The race is on for advisors selling universal life insurance policies. As of January 1, 2017, these policies will shed many tax advantages. Insurers are adding new resources to handle the last-minute surge in insurance applications.
Advisors with corporate or high net worth insurance clients are feeling the pressure rise. Imminent changes to Canadian income tax law will affect the taxation of life insurance policies, especially the universal life level cost product.
“Level cost universal life insurance policies may offer a much greater financial benefit if they are issued before January 1, 2017,” Andrée Couture, vice-president, Sales - Quebec at PPI Advisory, told The Insurance and Investment Journal in an interview.
Couture listed three features that will be hit particularly hard by the new taxation: the accumulation fund of the policy, credit in the capital dividend account (CDA), and the deduction of part of the insurance cost, called net cost of pure insurance (useful when the policy guarantees a loan).
Insurers have set early deadlines for receiving insurance applications, and hope to be able to process all cases by year end. For example, Desjardins Insurance set a target date of September 30, and iA Financial Group opted for October 1. Manulife and Canada Life (including Great-West and London Life) announced target dates of October 30 and November 1.
Empire Life wants to receive applications by October 14, to raise the chances of issuing the policies in time, namely by December 31, it said in a notice to advisors. It warns that it cannot backdate any policies issued in 2017.
The insurers make no promises. “We will do our best to issue policies in 2016, but cannot guarantee that all applications received this year will be approved and issued in 2016 […] Underwriting requirements should be completed and submitted on or before November 30, 2016 to allow time for our Underwriting team to review and issue the policy on or before the December 31, 2016 deadline,” the notice says.
Several sources close to distribution networks say they fear a bottleneck at insurers. Empire Life acted quickly to give its advisors time to comply. “We published a three months’ notice in July. Usually, the insurers give two or three weeks’ notice,” says Peter Wouters, director, Tax & Estate Planning at Empire Life.
The insurer announced in late July that two whole life products adapted to the new rules would be launched on October 14. At the same time, the company said it would withdraw its universal life insurance product Trilogy, which will be replaced.
Most insurers extended the target date to let advisors send their underwriting departments additional information.
Possible stumbling blocks include “medical statements, financial information, etc. And then we’ll do whatever possible to issue the policy on time. Anything can happen. Something could go wrong. A new requirement can come if we received a statement that mentions a condition that we’ve never heard of,” Wouters explains.
Insurers are also hiring more staff to handle the wave of insurance applications that will inevitably grow as the target dates approach, and to meet the additional requirements. “We’re seeing quite an increase in applications. Our back-office and underwriting department are adjusting to that because we’re hiring new staff,” Wouters points out.
A similar scenario is unfolding at Canada Life. “We can’t guarantee anything, so we aren’t. What we say is new business applications received in head office prior to November 1 will be given priority in our underwriting, That should help us to issue the policies before January 2017,” says Saundra Roll (formerly Edwards), assistant VP Business Development and Solutions at Canada Life, Great-West and London Life.
The insurer confirms that it is taking action to deal with the overflow. “To help us achieve that, we’ve hired additional staff within our new business organization and within our client services organization, because policy changes and term conversions also need to be done before January 1,” Roll explains.
Desjardins Insurance, which mainly serves a family clientele, is feeling less of a squeeze. “We are seeing a slight increase in the number of applications but not a huge rush,” says Nathalie Tremblay, manager, development and marketing, Life and Health Products. Advisors will seize the business opportunity, Tremblay says, adding that “There will be a major impact for clients who put savings in their level cost UL insurance policy.” She points out that only a small number of clients save in the accumulation fund of these policies. “These savings happen after clients have reached the maximum permitted in the RRSP and their tax-free savings account (TFSA). It is not a major revolution. The ones who are very busy with this are advisors who specialize in high net worth products,” she explains.
Advisors who deal with corporate insurance and high net worth clients are indeed working overtime. “Most insurers have set a deadline around September 30. Today many are in a mad rush,” says Gilles Chevalier, president of Engel Chevalier Wealth Protection, which specializes in serving entrepreneurs.
Chevalier says that advisors working with clients who want to buy universal level cost life insurance should finish up these cases promptly. They need to check if their client will be better served under the current rules or if they can adapt to the new rules smoothly. “A quick glance at the limited space that the 2017 products will leave for credit in the capital dividend account (CDA) is enough to convince me that the level cost UL insurance product will be less attractive for many of my clients,” he explains.
Not the end of the world
PPI CEO Jim Burton says life will go on after January 1, 2017. “We will develop products (in fact, we have already) that reflect the new rules and that offer investment options within Universal Life that maximize the opportunity under the new rules. We have worked and will continue to work with carriers on product development and we’ve already taken a very innovative approach,” he says.
PPI has taken the lead with its Equibuild product. Simple and flexible universal life insurance, this product was developed jointly with iA Financial Group. Its design factors in the tax rules of both 2016 and 2017, Burton explains.
Peter Wouters is also unperturbed. “The sky is not falling, it’s just dropping a little bit. It’s not all bad news. Some of the things that will happen next year are actually good news. It depends on your perspective. It depends on what the insurance has been sold for,” he says.
The changes also offer advantages. One example: the CDA credit lets a private company pay shareholders a tax-free dividend, equal to the death proceeds that exceed the adjusted cost basis (ACB) of the policy. In fact, the ACB will be higher after 2016, leaving less room for the CDA credit.
“The downside of a higher adjusted cost basis is that the holder will pay less taxes when they withdraw or dispose of the funds. On the down side, you have to wait longer to be able to reach the full credit in the capital dividend account,” Andrée Couture explains.