May 2009 - Larry Balback Insurance Strategies for Estate Planning - 3 Case Studies


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May 2009 - Larry Balback Insurance Strategies for Estate Planning - 3 Case Studies

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  • Thank you for taking the time to join us today. While shared ownership (or split dollar) has been applied to life insurance for some time, it has only recently been applied to critical illness insurance. After this session, you may find you have still another reason to talk to your clients and prospects about critical illness insurance.
  • In addition to our usual disclaimers, it is especially important to involve your client’s professional advisors due to ongoing uncertainty about the tax treatment of c ritical i llness insurance.
  • Here’s the agenda for today When we’re finished you’ll know What’s in it for you and your customers Where to look for prospective buyers How it works Planning considerations, and Steps required to implement a shared-ownership agreement
  • Shared ownership is really a simple concept that’s been around for a long time 2 or more parties agree to share a single asset because they only want some of the benefits And usually only want to pay for what they use Lots of non-financial examples Time shares or “fractional ownership” as its now being marketed Private airplanes are often shared Financial example – strip bonds where one party owns the coupons (income) and another owns the principal repayment.
  • In the case of CII – the employer owns and pays for the basic coverage and policy fee If the insured is diagnosed with a covered critical illness and survives the specified period, the company will receive the sum insured The insured owns and pays for the ROP benefit(s) If there is no critical illness claim and the policy is in force for a specified period, the parties may agree to cancel the policy. Insured receives sum of total premiums paid by both parties.
  • Why do this? Protect business in case of critical illness of key EE Provide potential windfall to employee – conditional on staying with the company What’s in it for you? Would you like to have more business owner clients? Here’s a subject that’s easy to talk about with them. For those who sell a lot of group insurance, this is an easy way to transition from a group sale to multiple individual sales
  • Who should you talk to? business owners – will be the ultimate decision makers Don’t forget incorporated professionals who are employees of their corporations This varies by province Existing group clients for those who sell group Good transition to personal sales
  • Here’s a typical customer profile: Any business that needs corporate-owned CI insurance for Key person protection or To fund a buy-sell arrangement How many business owners do you know that haven’t updated their buy-sell agreement? How many don’t even have a provision for critical illness?
  • Here are the steps needed to set up and implement a shared ownership arrangement using Sun Critical Illness Insurance: Analyse needs and recommend CII with shared ownership Apply jointly for the policy Must include ROPC/E benefit – ROPD optional Premium waiver not available with shared ownership SLF can separate premium for billing purposes E.g. 2 PAC plans or 2 annual premium notices When approved: Have lawyer draw up agreement Execute agreement Send copy of agreement to Sun Life Financial
  • Your clients should consult professional advisors to set this up properly Tax area is unclear, meaning there is some degree of tax risk in this strategy Tax outcomes rely on critical illness meeting definition of A&S insurance The CRA technical interpretations and administrative notes suggest ROP benefits may change the character of the basic policy (other than in QC) Only QC civil code confirms and provides that riders such as ROPC/E don’t change character CII does not appear to meet BC definition of A&S (only policies that reimburse expenses appear to comply) Each party must pay true cost of benefits – ROP benefits must be separately priced, not bundled in Also important to remember that only one benefit will be paid under the policy – either the CI benefit or the ROPC/E – but not both See the reference paper on Critical Illness on our advisor website
  • No mechanism like the CDA to get CII benefit out of the corporation Taxed either as dividend or salary/bonus If insured were able to cancel policy on own, ROPC/E benefit could be taxable on the basis that the action has potentially “impoverished” the company. E.g. if insured has CI event after cancellation, company could have received benefit instead of insured. Therefore important to have in agreement that both parties sign to cancel the policy. (This will be SLF business practice in any event). If insured is a shareholder, the CRA is more likely to audit. Some feel that a shared ownership arrangement with a Health & Welfare Trust is a way to get around the rule that restricts the inclusion of ROP benefits in a H&W trust A possible outcome is that the CRA may cancel the deductibility of all contributions to the trust if ROP benefits are deemed to be part of the policy. This is a big risk for a relatively small reward.
  • There are some key considerations when setting up a shared ownership strategy Both parties need independent legal advice Must consider all contingencies such as: Non-payment of premiums by either party Termination of employment Possible transfer of company owned portion to individual May be tax consequences to insured Possible transfer of individually owned ROP benefits to company Bankruptcy or winding up of company Sample agreement available on advisor site to bring to lawyer together with checklist from illustration
  • Let’s look at a quick case study to see how this could work: Key employee is a 45 year old male non-smoker Company needs $250,000 key person coverage Parties apply for $250,000 Sun Life Financial critical illness insurance with ROPC/E payable in 15 years On approval, set up the shared ownership agreement
  • Here’s the cost to each party. If Maury has a CI event covered under the policy, the company receives $250,000 tax-free If there is no CI event, in 15 years, the parties could agree to cancel the policy Maury would receive a guaranteed sum of $84, 275 Note that this ROPC/E benefit is higher than a comparable benefit under our T75 or Lifetime plans Although the IRR on Lifetime and T75 are higher, the premiums are lower initially and the ROPC/E benefit is highest under the T10 policy Ultimate policy choice may depend on several factors: Is insured a shareholder or employee – more likely to be T10 for employee Is coverage needed for key person or for buy-sell – more likely to be T75 or even lifetime if funding buy-sell The IRR is the after-tax rate of return required to turn the premiums paid by each party into their respective benefits.
  • These results are impressive no matter which one happens. The IRR is the after-tax rate of return required to turn the premiums paid by each party into their respective benefits.
  • Your insurance specialist is your first source of sales support Sun Life Financial has a complete set of materials to support your sales using this concept Check out our advisor site for information on all our sales concepts
  • May 2009 - Larry Balback Insurance Strategies for Estate Planning - 3 Case Studies

