2009 Annual Meeting ● Assemblée annuelle 2009Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse)

2009 Annual Meeting ● Assemblée annuelle 2009Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse)

Canadian Institute

of Actuaries

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

L’Institut canadien desactuaires

Selling Insurance in Today’s Market

Jeff ShaddickRon Atkinson

Jean Roy

Today’s Market

Unsettled Times Unstable Economy Some Clients are having a tough time

But Many are not

Unsettled Times Unstable Economy Some Clients are having a tough time

But Many are not

Challenge or Opportunity?

In good times clients become blasé In these illiquid times, insurance becomes

more real and obvious as a viable financial planning solution

In good times clients become blasé In these illiquid times, insurance becomes

more real and obvious as a viable financial planning solution

Opportunities

The Dreams still remain– Protection of Family– Protection of Business– Protection of Legacy

The Dreams still remain– Protection of Family– Protection of Business– Protection of Legacy

Opportunities

Clients facing reality of reduced value but also reduced liquidity

Problems still remain– Capital Gains Tax– Funding Shareholders Agreements– Succession Planning– Charitable Commitments

Efficient and Effective Tax Planning

Clients facing reality of reduced value but also reduced liquidity

Problems still remain– Capital Gains Tax– Funding Shareholders Agreements– Succession Planning– Charitable Commitments

Efficient and Effective Tax Planning

Corporate Owned Insurance

Male 50 non smoker $5,000,000 T100 or minimum funded UL/LCOI

Male 50 non smoker $5,000,000 T100 or minimum funded UL/LCOI

Internal Rate of Return at Death

Age at Death After-tax IRR Pre-tax Equiv.

70 12.9% 21.1%

75 8.8% 14.1%

80 6.4% 9.9%

85 4.8% 7.2%

90 3.6% 5.4%

Enhanced IRR with Capital Dividend Account Credit

Age at Death After-tax IRR Pre-tax Equiv.

70 15.0% 25.3%

75 10.6% 17.3%

80 7.8% 12.6%

85 6.0% 9.5%

90 4.7% 7.3%

Charitable Gifting

Value of T100/LCOI 2007 legislative change Can be gifted for FMV not just CSV

Value of T100/LCOI 2007 legislative change Can be gifted for FMV not just CSV

Charitable Gifting

Client

FMVActuary

Charitable Gifting

3 Potential Structures– FMV + Commitment to pay future Premiums– FMV + Life Annuity to pay future Premiums– FMV + 3rd Party Contributor

3 Potential Structures– FMV + Commitment to pay future Premiums– FMV + Life Annuity to pay future Premiums– FMV + 3rd Party Contributor

Charitable Gifting

Process– Independent Actuarial Valuation

Cost $1,200 (tax deductible)

– Purchase SPIA– Donate T100/LCOI policy and SPIA– Charitable receipt

Process– Independent Actuarial Valuation

Cost $1,200 (tax deductible)

– Purchase SPIA– Donate T100/LCOI policy and SPIA– Charitable receipt

Charitable Gifting

Male 70 owns T100 purchased at age 50– Death Benefit $2 million– Premium $22,061

Male 70 owns T100 purchased at age 50– Death Benefit $2 million– Premium $22,061

Fair Market Value

Life Annuity Cost

Total Contribution

$635,000

$257,000

$892,000

Total Tax Credit (45%)

Life Annuity Cost

Net Positive Cash Flow

$401,400

(257,000)

$144,400

Charitable Gifting

Replacement Donor– Commits to fund future premiums: or– Buys life annuity to fund future premiums

Policy Donor– Receipt for policy’s FMV and designates

proportion of death benefit

Replacement Donor– Receipt for SPIA and designates balance

of death benefit

Replacement Donor– Commits to fund future premiums: or– Buys life annuity to fund future premiums

Policy Donor– Receipt for policy’s FMV and designates

proportion of death benefit

Replacement Donor– Receipt for SPIA and designates balance

of death benefit

Alternative to buying Term

Male 50 non Smoker $2,000,000 45% Tax Rate; 2% PV rate

Male 50 non Smoker $2,000,000 45% Tax Rate; 2% PV rate

Term 10 R&C

$272,100

$210,212

LCOI UL Min Prem

$441,225

$367,947

UL with Charitable Gift

$175,645

After 20 years

Total Outlay

Net PV

Alternative to buying Term

Options left open to insure future needs at today’s rates Flexibility to accumulate cash on a Tax Exempt basis If true short term need;

– Charitable legacy– Lower PV cost

Higher Compensation

Options left open to insure future needs at today’s rates Flexibility to accumulate cash on a Tax Exempt basis If true short term need;

