt is a natural part of modern life for most Canadians. The Bank of Canada reports that for every $1 of income earned by Canadians, $1.70 is owed. So, chances are good that you have significant debt, whether it’s tied to credit cards, a car payment, or a mortgage. Ideally, you’ll be able to pay off these debts long before you die. However, should the worst happen, much of that debt will pass to your loved ones.

If you don’t want to burden your family with debt, having a life insurance policy is a wise choice. Not only can the death benefit cover any debt you already owe, but it can help alleviate additional costs, such as funeral expenses.

Provide for your family

If you are married and/or have children, then you owe it to your family to have life insurance. This is especially true if you are the primary breadwinner in the household. Although most people don’t want to think about what may happen if they pass on at a relatively young age, the fact is that you need to make sure that your family is still looked after financially if that does occur. A life insurance policy can offer peace of mind, knowing that your spouse and children will be provided for no matter what.

Benefit from the tax advantages

If you want a more pragmatic reason for getting life insurance, what about the fact that the death benefit is tax-free? This fact is the reason why life insurance is used to provide estate liquidity in paying taxes that become payable as a consequence of death. In addition, there are several ways that you can make your policy a haven for any funds that you don’t want exposed to income tax.

If you invest in permanent, cash value life insurance such as Universal Life or Participating Whole Life, the investment growth in the policy is tax-free should you die. The cash value may also be accessed while you are living.

Transfer assets to children and grandchildren

Establishing cash value policies for your children and grandchildren is a recognized method of both guaranteeing their insurance future while you control the investment portion which is growing tax-free on their behalf. When the time is right for you to transfer the policy to them, the change of ownership occurs free of income tax. This is truly a tax-free intergenerational wealth transfer.

Save for retirement

Although life insurance is typically paid out when you die, there are options to take advantage of the money in your policy while you’re still alive. If you have exhausted other retirement vehicles (e.g. RSP’s, TFSA’s), investing in a Universal Life or Participating Whole Life policy is a method to augment your retirement savings. Universal Life policies will perform based on the equity or other asset class investment options you select. Participating Whole Life policies provide stable, increasing returns which are favourable compared to the risk.

Using cash value life insurance for building wealth to be accessed in the future, is a strategy consistent with proper diversification of assets. The fact that the investment growth in a life insurance policy is tax-advantaged is a definite bonus.

To protect your business

If you own or operate a business, you most likely are aware of the corporate need for life insurance. All significant corporate debt should be insured. In fact, many lenders will insist upon it. Just like all machinery and fixed assets of a business are insured, so should the key people who contribute to the profits be life insured as well. If the company or partnership has a Shareholders or Partnership Agreement, they should be funded with life insurance to provide for the transfer of shares or partnership interest from the beneficiaries of the deceased to the firm.

Using cash value life insurance in a private corporation avoids the punitive tax levied against any passive investments in the corporation which, depending on the province, could be higher than 50%. Tax-free benefits can be paid out of the corporation upon the death of the insured for the benefit of the surviving shareholders or family.

Remember that in addition to you and your family, there may be employees who are dependent on the continued success of your company for their livelihood. Life insurance owned by the business goes a long way to guarantee this.

To equalize your estate

If your estate includes shares in a business that you may have designated one of your children to inherit in lieu of another child, consider equalizing the bequests by life insurance. Another example of where life insurance could be used for estate equalization is leaving your primary residence or other real estate (such as a cottage) to a specific child instead of one or more of his or her siblings. If the other assets being left are not enough to compensate, life insurance should be considered.

To donate to charity

You can provide significantly for your favourite charity using life insurance. Whether it be by taking out a policy to benefit the charity, by transferring an existing policy you no longer need to a charity, or by just naming the charity as a beneficiary to a life insurance policy prior to your death, you or your estate will benefit from significant tax credits. Your legacy will be remembered by the fact that your generous act contributed to the charity’s humanitarian endeavors.

