Canada: Life Insurance – Uses, Tips And Traps

Article by Crista C. Osualdini

Life insurance is a familiar product to many of us and can be an element of estate planning that should not be overlooked. It is typically used to either create or preserve wealth and can be used in a variety of ways in structuring an estate plan. For example:

Creating Liquidity to Pay Debts –

When completing your estate plan, an analysis should be done of the nature and extent of anticipated debt and expenses upon death. In Canada, upon death we are notionally deemed to have disposed of all our assets for tax purposes. This means that any unrealized capital gains at the time of death will be taxed. This can often result in a significant tax bill – family cottages often being a prime example. Life insurance can create the necessary liquidity so that assets do not need to be sold in order to pay associated tax debt or any other forms of debt.

Creating Wealth Outside the Estate –

When developing an estate plan, the law requires you to ensure that certain persons are properly provided for. These people include, but are not limited to, spouses, minor children and dependent adult children. This can become problematic, especially in blended family situations, where there is a need to provide for a second spouse, but also a desire to provide for non-dependent adult children of the first marriage. Life insurance can be used to create wealth and increase the “size the pie” that is available for persons you would like to provide for.

Funding Buy/Sell Agreements in Privately Held Corporations – It is typical that in a small business upon the death of a shareholder, either the remaining shareholders or the corporation will purchase the deceased shareholder’s shares. This can be a substantial cost. The expense could interfere with the company’s ability to carry on business with the added cost of new financing or reduced capital availability. Life insurance can be a tool used to fund the share purchase so that the impact of the shareholder’s death on the operation of the corporation is minimized.

When working with life insurance, the following are 10 Tips and Traps from my experience in working with individuals to develop their estate plan:

  1. In light of the aging baby boomer generation, it is anticipated that over the course of the next thirty years there will be an unprecedented inter-generational wealth transfer. It will likely follow that estate litigation will be on the rise. Consider naming beneficiary on your life insurance other than your Estate, this will assist in protecting it from claims of disappointed beneficiaries and creditors.
  2. Consider the need for life insurance earlier rather than later. Life insurance is often prohibitively expensive later in life and thus renders it an uneconomical solution.
  3. If you name your Estate as the beneficiary of your life insurance, it will be subject to probate fees. While Alberta currently has low flat rate probate fees, this may not always be the case. In certain Provinces, probate fees are calculated as a percentage of estate value.
  4. In addition, if you name your Estate as the beneficiary of your life insurance, your executors will likely need to wait for a Grant of Probate to be issued prior to the insurance provider releasing funds. At the time of writing, a Grant of Probate takes approximately three to four months to issue at the Court of Queen’s Bench.
  5. Make sure your beneficiaries are aware that you have life insurance in place. Or alternatively, provide this information in your Will. If your executor or beneficiaries do not know that you have life insurance in place, it is possible that it may go unclaimed upon your death.
  6. When life insurance is used to fund a corporate buy out of share upon death, make sure your shareholders’ agreement sets out whether those funds will be paid through the Capital Dividend Account and thus on a “tax free” basis to the estate of the deceased shareholder. If this is unclear in the agreement, it can lead to litigation as to who receives the tax benefit generated by the payment of life insurance to the corporation.
  7. Ensure that your beneficiary designations are not in violation of any existing separation or divorce agreements. If they are, this will likely lead to litigation. The result of such litigation could be that a remedial trust is imposed by the Court over the insurance proceeds for the benefit of whomever the insurance was supposed to be paid pursuant to the agreement.
  8. Make sure initial and any subsequent amendments to beneficiary designations are done correctly. The Insurance Act sets out the requirements for making a beneficiary designation  amendment and must be complied with. Far too often these designations are completed incorrectly which can lead to expensive and time consuming litigation. Make sure the designation is signed by you and specifically names the insurance policy that you are referring to and who you are naming as the beneficiary.
  9. Insurance can be a great tool to use when you are desirous of making a charitable donation upon death. There are different ways to structure such a gift, so ensure you receive tax advice on what method is best for your circumstances.
  10. For couples with young children, an important consideration in estate planning is appointing guardians for the children in the event of the death of both parents. Part of this discussion usually pertains to where the children would live. Quite often parents will want to maintain continuity for the children and for them to continue living in the family home. Do not forget about mortgage insurance and considerations as to how the Estate will be able to afford to continue to maintain the family home.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Tech and regulations among 5 forces shaping life insurance in 2017

Quickly-evolving technology has emerged as a dominant force shaping the year ahead in Canada’s life insurance sector, according to EY’s 2017 Life Insurance Outlook. This is just one of the 5 forces for life insurers to rein in this year, along with increasingly complex regulations, a growing talent crunch and customer-driven innovation.

“Life insurers face difficult challenges this year that will add pressure to an industry already in a period of sustained transformation,” says Janice Deganis, EY’s Insurance Leader. “Insurance leaders should be finding ways to unlock value from tough new regulations, remain laser-focused new technologies, like robotics, and at the same time, attract new talent.”

Talent has emerged as a new force in EY’s ranking, compared to last year’s outlook.

