RRSP season? Try UL season

In a Canadian Life and Health Insurance Association (CLHIA) survey conducted a little over a year ago 75% of respondents said they look to their financial advisor for estate planning advice and on average it had been five years since they were approached to review their needs, coverage.

Five years? Really?

Many advisors tell me they are too busy during RRSP season to take the time to complete insurance reviews. Fair enough, but how much time does it really take to ask every client…Do you own a universal life (UL) insurance policy and are you paying the bare minimum for it?

Why ask that particular question and why ask it during RRSP season? The single most important reason is because 85% – 90% of all UL sold in Canada has been sold on a minimum funded basis, which means there is an opportunity to deposit money into the UL contract instead of putting it into an RRSP or in addition to the RRSP contribution.

Dually licensed advisors have a unique opportunity, as well as a fiduciary responsibility, to work with their clients to help them find the right balance when it comes to the percentage of disposable income that should be appropriated to wealth accumulation goals and what percentage needs to be directed to products that can protect, preserve the goals or the wealth already accumulated.

RRSP season is a great time to remind owners of UL clients of the 250% rule which puts the spotlight on the total value of the funds in a UL contract in the 7th policy year.

So, with about two thirds of the population not having reviewed their life insurance for five years and the majority of UL policy owners not taking advantage of the tax deferred investment growth offered in UL contracts, then many will only have 2 more years to take action!

You can help your client avoid getting a nasty surprise when their UL contract hits its 10th policy anniversary because that’s when the 250% is applied. In short, the 250% rule (also called the “anti dump-in rule”) changes the ceiling known as the maximum actuarial tax reserve (MTAR) down to 250% of the total fund value in the 7th policy year. This 250% rule or test is applied every year and looks back to the total fund value 3 years prior to cap any contributions at 250% of that value and this rule stays in effect until the policy owner is age 85.

UL owners who regularly make large deposits should be at little risk of being affected by the 250% rule, however, a client who wants to make a large deposit after the 7th policy anniversary and hasn’t been making those deposits may need to be transfer some of the money out of the policy starting at the 10th policy anniversary.

Why not use this RRSP season as the ideal time to:

1) Ask all your clients if they own a UL policy.

2) Ask how it is funded.

3) Explain the $250% rule.

4) Outline the advantages of “dumping in” money into these minimum funded contracts.

Use those same client meetings as the opportunity to set up appointments after RRSP season so that you can do a full review of their other asset class – their insurance coverage.

Remember life insurance is unique in many important ways not the least of which is that the owner of the contract is in complete control and has the flexibility to change the named beneficiary(s) at will to whom the proceeds are paid privately.

Regardless of the product name or type, life insurance can be summed up in five simple words – tax free money paid at death.

Helena Smeenk Pritchard has over 36 years of experience in the insurance industry and is the Principal of Helena Smeenk Pritchard & Associates, a leader in “Insurance Know-How” training. Helena publishes a weekly free ‘Did You Know’ newsletter on her site.