Consider how life insurance can fit into your financial plan

Even though some people have a reluctance to think about life insurance, no matter how you look at it, life insurance is a necessary part of modern life. Without it, you could be condemning your family to financial instability. Whether it’s debt, last expenses, guaranteeing your children’s education, providing for income for your family, protecting your business, or tax and estate planning, life insurance provides tax-free dollars when it will be needed the most. You buy life insurance, not for what it is, but what it does.

Copyright @ 2023 FSB Content Marketing – All Rights Reserved

The Best Way to Insure Your Mortgage

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If you have a mortgage, it makes good sense to insure it. Owning a debt-free home is an objective of any sound financial plan. In addition, making sure your mortgage is paid off in the event of your death will benefit your family greatly.

The question is, should you purchase this coverage through your lending institution or from a life insurance company? A good rule of thumb to follow when searching for advice? Ask an expert!

So, while it might be convenient when completing the paper work for your new mortgage to just sign one more form, be aware that it might be a costly decision.

8 reasons to purchase your mortgage coverage from a life insurance advisor

Cost

Term life insurance available from a competitive life insurance company is usually cheaper than mortgage life insurance provided through the lender. This is especially true if you qualify for non-smoker rates.

Availability

If you have health issues, the lender’s mortgage insurance may not be available to you. This may not be the case with term life insurance, where competitive underwriting and substandard insurance are more readily attainable.

Declining coverage

Be aware that the death benefit of creditor/mortgage insurance declines as the mortgage is paid down. Meanwhile, the premium paid or cost of the coverage remains the same.

With term life insurance, the death benefit does not decline. You decide how much coverage you want to have. This gives you the flexibility to reduce the amount of coverage and premium when the time is right for you. Or keep it should another need arise or in the event you become uninsurable in the future.

Portability

Term Life insurance is not tied to the mortgage giving you flexibility to shift it from one property to the next without having to requalify and possibly pay higher rates.

Flexibility

Unlike creditor/mortgage insurance, term life insurance can be for a higher amount than just the mortgage balance, so you can protect family income needs and other obligations but pay only one cost-effective premium.

When you pay off your mortgage, you will no longer be protected by creditor/mortgage insurance, but term life insurance may continue. Also, unlike mortgage insurance, you are able to convert your term life insurance into permanent coverage without a medical.

The beneficiary controls the death benefit

With creditor/mortgage insurance, there is no choice in what happens to the money when you die. The proceeds simply retire the balance owing on your mortgage, and the policy cancels.

With term life insurance, your beneficiary decides how to use the insurance proceeds. For example, if the mortgage carries a very low-interest rate compared to available fixed-income yields, it might be preferable to invest the insurance proceeds rather than immediately pay off the mortgage.

Can your claim be denied?

Creditor/mortgage insurance coverage is often reviewed when a death claim is submitted. Creditor/mortgage insurance allows for the denial of the claim in certain situations even after the coverage has been in effect beyond that 2-year period.

Term life insurance is incontestable after two years except in the event of fraud.

Advice

Your bank or mortgage broker can advise you on the best arrangement to fund your mortgage but advice on the most appropriate way to arrange your life insurance is best obtained from a qualified insurance advisor who can implement your life insurance coverage according to your overall requirements.

Your mortgage will probably represent the single largest debt (and asset) you will acquire. Making sure your mortgage doesn’t outlive you is the most prudent thing you can do for your family.

Connect with me if you think it’s time to review your current insurance protection. As always, please feel free to share this article with anyone you think would find it of interest.

Copyright © 2023 FSB Content Marketing – All Rights Reserved

Whole Life Insurance – A Whole New Asset Class

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The recent developments in investment markets and the volatile performance that has resulted have brought about a new appeal to an old workhorse. For investors looking for a diversification in their investment portfolio and a more tax-efficient fixed income investment alternative, a compelling argument can be made for the use of Whole Life Insurance.

Why is Whole Life Insurance a good investment?

