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Traditional Subscription Methods

Traditional Subscription Methods. What is Shared Ownership Insurance ?. Corporation. Key person. TRANSITION. Premiums for Flexible Refund of Premiums rider Premiums for Refund of Premiums Upon Death rider. Premium payment. Critical illness premiums. Critical illness benefit.

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Traditional Subscription Methods

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  1. Traditional Subscription Methods

  2. What is Shared Ownership Insurance? Corporation Key person TRANSITION • Premiums for Flexible Refund of Premiums rider • Premiums for Refund of Premiums Upon Death rider Premium payment • Critical illness premiums • Critical illness benefit • Flexible Refund of Premiums benefit • Refund of Premiums Upon Death benefit Benefits TAX-FREE benefit TAX-FREE benefits

  3. Target Market • The “Shared Ownership Insurance Financial Strategy” is designed for business people who want to obtain critical illness coverage through a beneficial financial strategy. • The company must be a corporation with one or more shareholders. • The company must have surplus cash that is not required to operate the business

  4. Shared Ownership Insurance Procedure in 3 steps: • Purchase Transition insurance • Designate the beneficiaries for each benefit • Draw up a shared ownership agreement (prepared by the client’s legal advisor)

  5. Transition Insurance • The client chooses the type of Transition coverage. However, the coverage must include the Flexible Return of Premiums rider: 3 choices of coverage: • T100 (with Return of Premiums) • T10 (with Return of Premiums) • T75 (with Return of Premiums)

  6. Sharing of Rights and Obligations Each party is responsible for a portion of the total premium • The corporation pays the premiums for: The critical illness coverage • The key person pays the premium for: • The Flexible Return of Premiums rider • The Return of Premiums Upon Death rider

  7. Designation of Beneficiaries • The corporation must be designated beneficiary of: • The critical illness benefit (use the F1A insurance application) • The key person must be designated beneficiary of: • The Flexible Return of Premiums benefit • The Return of Premiums Upon Death benefit (use the “Designation of Beneficiary – Shared Ownership Insurance” form, available on the extranet)

  8. Splitting Premiums Each party pays a portion of the premium • Transition T10, T75 or T100 • The software application determines the premium for each coverage and refund of premiums rider.

  9. Premium Payment • The Company will only accept the total premium payment by a single party. • Consequently, the applicant will have to pay the entire premium, and claim from the other party the portion corresponding to the Flexible Refund of Premiums rider and Return of Premiums Upon Death rider, if any.

  10. Shared Ownership Agreement The agreement must define: • The parties • The total annual premium • The portion of annual premium for each party • All beneficiaries • Conditions that apply if one of the following events occurs: • financial difficulties • sale of the company • shareholder’s disability • shareholder retires Agreement samplesavailable on the extranet

  11. How it Works Distribution of premiums Example with a Transition T100 contract and Flexible Return of Premiums rider Male, NS, age 45, $200,000 in coverage: Total annual premium: $4718 Key person Corporation ± 70% ($3344) ($1274) ± 30% TRANSITION • Premiums corresponding to critical illness protection • Premiums corresponding to Flexible Return of Premiums rider • Premiums corresponding to Return of Premiums Upon Death rider (optional)

  12. How it Works Benefits Key person Corporation TRANSITION • Critical illness benefit • Flexible Return of Premiums benefit • Return of Premiums Upon Death benefit (optional) TAX-FREE benefit TAX-FREE benefits

  13. Example • Individual purchase DIV: $7042 RATE: 33% ABC Inc. Key person $4718 $7042 TRANSITION CI: $200,000 Benefits paid to shareholder CI: $200,000 ROP 15 years: $70,770

  14. Benefits paid to ABC Inc. CI: $299,785 ROP 15 years: $105,630 Net amounts paid to the key person as a dividend CI: $200,856 ROP 15 years: $70,772 Example • Individual purchase ABC Inc. KEY PERSON $7042 TRANSITION CI: $299,785

  15. Net amounts paid to the key person as dividends CI: $175,371 ROP 15 years: $92,340 Benefits paid to ABC Inc. CI: $261,748 ROP 15 years: N/A Example • Purchased in shared ownership ABC Inc. KEY PERSON DIV : $2684 RATE: 33% $1798 (±30%) $7042 $4358 (±70%) TRANSITION CI: $261,748

  16. Summary by Types of Subscription • Net amounts available for the key person VARIATION

  17. Net amounts paid to the key person as dividends CI: $200,856 ROP 15 years: $105,630 Benefits paid to ABC Inc. CI: $299,785 ROP 15 years: N/A Example • Return on additional investment ABC Inc. TaxRATE: 33% KEY PERSON DIV: $2060 $2060 (±30%) $680 $7042 $4942 (±70%) TRANSITION CI: $299,785 - Add. $800 per year for add. ROP of $34,858 - Conditional ann. return of 14.30%

  18. Tax Impact • There would only be a taxable advantage if the corporation also assumes the premium for the Flexible Return of Premiums benefit. • The benefits payable to the corporation cannot be payable to the key person through the CDA.

  19. Documents Required • F1A, F1AP (life insurance application) • Q4A (critical illness medical questionnaire) • Designation of Beneficiaries – Shared Ownership Insurance (extranet) • Shared ownership agreement (corporation & shareholder) • Excerpt of the composition of the board of directors • Company seal (if available) Not required by the corporation

  20. Important Note • Make sure that the company is in good financial health and that it has enough cash to pay the premiums, to avoid having the policy lapse after just a few years • Even though the company believes in the tax and legal advantages of this strategy, the corporation’s tax, legal and accounting specialists are in the best position to determine if the concept suits their client.

  21. Tax Impacts • Currently, critical illness insurance contracts are not governed by any tax law specific to this type of coverage. Right now, the critical illness insurance benefit and the Flexible Return of Premiums benefit are paid tax-free. • The Insurance Act does not consider critical illness insurance to be life insurance. The resulting benefits are not subject to the definition of capital dividend account (CDA) established by the Income Tax Act. • In Quebec, the Civil Code clearly states that the addition of a return of premiums rider does not modify the foundation of this type of protection. However, it is currently the only provincial legislative text that mentioned it.

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