    1. 1. A businesscontinuation/executivebenefit strategy
    2. 2. Welcome Disclaimer• This presentation is intended for information purposes only.• Neither Sun Life Assurance Company of Canada nor the presenter has been engaged for the purpose of providing legal, accounting, taxation, or other professional advice.• No one should act on the examples or information without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of the specific case are considered.
    3. 3. Agenda• Sharing defined• Strategy summary• Why do this?• Spotting opportunities• How does it work?• Planning considerations• Case study• Steps to implement• Sales & marketing support
    4. 4. The idea Sharing defined• Two parties share ownership, costs and benefits of a single asset• Neither party wants it all• Non-financial examples: • Time share vacation property • Private airplanes• Financial examples: • Strip bonds
    5. 5. The concept Sales strategy in a nutshell1. Company owns basic coverage • payable on diagnosis of a covered critical illness; and • surviving the specified period2. Insured owns return of premiums (ROP) • payable if there is no claim during specified period • 15 years or • policy anniversary after age 65
    6. 6. Win-win-win solution Advantages to employer, employee and you• Employer – risk management • Protect company against loss of key employee(s) • Fund key person replacement and/or buy-sell arrangements• Employee • Potential tax-free return of total premiums• Advisor • Reinforce your value to existing clients • Foot-in-the door with business owners
    7. 7. Spotting opportunities Where to focus your efforts• Owner/managers of small to medium-sized businesses • Incorporated professionals who are employees• Any business with one or more key employees • May include shareholder employee• Existing group clients • Transition to individual sales
    8. 8. Who to target Typical client profile• Ages 30 – 60• Need for corporate-owned CI insurance • Key person protection • Fund buy-sell agreement• Any business that hasn’t updated their buy-sell agreement
    9. 9. Steps1. Needs analysis & recommendation2. Apply for a critical illness insurance policy as joint owners • Include ROPC/E benefit3. On approval: • Lawyer draws up a shared ownership agreement • Company & insured sign agreement • Copy of agreement to Sun Life Financial
    10. 10. Tax considerations 1. Consult with tax advisors • Greatest certainty in QC, least in BC • Each party must pay true cost of their respective benefits • ROP benefits must be priced separately, not bundled 2. Only one benefit • CI benefit OR ROPC/ESee reference paper
    11. 11. Our apologies… More tax stuff• No Capital Dividend Account • CII basic benefit tax-free to corporation but taxable if paid out• Both parties must agree to cancel policy • Possible adverse tax consequences if only ROP owner cancels• Less risk if insured is employee and not a shareholder• High risk to sharing with H&W Trust
    12. 12. Legal points to ponder• Two contracts – policy & shared ownership agreement • Both parties need independent legal advice • Consider all contingencies• Eos has an agreement checklist • Sample agreement on SLF advisor siteSee sample agreement at
    13. 13. Case in point• Maury Blaas • M45 n/s • Key person• Sun CII – Term 10 • $250,000 • ROPC/E – 15 yrs
    14. 14. Maury’s story [cont’d…]• Company pays: • $1,972.50 first 10 yrs • $4,247.50 next 10• Maury pays: • $1,700 first 10 yrs • $5,262.50 next 10• If policy cancelled after 15 years: • $84,275 year 15 • Internal Rate of Return (IRR) 10.16%
    15. 15. The resultsNote: Only one of these benefits will be payable. ROPC/E Age 60 CII Benefit Benefit Payment $250,000 $84,275 IRR 23.1% 10.16%IRR is after-tax rate of return premiums would haveto earn to pay these benefits.
    16. 16. Sales support• Marketing materials • Customer fact sheet • Advisor case study • Reference paper • Critical illness advisor guide•
    17. 17. Corporate Owned Life Insurance Shareholder A Shareholder B Life Life Insurance nceInsura 50% 50% owner owner beneficiary OPCO beneficiary
    18. 18. Corporate Owned Life Insurance - Advantages• Often lower tax rate than individual• Easy administration• Potential partial premium deductibility (collateral ins.)• Death benefit tax free to corporation• Mortality gain flows through capital dividend account (proceeds less adjusted cost basis)
    19. 19. Corporate Owned Life Insurance - Disadvantages• Creditor exposure• Issues if no shareholder agreement• Tax issues when transferred to life insured. (retirement, sale, etc.)
    20. 20. Transfer of Ownership Corporate Owned Life Insurance Factors considered in determining value: (IC 89.3 paragraph 40)• Cash surrender value• Policy loan value• Face value of policy• State of health of insured and life expectancy• Conversion privileges• Other policy terms (riders, A.D.B.,)• Replacement value.
    21. 21. Shared Benefit Life Insurance Owner Owner Shareholder A Shareholder B Life Life nce InsuranceInsura Insurance 50% 50% Insurance Agreement Agreement y ar Be fi ci ne e) ne OPCO bl(ir fic iar Be oc a r y v ev re o ca b (ir le)
    22. 22. Shared Benefit - Advantages• Corporation pays premium (or part)• Death benefit tax free to corp. (ACB?)• Creditor protection during lifetime• Different plans for each shareholder• Easy transition at retirement, sale etc.
    23. 23. Shared Benefit - Disadvantages• Need for insurance agreement – lawyer• More administration issues• No premium deductibility? (collateral ins.)
    24. 24. Shared Benefit Life Insurance Shareholder A Shareholder B Owner Owner Holdco A Holdco B Life Life nce InsuranceInsura Insurance Insurance 50% 50% Agreement Agreement Be y ne OPCO iar fic ic )(ir iar ef le r ev y en ab o ca B oc b le) rev (ir