  • The tax-advantaged steady growth, combined with significant estate benefits, are the primary reasons why Participating Whole Life is now being thought of as a new asset class.

  • Unlike other accumulation policies such as most Universal Life policies, mutual funds and other equity investments, the cash and dividend value of a Whole Life policy cannot decrease as long as premium payments are made.

Who should consider Whole Life Insurance as an investment alternative?

  • Anyone looking for stable returns on their investment portfolio.

  • For those that have corporations and are accumulating surplus, the use of Whole Life in the corporation not only provides the same stable, tax-deferred returns but also provides opportunities for Capital Dividend Account planning.

What Is Whole Life Insurance?

  • It is permanent life insurance protection – meaning it won’t expire before you do!

  • It has level guaranteed premiums for the life of the policy. (Shorter premium paying periods are often available.)

  • It has tax-advantaged cash value growth.

  • It can pay annual dividends (participating whole life).

  • Dividends can be taken in a number of different ways but the option most often selected to provide the maximum tax-advantaged growth is “paid-up additions.”

  • The assets of the participating pool are professionally managed and largely in fixed-income investments. Management fees are extremely low (some as low as 0.07% management fee), and the funds have very little volatility.

  • This combination of guaranteed cash value and the non-guaranteed portion from the dividend account grows tax-deferred. At death, it is paid to the beneficiary tax-free.

Can I access the cash value of the policy?

  • During the lifetime of the insured, the cash values can be accessed by way of partial or total surrender or policy loan.

  • Income tax may be payable on withdrawals. However, one alternative to avoid paying income tax is to use the policy as collateral and borrow from a third-party lender. And if structured properly, the interest on the loan may be tax-deductible.

Favourably compares to a long term, high yield bond

  • Today most portfolio managers recommend that a prudent investor have a diversified portfolio with a significant portion in fixed-income investments, such as bonds, term deposits, etc.

  • Many investment managers suggest one-third to 40% of an investment portfolio be in these types of investments for balanced growth.

Including participating whole life in your portfolio can produce some significant results and reduce overall volatility.

Whether investing as an individual or via a corporation, the significant results that can be achieved by using Participating Whole Life are worth investigating.

Connect with me if you think you would benefit from this strategy, and as always, please feel free to share this article with anyone you think would find it of interest.

Copyright @ 2023 FSB Content Marketing – All Rights Reserved

Estate Equalization for Family Business Owners

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In the planning of their estates, most parents might prefer to leave their assets in equal shares to their children. Often, the only complication in this scenario could be how to divide up the family home.

For owners of a family business, however, the concept of treating the children equally can often be much more problematic. This can especially be the case where one or more children are active in the business while others are not.

For many business owners, most of their wealth is linked to their companies and often there are not sufficient assets left over to equalize the estate. Conflicts often arise from estate plans where the corporate shares are split evenly amongst all the children including those who are not involved and unfamiliar with the business. Burdening children actively involved in the company with a sibling shareholder partner who has no experience or interest in the company can create numerous problems – corporately, financially, and emotionally, which could possibly lead to disputes within the family.

Often, a solution could be leaving the non-business child other assets to compensate. This could result in taxes that might have to be paid (such as in the case of RRSPs, cottages, stocks and other equity holdings) reducing the net value received by that heir. In a perfect world, having the exact amount of cash necessary to equalize the estate would be the ideal situation but often there is not enough liquid cash in an estate to cover taxes and proper equalization of assets, especially where those assets are private company shares.

In this situation, life insurance is often recommended to resolve this problem. Life insurance is a cost-effective instrument that creates tax-free cash and is a widely used vehicle for reducing the total cost of settling an estate.

In Canada, taxes arising when we die can often be deferred by leaving assets to our spouse in our will. Since the taxes become payable when our spouse dies or disposes of the assets, joint last-to-die life insurance is a preferred product in estate planning. By adding an additional amount of death benefit to the joint last-to-die policy used to pay taxes at death, estate equalization can be achieved effectively on a tax-free basis.

