CI insurance: Tax consequences and changing demographics

(January 20, 2004) The potential tax consequences of critical illness insurance (CI) was the subject of a popular seminar at the recent World Critical Illness conference in Victoria. Florence Marino, Manulife Financial’s assistant vice-president of tax and estate planning, delved into the Income Tax Act and CCRA’s interpretations of CI in front of a capacity crowd on Friday, January 16 at the Empress Hotel.

The return of premium rider — which refunds all the premiums paid if the insured survives the policy’s coverage or dies — is also a tax thorn despite being one of the most attractive features of CI. Some return of premium benefits may qualify the CI policy as life insurance under the act, potentially making those benefits taxable. Premiums on stand alone CI are a personal expense and also taxable, she explained.

As insurance products go hybrid, other tax questions arise, cautioned Marino. “CCRA is acting with some restraint on proposed contract wording for CI as a rider or stand-alone CI,” Marino said.

The good news is that stand-alone CI, the most common form, is considered accident and sickness insurance, or non-life, and is therefore not bound by the act and enjoys the tax-free, lump-sum benefits on claim. This money could be spent on medical expenses, potentially qualifying for other tax credits.

A joint paper by the Conference for Advanced Life Underwriting and the Canadian Life and Health Insurance Association asking CCRA and the Department of Finance for explicit explanations of the tax treatment of CI and long-term care is expected this spring, five years after the process began. “It has taken so long because CI products don’t stand still,” Marino told the delegates.

“Product innovation brings complexity and we have to make time for that,” she added. “Plus individual disability insurance will be affected by whatever the outcome of the document is so we have to be careful how we draft it.”

And the CI industry is in for more product innovation. Great-West Life’s senior vice-president of living benefits Monique Maynard said, “Canadian demographics will demand realignment of the CI product.” She referred to the baby boom generation as the group of people who will continue to dominate sales patterns. “The baby boom dictated the pattern of home ownership, school enrolment and now medical drugs.”

Boomers are definitely paying more attention to their health as they plan for long retirements. “They have a higher disposable income,” Maynard explained. “They are focusing on quality and service, not price. They will move from mall shopping to specialty shopping. So when they need healthcare, are they likely to wait for the necessary medical care or are they going to be able to pay for and demand the services now?”

Insurance companies must create sustainable products that combine sound design, pricing and thorough underwriting techniques, Maynard said. All of this while still meeting the boomers’ needs. She suggested that advisors speak to their clients about healthcare and the potential financial benefits of CI.

What are your concerns or recommendations about CI? What strategies have you found that work when approaching your clients about CI? Share your thoughts about this relatively new kid on the block with your fellow advisors in the Talvest Town Hall on Advisor.ca.

Filed by Sheila Avari, Advisor’s Edge, sheila.avari@advisor.rogers.com