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holistic planning
The five-year duration aligns with recommendations made by the Conference for Advanced Life Underwriting (CALU).
“With medical advancements, it’s hard to get a doc- tor to say, ‘Yes, this person has a life expectancy of less than a year’ or less than two years,” says Kevin Wark, tax advisor for CALU. “By expanding this to five years, we thought that would open the door to more people being able to qualify.”
Guy Legault, CALU’s president and CEO, says he hopes other insurers follow suit with the five-year dur- ation. “In the new year, we’ll be talking to the other companies,” he says.
CALU will also continue to highlight long-term care needs. Legault says not enough is being done as Canada faces a “tsunami” of care costs with an aging population. While programs like BMO’s aren’t a panacea, they help, he says.
Advising clients on the new program
Cooney says it will be up to advisors to examine clients’ circumstances and determine whether or not BMO’s pro- gram is a fit.
Clients must be educated about the program’s terms so they understand what amounts they’ll receive over what time period, the costs (including interest) and what will remain for beneficiaries. Clients must provide writ- ten proof of financial hardship, including expenses that exceed after-tax income and a net worth of $250,000
or less. Policy costs are withheld from each of the five annual advances to the client.
An advisor can consider whether there are other ways to accomplish the client’s goal besides taking out the loan against the death benefit, Wark says, and can help manage the loan if that’s what the client chooses. As such, relative to the client selling their policy (for which there are considerable constraints — see “Advis- ors cautioned about life settlements,” p. 14), with a pro- gram like BMO’s “there is an advice component,” which means clients can make qualified decisions, he says.
Other potential options, Wark says, include accessing the policy’s cash value, borrowing from a family member (repayable from the insurance on death) or borrowing against another asset such as a home. The advisor could also “confirm if there are any ancillary benefits under the policy such as disability waiver of premium or a critical illness benefit that could provide funds to maintain the policy in force and help cover living expenses,” he says.
With BMO’s program, clients should also be aware that, once they’re in the program, the policy can’t be sur- rendered. “There wouldn’t be any changes of ownership or beneficiaries,” Cooney says.
Advisors can consider whether there are ways to accomplish the client’s goal besides taking out the loan against the death benefit
Advance payments in context
In most of Canada, clients don’t have the option of selling their insurance policies on a secondary market.
CALU highlighted issues with the secondary market by explaining the evolution of viatical and life settlements in a practice note published last year that was based on a 2015 research report.
A viatical settlement — when an insurance company or third party purchases a life insurance policy from a terminally ill policyholder — became popular in the U.S. in the 1980s during the AIDS epidemic, typically for policyholders with
a life expectancy of less than two years, the note said. (In Canada during the AIDS epidemic, insurance companies offered collateral loans or advance death benefits, it said.)
As AIDS treatments improved and became less costly, demand for viatical settlements waned. As a result, com- panies offering the settlements expanded the profile of policies being acquired to include those of seniors with decreased life expectancies, the CALU note said. This practice grew into the life settlements market.
Eventually, investor demand for life settlements exceeded supply, and stranger-oriented life insurance (STOLI) arose in the U.S., which was sometimes abused through misrepresentation. Segments of the life settle- ment industry would actively solicit people who were older and uninsured to apply for policies that would be transferred to investors within a short time period.
Growth of the STOLI market was curtailed in the face of lawsuits brought by insurance companies, investors and others, the note said, and most states now have some form of legislation governing viatical and life settlements.
Canada’s life settlement market is relatively small because most provinces have anti-trafficking provisions that prohibit creating a marketplace for selling insurance policies (except back to the originating insurance company).
Advance access to death benefits was first made avail- able to terminally ill Canadian policyholders in 1988, says commentary from the Canadian Life and Health Insurance Association. “Canadian insurers are international lead-
ers in this area as this initiative has been copied widely around the world,” it said.
Still, while viatical settlements and STOLI have been more common in the U.S., Cooney says there were some in Canada.
About five years ago, Wark says CALU observed growth in Quebec’s life settlements market, which is among the handful of provinces without anti-trafficking provisions for life insurance. “Investor groups were act- ively soliciting policies,” he says. “CALU’s members and their clients were being approached to provide life insur- ance policies to investor groups.”
That’s when CALU decided to research the life settle- ments market in Canada and the U.S. In addi- tion to summarizing the research, the practice note explains insurance trafficking rules and how advisors can be at risk if they go offside of those rules.
While Canada overall has seen little develop- ment in the life settlements market, the evo- lution of advance death benefits is a welcome option for clients in need, where suitable. AE
When a client seeks your advice on selling their life insurance policy as part of a life settle- ment, consider the following:
› Why is the client con-
sidering this sale? What has changed in their situation?
› What other options, such
as an advance death benefit
or collateral loan, are avail- able that would allow the policy- holder to retain part or all of
the policy and related death benefit?
› Does the activ- ity fall within provincial legislation that prohibits traf- ficking in life insurance?
› Is the life settle- ment company reputable and will it keep its promises?
› Are all fees and costs being properly dis- closed to the policyholder?
› How will pro- ceeds from a policy sale be treated for tax purposes?
› Will the activity cause the life insurer to cancel the advisor’s contract?
› What liability could arise from the activity, and would it be cov- ered by errors and omissions insurance?
Source: CALU
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