EY has identified five external forces shaping Canada’s life insurance sector in 2017, and a roadmap to help guide insurers through the shifting landscape ahead.

Impact of external forces on the Canadian life market in 2017:
(0 = Very low impact, 10 = Very high impact)

Regulations (9) – Ever-increasing regulations and new accounting standards will challenge insurers to find ways to unfold value and get out ahead of the potential opportunities these changes represent.

Technology (9) – Digital technologies continue to redefine life insurance, from the potential for cost savings through robotics and analytics, to the growing influence of InsurTechs, to the opportunities artificial intelligence and block chain may offer.

Economic environment (8) – Continued global economic weakness, combined with stubbornly low interest rates, mediocre growth in Canada and political changes in the US and EU ratchet up the pressure on insurers’ margins.  

Customer expectations (7) – Customer expectations continue to shift towards a more digital, personalized and seamless experience. Simpler products and a holistic approach will become prerequisites of true customer centricity.

Talent (7) –Canadian insurers face a mounting talent shortfall in 2017, fueled by growing retirements among insurance professionals and the impact of digital transformation, which requires new skills in data science, cyber-risk management and blockchain innovation.

Roadmap for transformation: priorities for 2017

Leading life insurers will focus on the following path to change:

1. Focus on unlocking value from a complex regulatory environment.
2. Prepare for more economic uncertainty ahead.
3. Remain laser-focused on customer-driven innovation
4. Embrace the technologies that can improve top- and bottom-line performance
5. Rethink strategies to attract, develop and retain talent.

“Vigilance in both understanding and adapting to these emerging forces will be the key for positive transformation of Canada’s insurers,” explains Deganis. “Those who prepare for the economic uncertainty ahead and push ahead with thoughtful innovation will be better positioned to get ahead.”

Read the full 2017 EY Life Insurance Outlook and the 2017 EY P&C Insurance Outlook.

About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

For more information, please visit ey.com/ca. Follow us on Twitter @EYCanada.

EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

SOURCE EY (Ernst & Young)

Exclusive: Desjardins to sell Western Financial unit – sources

Excerpted article By John Tilak and Matt Scuffham

TORONTO (Reuters) – Canadian financial services group Desjardins is selling Western Financial, an insurance brokerage unit in Western Canada, six years after acquiring the business, sources familiar with the sale said.

The asset, which includes a brokerage and a life insurance business, could be worth about C$500 million ($381 million), according to three sources, who declined to be named as the matter is private. The sources spoke over the past week.

Desjardins said on Friday it doesn’t comment on rumors.

Canada’s property and casualty insurers have been consolidating in response to challenging market conditions due to low interest rates, volatile investment returns and sluggish economic growth.

The retreat from a business focused on some of the oil-producing provinces comes after a prolonged slump in oil prices began taking a toll on financial service providers exposed to the region. Quebec-based Desjardins is the biggest customer-owned financial services group in Canada.

Desjardins acquired Western Financial Group for C$443 million in 2011. Western Financial was a publicly listed company for 15 years until the acquisition.

Economical Mutual Insurance Co this month bought Desjardins Group’s pet insurance business, Western Financial Insurance Co, which was part of Western Financial Group.

British insurer Aviva plc’s (AV.L: Quote) Canadian division last year acquired the general insurance division of lender Royal Bank of Canada (RY.TO: Quote) for C$582 million ($443.06 million).

Desjardins, which snapped up State Farm Canada’s businesses in property and casualty and life insurance in 2015, is now one of the biggest property and casualty insurers in Canada.

Canadian property and casualty insurer Intact Financial Corp IFC.TO, Aviva and U.S. insurer Travelers Cos Inc TRV.N are among those that may be interested in Western Financial Group, the sources said.

Intact, Aviva and Travelers Cos did not immediately respond to requests for comment.

Insurance companies looking to strengthen their distribution network are likely to find it particularly appealing, the sources said. Pure-play brokerages could also take a look, the sources said.

The potential buyers could also spin out the life insurance business after completing a deal, one of the sources said.

Desjardins is looking to sign a deal over the next few months, the sources said.

The insurer reported a 12 percent rise in earnings before payouts to members in its latest quarter, with strength in wealth management, life and health insurance businesses making up for weaker growth in its property and casualty business.

(Reporting by John Tilak and Matt Scuffham; Editing by James Dalgleish)

 

Life insurers’ new genetic test policy called an 11th hour stalling attempt

The decision by Canada’s life insurers to stop requiring genetic testing for the vast majority of new policy holders is being dismissed as a pre-emptive strike against pending federal legislation that the industry strongly opposes.

Supporters of a Liberal private member’s bill that would explicitly forbid discrimination on the grounds of genetic test results say the Wednesday, January 11, 2016 industry announcement is little more than an 11th-hour stalling attempt that will wind up being redundant if the bill becomes law.

The Canadian Life and Health Insurance Association announced that they will soon bar insurers from requesting or using genetic test results for policies valued at up to $250,000.

That threshold represents about 85 per cent of all policies, the association said, adding the new rules would go into effect on Jan. 1, 2018.