Here are reasons why life insurance is extremely beneficial in estate equalization for family businesses:

  • If the first generation did an estate freeze, then the future growth of the company shares passes to the next generation involved in the business. The result is that the non-business children will not participate in that growth. Life insurance could be used to create fair, if not equal treatment, for the children not involved in the business;

  • Life insurance provides a guaranteed result and since proceeds flow via a beneficiary designation the arrangement can be completely confidential;

  • Life insurance proceeds payable to a named individual beneficiary do not result in any probate fees or administrative costs. In addition, the proceeds may be exempt from any creditors or litigant claims;

  • With specific planning, the life insurance designated for estate equalization can be owned and paid for by the corporation;

  • Life insurance proceeds paid to the non-business beneficiary can be received by that person promptly without any delay related to required business filings and elections.

As you can see, for the family business owner who is concerned about providing fair and/or equal treatment in estate distribution to any children not involved in the business, life insurance provides tremendous benefits and advantages.

As always, please feel free to share this article with anyone you think would find it of interest.

Is the Life Insurance Industry in Canada Stable?

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Given the problems encountered by some large financial institutions in the United States, how concerned should we be about the state of the life insurance industry in Canada?

Insurance is one of the most closely regulated industries in Canada. Unlike the United States, in Canada, there is a government organization that supervises all of the federally incorporated and foreign insurers to ensure that these companies operate in a prudent manner. This organization is the Office of the Superintendent of Financial Institutions (OSFI). The major life insurance companies are federally regulated by OSFI (For those companies that are provincially chartered their oversight is provided by the province in which they do business).

Life Insurance companies are decreasing in number

It is a fact that over the past decade the number of life insurance companies operating in Canada has decreased dramatically. This decrease is mainly due to the mergers and acquisitions of the existing companies. For example, those individuals who maintained policies issued by Maritime Life, Commercial Union, North American Life, or Aetna Life, now find themselves insured by Manulife Financial.

The good news? No insured individual has ever lost any contractual benefits due to their insurance company being acquired by another.

Adequate reserves are the key to stability

  • OSFI oversees the stability of life insurance companies by enforcing the requirement that adequate reserves be maintained in order for the companies to meet their future contractual obligations.

  • Reserves are known as “actuarial liabilities” and each company is required to put money aside and to invest that money prudently so that they may pay future benefits on policies that they have sold in the past.

  • These reserves are generated from premiums paid to the insurer and the investment income earned on those premiums. Under the Insurance Companies Act, insurers are required to invest in a “reasonable and prudent manner in order to avoid undue risk of loss.”

  • Also, OSFI requires an amount over and above these reserves, known as the Minimum Continuing Capital and Surplus Requirement (MCCSR) to be maintained by the insurer. OSFI expects that the life insurers maintain an amount equal to 150% of the MCCSR requirement. The MCCSR ratio maintained by member companies of the Canadian Health and Life insurance Association has consistently been significantly higher than the minimum requirement.

More protection for Canadian policyholders

As additional protection afforded a life or health insurance policyholder there are benefits provided to all policyholders through a not-for-profit organization known as Assuris. This organization in a manner similar to the Canadian Deposit Insurance Corporation protects policyholders should their insurance company fail. Assuris guarantees the following:

  • Death benefits – Up to $200,000 or 85% of the promised face value, whichever is higher;

  • Critical Illness – Up to $200,000 or 85% of the promised benefit, whichever is higher;

  • Health expenses (including travel insurance) – $ 60,000 or 85% of the promised benefit, whichever is higher;

  • Monthly income (disability, annuity etc). – $2,000 or up to 85% of the promised benefit whichever is higher;

  • Insurance companies TFSA’s – Up to $100,000;

  • Segregated Funds – $60,000 or up to 85% of the promised guaranteed amount whichever is higher.

So how strong is the Canadian Life Insurance industry?

