Premium Advice — Insurance and your summer home

Now that school’s out and summer is here, many of your clients are likely planning to spend time at the cottage. Most aren’t thinking about how to use insurance to protect their idyllic home away from home — and if they are, it’s usually related to protecting the asset in case of a casualty, fire or burglary. However, there are many other insurance needs they must take into account

Let’s consider two siblings in British Columbia, Joanne and Todd They’re both in their mid-50s and they have each experienced a reasonable amount of success in their lives. Joanne and Todd both have summer homes — one in Arizona, the other in Nelson, B.C. — and while they enjoy the warm months away from the city, they hope to retire to their cabins at some point. But doing this requires specific insurance needs that I will discuss here.

When a cottage is initially purchased, debt or mortgage coverage for any loan outstanding may be requested by the lender. Many advisors have spent years recommending individually owned life and critical illness insurance versus creditor type coverage for mortgages on a primary residence. Those same reasons work for debts on second properties: guaranteed premiums, full range of premium structure (renewable 10, 15, 20 or more years to permanent plans locking in rates to age 100), level benefit payouts instead of a declining balance equal to the loan, portability of coverage to different lenders, ability to offer coverage when special health issues arise, etc.

Once the initial purchase is covered, Todd and Joanne can enjoy their second homes to the fullest. Although they are in good health currently, they have become more concerned about declining health in their retirement years.

Their advisor has suggested that both families consider full insurance protection for their living needs. For Joanne, one risk that must be covered is medical costs in the event of an unforeseen health shock while in Arizona. Travel medical insurance will be necessary once she retires, since she currently has coverage on her group benefits plan. She might want to consider renewable travel insurance. For a slightly higher premium than annual travel medical coverage, it renews each year as she gets older, removing the necessity to qualify each year, and she can purchase it while she’s still young and healthy.

Their advisor has suggested that they both consider long-term care insurance for themselves and their spouses. If their health deteriorates and assisted living is required, they may or may not be able to get access to care in their second home or at a facility close to it. By the time they make a claim, they will have been living in their retirement property for 20 years and won’t want to move back to the city for medical care. So, by having additional tax-free cash flow, they’ll be afforded more options in accessing care in their out-of-the-way locations. In response to their unique needs, their advisor has researched the market and ensured that Joanne’s coverage is issued by a company that will facilitate claims adjudication in the United States.

Let’s fast forward now to the autumn of their years. For simplicity’s sake, we’ll assume that Joanne’s and Todd’s spouses predecease them and the marital assets rolled over tax free to the survivor. That leaves the vacation homes in their names. Upon death, Todd’s Nelson, B.C., home might qualify as a primary residence and be exempt from any capital gains tax. However, that exemption could be limited to the number of years that the Nelson property was actually the principal residence. In any case, there will probably be some capital gains tax payable in the estate due to the amount of time that the cottage was not the principal residence.

This is where life insurance comes in. Having purchased low cost, joint last-to-die coverage in their 50s on the advice of their advisor, Todd and his wife pre-funded the tax bill with liquidity from insurance proceeds for pennies on the dollar. For Joanne, having a home in Arizona would subject her to U.S. estate tax regimes, which have changed and evolved significantly in the last decade. Being of a modest net worth, she may be exempt from these rules but would need to consult a professional for advice on an ongoing basis as these rules evolve.

Clearly, there needs to be more thought put into purchasing a cottage than just the asking price. So, make sure you talk to your clients about insurance so they can spend their summers worry free.

Chris Paterson is vice-president of sales for Manulife Financial.

(07/04/08)