Bev Heim-Myers, chair of the Canadian Coalition for Genetic Fairness, said the association’s voluntary move should not be seen as a substitute for the legislation that’s set to undergo third reading in the House of Commons in the coming weeks.

“For years and years, the insurance industry has had an opportunity to embargo the use of genetic test information, and they have chosen not to,” she said. “So now, in the 11th hour, when we have legislation on the table, …they have come forward with this? It seems that the timing is to discourage the legislation from going through.”

Bill S-201, which received unanimous support from the senate last May, features legislation that would make it illegal to request or use genetic information against somebody’s will.

The bill would also add genetic characteristics as a prohibited ground of discrimination under the Canadian Human Rights Act, enshrining it alongside race, religion and other long-standing civil rights.

Insurance Association President Frank Swedlove did not deny that the organization has opposed the bill and would not lament any potential failure in the House of Commons.

He argued that banning genetic testing would drive the cost of insurance higher, since Canadians would be relatively free to apply for higher-value policies if there were fewer restrictions in place.

The industry has spoken up against the bill in order to try and keep the cost down for consumers, he said.

Swedlove said the new rules around genetic testing are a way to address their concerns with the bill while acknowledging Canadians’ fears about the way their genetic material could be used.

“If the issue is to ensure that the average Canadian family can continue to buy insurance, then this commitment does provide that,” he said. “What Bill S-201 would do is have the impact of increasing, significantly, the cost of insurance and making it unaffordable for a lot of people. So if this action discourages Bill S-201 from being passed, then I would see that as being positive.”

Heim-Myers said the new rules are discriminatory, since they still require people seeking coverage of more than $250,000 to undergo testing. This, she said, could marginalize those with more complex health needs or chronic conditions who frequently need more extensive coverage.

The office of the federal privacy commissioner has also questioned the use of genetic testing results in the insurance industry.

A 2014 report on the issue noted privacy implications that can arise from the collection and use of genetic information.

“Based on our analysis, it is not clear that the collection and use of genetic test results by insurance companies is demonstrably necessary, effective, proportionate or the least intrusive means of achieving the industry’s objectives at this time,” the report said.

There are now hundreds of genetic tests available to help spot genes known to increase a person’s risk of developing certain medical conditions.

But some people may decline tests for fear a positive result may mean they could face discrimination from insurance companies or their employers.

Heim-Myers argues that privacy laws would have the added benefit of advancing scientific research, since more Canadians may be willing to agree to genetic testing if they felt their information was secure and could not be used against them.

 

Life insurance explained in (exactly) 250 words

Source: Amy Danise – nerdwallet.com

What life insurance is: a policy that pays out if you die.

When you need it: if your death would cause financial hardship to someone, like a spouse.

How it’s priced: based on life expectancy. Any factor reducing life expectancy, like heart disease, will likely mean a higher price.

Comparing prices: Even if you have medical conditions, compare life insurance quotes from several companies. Insurers are competing for your business.

When you apply: A life insurance medical exam is often required. Insurance companies typically also look at your medical records, use prescription-drug databases to see what medicines you take, pull your driving record, and access a database with your answers for previous life and health applications.

Easiest life insurance to understand: term life insurance. You choose only the policy amount and the length.

Cash value life insurance: policies that contain an account that can build up money over time. Eventually you can withdraw the money or take a loan against it. Policies with cash value include whole life, universal life and variable universal life. Term life insurance has no cash value.

Once you buy: Your rates can’t go up once you have a policy, even if you develop new health conditions.

Life insurance payout: called a death benefit. It will go to the person (or people) you designate as the beneficiary.

Note on minor children: They cannot receive life insurance money directly. If you’re buying life insurance to benefit children, you should set up a life insurance trust for them.

 

Sun Life is now offering life insurance to HIV positive Canadians

By Alexandra Posadzki

THE CANADIAN PRESS

TORONTO _ Sun Life Financial Inc. (TSX:SLF) is now selling life insurance to people living with HIV, as well as overhauling its life insurance application process.

In in order to make it easier, the insurer says it will no longer routinely require saliva, urine or blood samples from those applying for critical illness or life insurance.

“Using tools we have these days around big data and predictive analytics, we’ve been able to asses our own experience and believe that we’re at a place today where the information that we’re gleaning from the applications themselves are sufficient for the vast majority of the policies that we’re issuing,” Sun Life Financial Canada president Kevin Dougherty said.

The company said in a statement that over three quarters of its critical illness insurance applicants and half of life insurance clients will benefit from the changes.

Sun Life’s decision to offer more than $3 million in life insurance to people with HIV follows a similar move by Manulife Financial Corp. earlier this year.

Back in April, Manulife announced plans to offer life insurance of up to $2 million to people who are HIV-positive.

Manulife said at the time that it was the first Canadian company to offer such coverage.

Dougherty said Sun Life decided to start providing coverage to people with HIV because the medical prognosis for the condition has improved.

“At one point it was an incurable condition with very, very difficult outcomes,” Dougherty said.

Now, thanks to medical advancements, people with HIV can live well into their 70s, as long as they’re adhering to their prescribed treatment plans, Dougherty said.

“This is a reflection of the progress that’s been made there,” Dougherty said.

CP3

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