  • The combination of strong effective oversight and regulation of prudently invested actuarial liabilities have resulted in a robust financial industry enjoying assets of more than $514 billion in Canada, making the industry one of the largest investors in Canada.

  • 10% of all Canadian and Provincial Government bonds and 15% of all Canadian corporate bonds are held by the insurance industry.

  • Canadian insurers also hold $650 billion in assets abroad. The industry in Canada employs over 150,000 people.

Even though the life insurance industry in Canada has gone through significant changes in the past decade or two, the industry remains stable and capable of meeting its contractual obligations in the future.

Don’t Wait Too Long to Convert Your Term Insurance

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If you require permanent life insurance coverage for family, estate planning, business, or tax planning purposes or you just wish to accumulate money in your life insurance program it may be time to look at a permanent, level-cost solution.

Many of us purchase large amounts of low-cost term insurance to cover our needs while we are raising our families or growing our businesses. However, as the saying goes, “there is no free lunch”. Eventually, this low-cost term insurance starts to become expensive and other options should be considered.

If your health has changed and you are no longer able to qualify for a new permanent insurance policy don’t worry, your safety net is the conversion option in your existing policy.

4 reasons to convert your coverage:

  • A change in your health – you are no longer able to qualify for life insurance or you have received a sub-standard rating.

  • A change in your residency – after you obtained your policy you relocated to another country. Most insurers in Canada will not offer new coverage if you are living abroad. Since the conversion feature in your policy is contractual converting to a permanent plan is allowed no matter where you reside.

  • A change in occupation – health is not the only reason an insurer may rate (apply substandard rates) or deny your application for new coverage. If you have changed occupations and now are employed in a more dangerous job, conversion allows you to obtain permanent coverage at standard rates.

  • Convenience – once you have decided that permanent insurance is required converting your existing term insurance is the easiest way of getting it. Usually, just your signature on a conversion form is all that is required.

When is the best time to convert?

  • Sooner rather than later – Over the past few years, insurance companies have been consistently raising their long-term insurance premiums. In this case, age is more than just a state of mind. As you age your premiums increase significantly so it is always best to convert as early as possible. And to add insult to injury, insurance age changes 6 months prior to your birthday!

  • Before your term insurance renews – If you are unable to replace your term insurance at renewal because of health, residency or occupation, your premium to renew will be substantially higher than what you are paying now. Converting to a permanent plan usually makes sense plus the converted premium is locked in and guaranteed for the rest of your life.

  • Before the Conversion Option expires – Conversion options vary but usually policies are convertible up until age 65, 70, or 75. Waiting to convert will cost you more, increasing the risk of it becoming unaffordable when you may need it most. It is important not to let your option pass without full consideration.

The Conversion Option contained in your term insurance policy is a very valuable feature that varies from company to company. It may be appropriate to schedule a review to determine if you have a permanent need for insurance.

Please call me if you think you would benefit from a review of your current insurance. As always, please feel free to share this article with anyone you think would find it of interest.

Has Purchasing Life Insurance Changed Since 2020?

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During this stressful and challenging time, many are wondering what effect COVID-19 could have on their life insurance. Some may be worried that the insurance companies would make changes to their existing policy due to coronavirus concerns, resulting in an increase in their premiums or a restriction to their coverage. It should be reassuring to all that insurance companies are generally not able to change the contractual provisions of the insurance policies that are in force.

This does not mean, however, that future products will not be changed to protect the insurer against unforeseen events, or that the insurance companies are doing business as usual. It is possible that they could make changes to their future products as a result of their experience with COVID-19, but these changes are not likely to be immediate.

Insurance companies rely on actuarial (mortality) tables to price their products. Once this world crisis is over and all the data is processed, there is a possibility that actuarial tables might have to be amended which would necessitate an increase in premiums. This may take some time, but if you consider that the cost of life insurance is going up each year as you get older, one thing is certain, life insurance will cost more in the future.

