CRITICAL ILLNESS PROTECTION FOR BUSINESSES

SPLIT DOLLAR CI

Let me start this by saying that I am NOT qualified to give tax advice and what you will read in this blog is a digested summary of material presented to me by various carriers.

Something to remember:

·        Critical Illness Insurance is NOT yet addressed in the Income Tax Act, so everything we hear is at best an educated opinion. Because of this, I would only suggest Split Dollar CI to those who have at least a mildly aggressive attitude towards tax planning. If you or your client want to dot every i and cross every t, then possibly this concept is not for you.

The very first thing to remember-consider-think about is that the purpose of the purchase MUST BE protection against a critical illness. The client MUST BE buying the plan in order to protect his business in the event of a cancer diagnosis, a heart attack or stroke, or any of the covered conditions.

I remember attending a meeting close to 40 years ago where someone from the Income Tax Department was giving a presentation. One of the attendees got up and said, “I incorporated my business in order to reduce my income taxes.” IMMEDIATELY the person from the Income Tax Department stated that saving income tax is NOT a legitimate or acceptable reason for incorporating a business. They certainly know that it is a benefit OF incorporation, but it must not be the reason FOR incorporation.

The same applies to everything that follows here. It is a benefit OF purchasing a Critical Illness policy through your corporation, but it must not be why you do it.

Who should you talk to about this idea? In my opinion, your best prospects are corporation owners who have significant cash inside their company. (I will leave the definition of significant to you). This concept can allow the client to access that cash on a tax-free basis.

How does it work? First, your client decides that he/she wants to purchase a CI Insurance policy to protect the company in the event of critical illness of a shareholder or key employee. The company will then purchase and pay for a policy to protect against that eventuality. The shareholder or employee decides whether they want to insure against staying healthy. So they purchase a Return of Premium rider (called a Health Benefit by one insurer). The cleanest way to set this up is to have the employee/shareholder pay the premium for this feature directly and personally BUT it is often paid by the company and included in the income of the shareholder/employee as a taxable benefit. If it is done that way, the inclusion in income is ABSOLUTELY OBLIGATORY for this concept to function. A separate agreement is drawn up specifying the rights and obligations of each party.

Now, three things can happen:

1. The insured is diagnosed with a covered condition and meets the insurer’s requirements.

In this case, a benefit is paid to the corporation tax-free to protect the corporation against the insured’s critical illness. If the corporation chooses to pay any of this amount to the insured, that payment will be taxable. How it is taxable depends on whether the insured is a shareholder or a true employee. Discuss this and all tax related issues with your client’s accountant/tax advisor

2. The insured dies – with no Critical Illness amount payable.

If the Return of Premium on Death feature is included, the premiums will be refunded as spelled out in the agreement.

3. The client arrives at a point where the Critical Illness protection is no longer required - Which should DEFINITELY be after the peak period for CI claims – probably no earlier than age 55 but ideally when the illness will no longer have a significant negative effect on the company.

In this case, the shareholder/employee will receive a refund of all premiums paid – those paid by him and those paid by the corporation. It is the industry’s opinion, backed up by outside legal and tax experts, that this refund should be NON TAXABLE. Given that this includes the money paid by the corporation, it can be a very attractive option.

Plan design issues:

• The premium for the Critical Illness benefit and for the ROP/Health Benefit should be fairly close. Otherwise, it could be viewed as excessively attractive for the shareholder if he collects a MUCH larger corporate premium. One issue that worries me is a product offered by a large carrier, one of whose tax experts stated, at a Critical Illness presentation I attended, that they were not strongly in favor of the concept. They just wanted to make it available to people who liked their company – and then offer a ROP cost MUCH LOWER than the basic premium charged.
• I also like the idea of a Health Benefit as opposed to a Return of Premium. Insurance, of any nature, is protection against an unforeseen event. We MAY get ill, yet we MAY remain healthy. Return of Premium MAY be viewed as being more under the control of the insured and more vulnerable to questions.
• There MAY BE advantages to purchasing this concept via a Quebec Insurance Company. Your client should discuss the implications of Quebec Civil Law vs. the legal system in the rest of Canada, specifically as it relates to concepts like Life Insurance, Accident & Sickness Insurance, and accessory features.

 Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

CRITICAL ILLNESS FOR BUSINESSES

In the next blog, I will discuss the “Split Dollar” Concept which can be very interesting for successful corporations. Today, however, let’s begin with the core issue. If one of the owners of a company (or one of the key employees) suffers a stroke, a heart attack, or is diagnosed with cancer, would this impact the company in any way?  Just imagine if the person most responsible for developing new clients, or the key IT person, or any key employee the company depends on for that matter were to suffer a major illness! The impact would be twofold: both on the individual and on the company. Throughout these blogs, we have explored the issues involved at the individual level, so I am going to concentrate on the effects involved at the corporate level.

One comment I MUST make is the following: if an owner states that HIS/HER illness will have little or no effect on the company that is almost a GUARANTEE that there is an employee (maybe even more than one) on whom the company depends. THAT person should be protected because his/her illness could mean disaster.

Remember that a severe illness almost never happens at the best possible time. In fact, they tend to happen at the worst possible time. I remember a company who had signed an agreement with Quebec to work on a major project – the James Bay Hydro project. It was a marvelous opportunity for all parties involved. There was no question of Quebec’s commitment to the project and they were certainly prepared to spend a significant amount of money on it. The company’s agreement was exclusive. It could well have been an opportunity to literally “print money” for the owners of the company EXCEPT that one of the owners suffered a major illness in the early stages of the contract. The opportunity to “print money” turned into a bankruptcy. Imagine if that company had had $250,000 or even $100,000 to spend on finding a replacement. Do you think any of the owners would have begrudged the cost of the coverage? Remember that it would have probably saved them from bankruptcy AND allowed them to “print the money”!

It can be very difficult to retain valuable employees. It is certainly expensive to replace them; there are initial recruiting and training costs involved and then a period of adjustment until they feel comfortable enough in their new tasks to fully take over where their former colleague left off. Have you ever overheard employees discussing how one of their colleagues or a family member has been diagnosed with cancer? It is not a pleasant conversation. Imagine now how the impact would be lessened and how their opinion of and loyalty to their employer would be affected if they knew that a check for $50,000 or $25,000 or $10,000 (tax free) would be forthcoming because of a plan you, as the employer, established?   This is a low (and tax deductible) cost with HUGE benefits to both the employer and the employee. Imagine the stress that would be relieved. Money does NOT make people well, but it sure does allow you to concentrate on getting well instead of on how the bills will be paid.

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

DO NOT USE CRITICAL ILLNESS INSURANCE TO FUND CARE OUTSIDE OF CANADA – OR THROUGH THE PRIVATE SYSTEM!

One of the points I almost always see mentioned in any company’s Critical Illness (CI) presentation is some version of, “You can use the funds to purchase private care.” Every time I see that I cringe because this statement is largely responsible for provoking the reaction, “What is $100,000 worth to me? It will not pay for ANYTHING!”

The whole purpose of my blog is to show that there are much better and more affordable options available.

Before I go further, let’s get the shock out of the way (and by this I am referring to why we are not selling as much Critical Illness insurance as we should be).

Most people seem to think: “If I need care, I will need $1,000,000”

Using data for a 40-year-old male, non-smoker, as an example, we obtain care in the US – or the private system in Canada – with $1,000,000 of Critical Illness insurance.

There are 4 basic pricing approaches (ignoring Return of Premium, which is a whole other topic).

                                             $1,000,000 Critical Illness Insurance

Plan	Annual Premium
10 Year Renewable Term	$4,215.00
20 Year Renewable Term	$6,425.00
Level Term to Age 75	$10,465.00
Level Term to Age 100	$13,555.00

If you can afford those premiums, feel free to buy the coverage, however, the vast majority of 40-year-olds have other demands on their income, and cannot afford this kind of premium.

What options are available?

Option A - $250,000 Critical Illness insurance in place of $1,000,000. $250,000 is adequate for 98% of the population. Only the wealthy – and some corporate situations – may require more than this.

Plan	Annual Premium	EHO* Premium	Total Premium
T-10	$1,110.00	$2,007.00	$3,117.00
T-20	$1,662.50	$2,007.00	$3,669.50
T-75	$2,672.50	$2,007.00	$4,679.50
T-100	$3,445.00	$2,007.00	$5,452.00

Option B - $100,000 Critical Illness insurance: adequate for 85-90% of the population.

Plan	Annual Premium	EHO* Premium	Total Premium
T-10	$489.00	$2,007.00	$2,496.00
T-20	$710.00	$2,007.00	$2,717.00
T-75	$1,114.00	$2,007.00	$3,121.00
T-100	$1,423.00	$2,007.00	$3,430.00

The first option provides $1,000,000 of coverage that you can use any way you want. It also covers 25 illnesses.