– Charitable legacy– Lower PV cost

Higher Compensation

Underwriting

The Underwriting Experience

Client’s view:– Long and complicated– Credibility is affected sometimes

E.g. some information is asked twice

– Some just give up in the process Business left on the table

Client’s view:– Long and complicated– Credibility is affected sometimes

E.g. some information is asked twice

– Some just give up in the process Business left on the table

The Underwriting Experience

Agent or broker’s view:– Physician medical reports take a long time

Apparently often incomplete the first time Information contained may lead to new requests

to other physicians or specialists Hospital records, doctors no longer in health

system make it even more difficult

Agent or broker’s view:– Physician medical reports take a long time

Apparently often incomplete the first time Information contained may lead to new requests

to other physicians or specialists Hospital records, doctors no longer in health

system make it even more difficult

The Underwriting Experience

Agent or broker’s view:– Wealthy people go to private sector– Private sector competes for the wealthy

Offer/suggest variety of tests/procedures Wealthy is key to the family/business They happily go for all sorts of tests/procedures Underwriter wonders what she/he is missing

Agent or broker’s view:– Wealthy people go to private sector– Private sector competes for the wealthy

Offer/suggest variety of tests/procedures Wealthy is key to the family/business They happily go for all sorts of tests/procedures Underwriter wonders what she/he is missing

The Underwriting Experience

Agent or broker’s view:– Travelling pattern of clients is problematic– More challenges on the financial side since

the financial crisis More information requested

Agent or broker’s view:– Travelling pattern of clients is problematic– More challenges on the financial side since

the financial crisis More information requested

Underwriting

Underwriters are more and more busy– Very little time left to think the situation through– More reactive

Increased workload & costs on sales force Art (judgement) versus science

Few young underwriters

Underwriters are more and more busy– Very little time left to think the situation through– More reactive

Increased workload & costs on sales force Art (judgement) versus science

Few young underwriters

Underwriting

How can process be simplified?– Slow process and reactive mode is invitation

for multiple applications which is perverse For a sale to materialize:

– Qualification– Need, relationship and momentum– Delays, and or unpleasant experience can

kill momentum and also relationship

How can process be simplified?– Slow process and reactive mode is invitation

for multiple applications which is perverse For a sale to materialize:

– Qualification– Need, relationship and momentum– Delays, and or unpleasant experience can

kill momentum and also relationship

Illustrations

Illustrations

Volatility in stock markets affected investment portions of UL policies

Is it realistic to illustrate equity returns in UL using flat rates?– Making 7% net over a 10 year period is not the

same as making 7% every year for 10 years– Use of variable rates should be emphasized

Volatility in stock markets affected investment portions of UL policies

Is it realistic to illustrate equity returns in UL using flat rates?– Making 7% net over a 10 year period is not the

same as making 7% every year for 10 years– Use of variable rates should be emphasized

Illustrations

Volatility can be amplified if COI is taken from equity accounts– Reverse dollar cost averaging– The higher the COI in proportion of the fund

value, the more you get hurt– Potential for high disappointment by clients– Shift towards GIC types for existing clients

Volatility can be amplified if COI is taken from equity accounts– Reverse dollar cost averaging– The higher the COI in proportion of the fund

value, the more you get hurt– Potential for high disappointment by clients– Shift towards GIC types for existing clients

Exempt Test Update

Exempt Test Update

Brief Review 2008 Meetings Next Steps

Brief Review 2008 Meetings Next Steps

Review

How did we let things get so far?– 1982 rules addressed traditional insurance products– By 1990’s, various interpretations to deal with UL

CHHIA submission in August 1998 (Green Monster) CLHIA/CALU submission on CI and LTC in March 2004

How did we let things get so far?– 1982 rules addressed traditional insurance products– By 1990’s, various interpretations to deal with UL

CHHIA submission in August 1998 (Green Monster) CLHIA/CALU submission on CI and LTC in March 2004

Review

Current concerns:– Single premium UL– Green Monster is 10 years old– Need to address CI and LTC

Refund of premium options

Current concerns:– Single premium UL– Green Monster is 10 years old– Need to address CI and LTC

Refund of premium options

2008 Meetings

April 22th– Are previous submissions still valid?– CI/LTC

Need to deal with ROP CI is more popular now than LTC Finance – wants to ensure rules are reasonable

April 22th– Are previous submissions still valid?– CI/LTC

Need to deal with ROP CI is more popular now than LTC Finance – wants to ensure rules are reasonable

2008 Meetings

June 26th– Finance review updated proposals to Green Monster– Finance wants to understand what an AF consists of– Finance is looking at IIT income

How to measure “value” inside a policy Is there “value” building inside T-100 or LCOI-UL?

June 26th– Finance review updated proposals to Green Monster– Finance wants to understand what an AF consists of– Finance is looking at IIT income

How to measure “value” inside a policy Is there “value” building inside T-100 or LCOI-UL?

2008 Meetings

Conclusion:– There should be pressure to do something

soon due to SP UL sales opportunities

Conclusion:– There should be pressure to do something

soon due to SP UL sales opportunities

Next Steps

There was immediacy after last meetings Now – nothing since last year Stay tuned!

There was immediacy after last meetings Now – nothing since last year Stay tuned!

Thank you