It may bring comfort to know that in Canada, life insurance companies are required by the Office of the Superintendent of Financial Institutions (OSFI) to run a pandemic scenario each year. It is assumed that pandemics will occur once every 100 years. Considering the last major global pandemic was the Spanish Flu ending in 1919, the modeling would appear to be accurate. As a result of the testing, life companies are adequately reserved for pandemics and since it is already built into the pricing, unlikely to increase premiums solely due to COVID-19.

The immediate challenge in obtaining new life, disability and critical illness protection could be in the area of underwriting – the process of assessing and approving the insured for coverage.

Life Insurance Companies Prefer to Deal with Certainty

While COVID-19 might be like other viruses, it is new and unique. “We just don’t know” is how many medical professionals preface their reply to many questions about this virus. Some have suggested that even after recovering from COVID-19 there might be some delayed impact on your future health.

Going forward, insurance companies may amend some of the questions on their life applications dealing with medical history. This could have a significant effect on disability insurance or critical illness applications. It is possible that we may see an increase in policies issued with exclusions as well as an increase in cost.

Applying for New Coverage Today

Applying for Life Insurance got easier since 2020. Life insurance companies require satisfactory medical evidence in order to issue a life policy at standard rates. This usually involves a paramedical exam (including blood and urine tests) and possibly a report from any doctor who has treated the applicant.

During the height of the Covid pandemic the major providers of paramedical examination services suspended the face-to-face examination which also meant no opportunity to obtain blood or urine tests on the proposed insured.

Fortunately, many life providers increased the amounts of coverage that could be purchased without having to be examined or provide bodily fluids. The insurance company reserves the right to ask for additional information and requirements, but for many applications, a telephone interview was all that was necessary.

Even though social distancing restrictions have been reduced or eliminated most insurance companies have kept their Covid-19 underwriting protocols in place resulting in a less invasive application procedure.

Concerns With International Travel

Life insurance companies require an applicant to disclose any recent or imminent international travel to a country which might be listed on the Canadian government travel advisory site. This would include countries with a continuing or recent outbreak of Covid or other communicable diseases. If you are applying for life insurance and you have visited any of these countries in the past 30 days your application is likely to be postponed for a minimum of one month. If you are planning to visit one of the countries on the travel advisory list, it is possible that your application would be postponed until 30 days after your return.

What Else Could Happen?

Possibly insurers could build into their future policies provisions that would protect them from unexpected or unusual losses. Hopefully, this will not happen, but at this point, nothing is certain.

Should You Buy Extra Life Insurance Now or Wait?

Many people are feeling more financially vulnerable right now and want to make sure they have adequate protection for their families. The bottom line is, if you have been considering increasing the amount of your life insurance coverage don’t let the immediate challenges stop you.

Reach out if you have any questions. As always, please feel free to share this information with anyone you think would find it of interest.

Now May Be a Good Time to Review your Estate Plan

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Prior to the pandemic, the projected deficit for 2020 was estimated to be $20 billion. As a result of Covid-19, the actual deficit in Canada rose to over $300 billion. In 2022, due to pandemic emergency spending being eased the deficit has fallen significantly BUT still sits at almost $100 billion.

Covid-19 and its affects are influencing the way we plan for our future. During the period of lockdown and self-isolation, many people put a great deal of thought as to how to keep themselves and their families safe – not only physically but financially as well.

For some, this meant finally looking at the recommendations they had been considering about their life, critical illness, and disability coverage. For others it became a time to reassess their investment, retirement and savings plans, as we all know the results uncertainty can have on equity markets.

Then, there are the potential long-term consequences that this pandemic may have on estate planning and its primary objective of reducing the impact of taxes during life and at death.

As the national deficit has soared, the logical question remains: where is the money going to come from to help cover this? While the government may be loath to raise taxes, and politically that is something it might wish to avoid, there is no question that increased tax revenues are probably necessary.

For the past year or so, financial pundits have predicted that there may be an increase in the inclusion rate for taxation on capital gains. When the tax on Capital Gains was first introduced in 1972, the inclusion rate was 50%, meaning that amount of the capital gain would be taxed.