On the other hand, the other two alternatives provide a lump sum of either $250,000 or $100,000 plus up to $5,000,000 to cover treatment for almost any illness (limited exclusions are outlined in the policy).

Conclusion: More affordable. Greater coverage. And the quoted premium includes a $250 deductible. The premium can be further lowered by increasing the deductible.

Superior coverage is provided for private care – either in Canada or abroad. It is superior both in the amount and the situations that are covered, and it is more likely to fit the client’s budget.

*EHO = “Executive Health Options” – for more information, contact me.

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

WHICH CI POLICY SHOULD YOU PURCHASE?

As I mentioned in the previous CI entry, everyone should begin with a “Simplified Issue” product in order to obtain coverage for the 3 (or 4) key illnesses, which are, cancer, heart attack, stroke, and (if 4 are provided) Coronary Artery Bypass surgery. Once your policy is in place, you can start to look at more complete coverage. At least we have moved away from the “My definition is better than YOURS” war and advisors do not have to be doctors. My professional opinion is that you can basically choose the company/product you most like/prefer and go with that.

That being said, there are points which may be important to you as an individual. Do not put too much emphasis on the total number of illnesses covered, as those additional illnesses generally represent an extremely tiny percentage of claims. However, should you have a personal reason for wanting coverage for one of those additional illnesses; that may sway your purchasing decision.

Certain contracts provide an early payment of part of the benefit prior to completion of the (generally) 30-day survival period. While admittedly useful, you must decide what level of importance you place on this.

Of somewhat (at least in my opinion) more importance is the coverage offered for less severe illnesses (early stage prostate cancer for example). The points to consider here are (1) How much coverage is offered? and (2) Does it reduce the amount payable for more serious illnesses? The actual illnesses covered under this feature are normally of lesser importance, unless you have a personal reason (yet again) for wanting that illness covered.

Another point is the coverage offered by “Best Doctors”. This is an often overlooked feature, but having listened to many people agonize over: “Am I getting the proper diagnosis?” “Why do I have to wait so long?” etc, this feature is a far more important item than it is often considered to be. Do not worry so much about care outside of Canada or in the private system. There are far cheaper and even better ways to provide for THAT than Critical Illness insurance. DO concern yourself with knowing that the help you will need in making choices and obtaining fast answers will be there if and when you need it. KEY questions include: “Who are these services available to? Is it only to the insured? To the immediate family of the insured? To the extended family of the insured – including in laws?”

In my opinion, these are some of the important points to consider when deciding on a CI policy for an adult.

What about a policy for a child?

I know that no one wants to think of their child being diagnosed with a serious illness, but it DOES happen, and when it does, it can be shattering financially as well as emotionally. If our child is seriously ill, there are only two things on our minds: “Make him/her WELL!” and “Be there!” Work is a non-starter. Money? If we have it we will spend whatever it takes. If we do not, we will beg or borrow all that we can. Over Christmas 2010, my niece went through a terrible month before her 6-year-old daughter’s tumor was confirmed benign and subsequently removed. At least consider purchasing CI for your child. If you do, there is one “best” product out there for children. I will neither purchase nor sell a product that either terminates at age 18 or 25 or that does not provide guaranteed rates beyond those ages. Rates will be higher or not guaranteed, or there will be other weaknesses. I will only buy, or sell, a permanent policy. Also, for a child, I vastly prefer a “20 Pay” policy where premium payments end after 20 years. Add it all up and today (March 25, 2011 – I will update this comment as needed) there is one product/policy today that is the best in Canada and that I suggest to clients: the one offered by Desjardins Financial Security.

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

NOT EVERYONE DRIVES A $250,000 CAR!

For some reason when it comes to Life Insurance, advisors have no trouble adjusting their recommendations to fit a client’s need and budget. Consider the following: a 45 year old male, non-smoker, in normal health (NOT preferred) whose analysis determined a need for $1 Million in Life Insurance coverage. Based on the most recent version of Compulife, the least expensive 10 Year Renewable Term policy would cost him $1,060/year and the maximum Level Premium Term 100 Universal Life policy would cost $58,520/year. Most everyone would find an acceptable premium somewhere between those two figures and likely closer to the lower of the two. Yet, if even that figure was beyond what a client was prepared to accept, I am sure that agreement on a lower amount of insurance coverage would follow. More than that, I am positive that very few prospective clients would ever be proposed the $58,520 premium.