Over the years since, the inclusion rate fluctuated from this rate to 66 2/3% and 75%. It was lowered again in October 2000 to the current 50%. With the top personal marginal rate in Canada averaging approximately 50%, this results in the tax payable on a capital gain (realized or deemed at death) to be 25%. It is highly likely, that inclusion rate will be increased soon to help increase tax revenues to combat the huge deficit by which the country is now burdened.

If it increases to 75% (as it was from 1990 to 2000) the effective rate of tax on a capital gain will increase to 37.5%. This assumes that the top marginal income tax rate does not increase and if that is not the case the effective rate would be even higher. This will have a significant impact on the future cost of settling an estate due to the deemed disposition of all assets on death.

There are other steps the government could take to increase tax revenue. The purpose of this article, however, is not to monger fear nor is it to give the government ideas, it is more to alert you to the possibility that taxes will be going up in one form or another.

Why is this important?

It has long been an accepted strategy to provide sufficient estate liquidity to pay taxes due at death from the proceeds of a life insurance policy. In Canada we are fortunate to have permanent life insurance policies that insure an individual for their entire life with a premium that is guaranteed not to increase. It is feasible to be able to use these policies in an effective estate plan.

How will these products be priced in the future?

When pricing the product, life insurance company actuaries, pay particular attention to the prevailing long-term interest rate. For some time now, the long-term interest rate has been extremely low. This resulted in steadily increasing premium costs for permanent life insurance coverage.

Although recent economic circumstances have necessitated the Bank of Canada to increase interest rates, there is great uncertainty as to what impact the large amount of the deficit will have on long term rates.

So far, Canadian life insurance companies have not rushed to lower their premiums as a result of the increases in long term interest rates and it remains to be seen if they will. When the economy stabilizes and the government, under the pressure of the deficit, reduces the cost of its borrowing, low long term interest rates may once again be the norm, potentially increasing the cost of new life insurance.

Other factors that will increase premiums:

  • Aging. Life insurance gets more expensive as you get older.

  • Possible changes in underwriting guidelines could result in higher costs for some individuals.

  • There are also life insurance industry accounting changes coming soon which could result in an increase in the pricing of permanent insurance policies.

How should you prepare?

It is highly probable that taxes, especially taxes on settling an estate, will increase. Combined with the possibility that the cost of new life insurance policies may also increase, now, is a good time to be reviewing your estate planning needs.

As always, please feel free to share this article with anyone you think would find it of interest.

Shielding Your Family From Your Creditors With Life Insurance

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Naming a beneficiary of a life insurance policy provides a significant benefit in planning and protecting one’s estate.  With a named beneficiary, the death benefit is paid directly to the beneficiary and is received tax-free. It bypasses the policyowner’s estate and is not subject to probate or any other administrative fees.  

Creditor Protection at Time of Death

Under provincial life insurance legislation* when a beneficiary is named, creditor proof status is conferred upon the insurance proceeds protecting them from the claims of the policyowner’s creditors.  This won’t apply, however, if the owner of the insurance policy is a corporation.

It should be noted that it is the owner of the policy, not the beneficiary who receives the creditor protection. Once a beneficiary receives the insurance proceeds, those funds are not protected by claims from the beneficiary’s creditors.  

If the beneficiary designation is done before the owner of the policy becomes insolvent or the creditors commence action the policy is protected. The creditors of the policyowner cannot make a claim against the policy proceeds.

One exception to this could be an action brought by a dependent for whom adequate provisions were not made.

Creditor Protection While the Insured is Living

Many life insurance policies have an accumulating cash value or investment account attached to them.   These could include annuities and segregated funds which are primarily investment vehicles.  

So how does creditor protection during the insured’s or owner’s lifetime work?  