For some reason (unfamiliarity with the product?), far too many Critical Illness presentations start at that very high level: a large face amount; 20+ illnesses covered; permanent protection (or at least Level to Age 75); Return of Premium on early surrender. What is even worse than that is that most advisors, when faced with the “sticker shock” reaction, do not seem to even know how to handle this normal reaction. As an aside, in my 41 years in Living Benefits, I have met TWO clients who did not react with: “Oh my – that is EXPENSIVE!”

A few suggestions:

1. Return of Premium is a “frill” and should only be offered after agreement has been reached on a plan and an amount. Understand that I am a strong supporter of Return of Premium on Disability Insurance – while disability may occur prior to retirement, there may also be periods of good health, and ROP on DI allows an insured to benefit from both. On CI, a single claim eliminates ROP. Frankly, your chances of claim are high enough that the purchase of ROP only serves to give the insurer more money to pay the claims. ROP on CI is for corporate clients and clients with extra cash to spend.
2. Given that the clients most in need of Critical Illness protection (those who are still accumulating funds; those with businesses and families who would be affected) are the group of people with the largest demands on their current cash flow, we cannot expect these people to have the cash available to purchase level or permanent protection. Term 10 and Term 20 are viable options.
3. One of the standard complaints I hear (other than about price) is “It is too hard to qualify for this protection”. STRONG suggestion: purchase/sell this product in two (or more) stages. First of all, apply for a policy offering protection for 3 or 4 illnesses. Even better, apply for an “Easy Issue” policy: it covers those 3 or 4 illnesses which represent 70% to 80% of all claims. It is better to have protection against 70% to 80% of illnesses than against NONE! If you apply for a policy covering Multiple Sclerosis, for example, then a family history of MS is an issue. If you apply for protection against cancer, heart attack, and stroke, a family history of MS is not an issue. More importantly, once you have that protection in place, you can try for more illnesses without losing that basic coverage.
4. It is very unusual for someone to need as much Critical Illness insurance as they do Life Insurance. One point to raise here: DO NOT USE CRITICAL ILLNESS INSURANCE TO PAY FOR CARE ABROAD OR FOR CARE THROUGH THE PRIVATE SYSTEM! There are far more effective, and FAR LESS EXPENSIVE ways to purchase that type of protection. $100K (even $50K or $25K) would be of huge assistance in paying off current debts, allowing a loved one to take time off to provide support, or for whatever else might be needed.

There are MANY cars on the road that cost less than $250K and that do a great job of transporting us around. This same concept can also be applied to Critical Illness Insurance.

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

CI - WHO NEEDS IT?

CRITICAL ILLNESS INSURANCE

WHO NEEDS CRITICAL ILLNESS INSURANCE?

HOW MUCH CRITICAL ILLNESS INSURANCE SHOULD I BUY?

Who needs Critical Illness Insurance?

Anyone who:

• has debts or bills
• has a “significant other”
• has children
• is alone
• would be negatively impacted by a significant illness

I could also answer by simply saying “Anyone”. If something were to happen to you, would you like someone to be there for you? Would you need to hire someone to help run your business? Pay an existing employee an additional amount? If something happened to your “significant other” or to one of your children, would you want to be there for them? Would it help if six months to a year of your mortgage, your rent, your credit cards or other bills were paid?

How much Critical Illness Insurance should I buy?

Buy as much as you can reasonably afford. Do NOT feel that you need to buy a huge amount. Certainly it is very unlikely that you would need as much Critical Illness Insurance as you would Life Insurance. Would $50,000 help? How about $25,000? Would you refuse $10,000?

“I have Disability Insurance. Why do I need Critical Illness Insurance?”

First of all, DI allows us to pay our usual expenses. It does not cover the additional expenses often created by a Critical Illness. For example, if you have cancer, you may need chemotherapy. After a session of chemo, you will not be driving home. Either your wife will have to take time off work or you will need to take a taxi. If you have a heart attack, you may not be disabled long enough to satisfy the waiting period on your disability policy. Alternatively, you may decide to “slow down” and reduce your hours. Disability Insurance will probably pay you, depending on the type of plan that you have, if your doctor tells you that you MUST reduce your hours, but not if you simply decide to change your lifestyle. If your condition requires home or vehicle modification, do you have the available funds? If your physician suggests experimental medication (or medication not covered by your Provincial Drug Plan or your private insurer), will you have the funds to pay for what may be a VERY LARGE bill?