Creditor proofing will exist if the type of beneficiary named in the policy is one of the following:

  1. An Irrevocable Beneficiary – while the beneficiary is alive, the owner of the policy cannot change beneficiary or make any material changes to the policy without the Irrevocable Beneficiary’s consent.

  2. A beneficiary named from the preferred class – when a beneficiary is a spouse, child, grandchild or parent, the life insurance contract (including segregated funds) is “exempt from execution or seizure”.

When does a policy not have creditor protection?

There is no creditor protection if the owner is the beneficiary of a policy. For example, if a husband owns a policy on his wife of which he is beneficiary, the cash value of that policy may not be protected from creditors.

If creditor proofing of the cash value of a policy is important, it is best not to have the owner also be the beneficiary.

Contingent Beneficiaries

When naming a beneficiary, it is recommended that a contingent beneficiary or beneficiaries be named.  This will avoid having any future proceeds payable to the estate and exposed to creditor claims should the current beneficiary die.

Cautions and Concerns

Generally, if a life insurance policy was purchased for specific needs, and not in an attempt to avoid creditors, the creditor proof nature of life insurance is strongly protected by law.

However, several recent court cases and legal actions appear to have eroded some of the protection previously afforded in this area.  These actions include;

  • claims of dependents

  • collection efforts of the Canada Revenue Agency

  • property claims resulting from marriage breakdown  

The good news is, for the most part, creditor proofing still works the way it was intended.  With proper planning and advice, life insurance and segregated fund contracts can provide a shield from creditors and potential litigants, giving peace of mind and financial protection to you and your family.

Group Life Insurance – Only Part of The Solution

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Ownership of individual life insurance at its lowest level in 30 years

The Life Insurance and Market Research Association (LIMRA) 2013 study shines a light on a developing problem for Canadian households:

  • Individual ownership of Life Insurance was at its lowest level in 30 years;

  • 3 in 10 households did not have individual life insurance at all.

Why Group Life Insurance may not be all that you need

If your goal is to replace income for your family for more than 2 years, you may want to add an individual policy to your group insurance coverage.

According to the same LIMRA study, on average, households with only group coverage can replace the household’s income for less than 2 years. Households with both group and personal life coverage can replace income for more than 5 years.

While group life insurance provided by an employer is a valuable benefit, it does have limitations when used as the only source for life insurance protection. Some of the reasons group insurance should not be relied on solely for family life insurance include:

  • Group Insurance is not totally portable: If you leave your job, your group life insurance typically does not go with you. While it is true that some of your group benefits may be converted to an individual plan when you leave, the plans available for conversion for life insurance are often extremely expensive and are quite limited. Given that a recent Financial Post survey reports that only 30% of respondents stayed in their jobs for more than four years, this could be problematic. Having additional personal coverage offers a safety net if you find yourself between jobs.

  • Group Life Insurance coverage is often inadequate: Most employee benefit plans provide group life insurance as a multiple of earnings up to a maximum. A common schedule is two times salary and the maximum may leave you underinsured.

  • Renewal of Group Insurance is not guaranteed: It is important to be aware that the contract to provide employee benefits is one between the employer and the insurance company. The employee has little or no control. The coverage may be cancelled by either the company or the insurer. Another concern is that future premiums may not be guaranteed.

  • Group insurance is not flexible for planning: While group coverage is usually a low cost source of life insurance, it should be looked upon as a top-up to personally held life insurance which provides the necessary protection. Proper financial planning will determine how much coverage is required to protect your beneficiaries in the event of your death.

5 reasons why consumers don’t act

The LIMRA study also lists five difficulties that consumers have when making decisions about their family protection options.

  • Difficulty in understanding policy details;

  • Are unfamiliar with life insurance;

  • Difficulty in deciding how much to buy;

  • Uncertain about what type of life insurance to buy;

  • Worried about making the wrong decision.

Contact me if you are one of the many Canadians who would benefit from a review of your options to determine if you have an adequate mix in your insurance portfolio. As always, please feel free to use the sharing buttons to forward this information to anyone you may think would find this of interest.

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