“Why are you suggesting that I purchase Critical Illness Insurance for my spouse or for my children?”

If something happens to your spouse or to your children, you will want to be there for them. If you have to take time off work, you almost certainly will. This may cause significant financial issues, which can at least be reduced if you purchase Critical Illness Insurance. No one likes to think of a spouse or a child becoming ill but it can happen. (I know, because it happened to my son). Insurance does not solve a problem, but it does allow you to do the best that you can, or to be there when you are needed

“I am financially well set with many millions in assets. Why would I need Critical Illness Insurance? I can well afford to pay any costs that I may incur.”

True; you can afford to pay these costs. You can easily write a check for $1 million if need be. But how can you best use your money? Should YOU write a check for $1 million, or are you better off paying a premium to the insurance company and let them write the check? For example, in the case of a male aged 45 who is a non-smoker, $1 million of Level Term to Age 75 Critical Illness Insurance would cost $12,500 in annual premiums. 

Back in 3 weeks to discuss the different types of policies available

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

Introduction

CRITICAL ILLNESS INSURANCE

I am going to open this discussion with two questions:

1. Do you know anyone who has survived a serious illness such as a heart attack, a stroke, or cancer?
2. Did that illness have an effect on their lives or on the lives of those close to them?

I wish I could pause now and let you consider those two questions. Since I cannot, I will return to December 3, 1967: the day the world’s first heart transplant took place. I was personally more impacted by the Salk/Sabin Polio vaccines as I am a polio survivor, but the world’s first heart transplant was far more of a world shaking event. A doctor had removed a heart from a recently deceased person and implanted it into the body of someone else – and saved that person’s life. I remember the newspapers running “line scores” showing how long the recipient survived. They got longer and longer until they became almost meaningless. Medicine had performed a miracle and it was now almost part of our routine life. The only events in my lifetime that I can compare with that are the collapse of the Iron Curtain and the invention of the Internet.

I repeat: “Medicine had performed a miracle and it was now almost part of our routine life.” We now survive health issues that killed us not very long ago.

However, that survival comes with a price. It has a significant effect on our lives, our careers, our families, on those we love and on those who love us. It was one of the doctors who performed that first heart transplant, Dr. Marius Barnard, who saw these impacts and developed the concept of Critical Illness Insurance to help us deal with the impact of surviving one of those illnesses. We have always had Life Insurance, which deals with the impact of dying. But today medicine is allowing many of us to survive an illness.

This product has existed in Canada for almost two decades, but it has never really become as popular as it should be. Why is this? In my professional opinion, it is because the insurance industry did not do a good job of launching the product. There were at least four major mistakes made in the launch:

1. Far too much emphasis on statistics: “1 in 3 people are diagnosed with cancer.” We all know that a lot of people get cancer, but this sounds like a scare tactic. Further, and frankly, it is far too easy to react “Well I will be one of the two who is not diagnosed.”
2. Far too much emphasis on Term to Age 75 and Permanent products. People have budgets, which is why so much Term Life Insurance is sold. Because we know clients (particularly those in the “growth” stage of their lives and most in need of this protection) have many demands on their cash, we know that not everyone can afford permanent insurance. Based on the Insurance Journal, it took until August, 2009 for the industry to discover that clients have budgets.
3. Far too much emphasis on Return of Premium (ROP). If you need ROP to sell this product, then you do not truly understand the need for this product. ROP is for the wealthy and for corporate clients.
4. Finally, forget using CI to purchase care from the private system or outside of Canada! There are far more effective (and lower cost) ways of doing that. If you think $100,000 CI – and then think “provide for care” – your instant reaction will be “$100,000 will do almost nothing for me”. Buy the care insurance independently. Because it pays bills and not a lump sum to you, it is MUCH cheaper! Virtually no one needs large amounts of CI. If you survived a heart attack, $25,000 or $50,000 or $100,000 would allow you to significantly reduce your bills, and your stress, and allow you to concentrate on recovery.

There will be a new post to this blog every three weeks. I will, of course, respond to questions and comments almost immediately.

Some of the topics I will be dealing with include:

• Types of products available
• Conditions covered
• Return of Premium on Death
• Return of Premium on Expiry/Surrender
• Why smokers pay so much
• Underwriting of CI
• Corporate CI
• Child CI

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance