In today’s consumer-savvy world, the amount you pay for a product or service is typically open to negotiation. Or if you’re patient, the product will likely go on sale, or you can search online for a better price. But when it comes to life insurance, the ability for the consumer to negotiate the price (the annual premium) is often limited.
Insurance companies won’t negotiate discounts for specific policies or clients. This is because life insurance is based on pooling the expected experience for a large group of similar clients. This averaging approach isn’t valid for just one client or even a handful of clients.
Where insurance companies provide discounts, they’re typically based on the preferred health status of clients or clients’ participation in a wellness program. These discounts would apply automatically to every client in the broad group who qualify — no negotiation required.
Insurance agents may also be prevented from providing a discount to clients as a result of provincial legislation restricting “rebates and inducements.” A rebate is typically funded by the insurance agent sharing some of the commission earned on the sale of a policy. The term “inducement” can include rebating but also applies to indirect payments or benefits offered by the insurance agent — for example, offering in-demand tickets to a concert or sporting event if the person agrees to purchase the policy.
Why the need for rebating rules?
These types of restrictions are based on the unique elements of purchasing and owning life insurance. Insurance purchasers are heavily reliant on the advisor’s advice, not everyone necessarily qualifies (or can lose the ability to qualify in the future) and the product itself is designed to be in effect for most of a person’s lifetime. The purchase of an inappropriate insurance policy or amount of insurance as a result of an inducement or rebate could have long-lasting negative implications for the policyholder.
The Canadian Council of Insurance Regulators says the rebating rules:
- protect consumers from making inappropriate insurance purchasing decisions,
- ensure parity between different-sized insurers and intermediaries who compete for the same business,
- address concerns that the cost of the incentives would ultimately be borne by all consumers in the pricing of the product, and
- ensure premium reductions are offered equally to all similar risks and not arbitrarily to certain consumers.
While the legislation governing rebating varies provincially, the overarching objective is to protect consumers from unfair sales activity by insurance companies and licensed agents.
Regulators can impose a variety of sanctions on insurance agents who are found to be in breach of provincial regulations preventing inducements and rebating. For example, in Ontario an agent can be subject to fines of up to $200,000 and/or the suspension, revocation or cancellation of their insurance licence.
Exceptions to the rule
Some provinces take a different approach. Alberta has no restrictions on rebating, although insurance agents still have a duty to act in good faith and in the clients’ best interests. In B.C., regulations under the Financial Institutions Act currently permit rebating up to a maximum amount equal to 25% of premiums. However, B.C.’s rebating rules are under review.
Tax treatment of rebates
In several technical interpretations, the Canada Revenue Agency (CRA) has indicated that, where a rebate is provided to a policyholder, the insurance advisor should include the full amount of the sales commission in business income and can deduct the rebate paid to the policy purchaser. The policyholder must include the full amount of the rebate in income.
The CRA’s position relating to the taxation of the rebate to the policyholder has been affirmed by a Quebec Tax Court. The court agreed with the CRA that a taxpayer who received a rebate of $90,000 on the purchase of an insurance policy had to include the full amount in income. Presumably, where an inducement is provided, its fair market value would similarly be taxable to the recipient. It is recommended that the taxability of a premium rebate or inducement be disclosed to the client or prospective client during the sales process to ensure they’re aware of their tax-reporting obligations.
Advisors should confirm what type of rebating or inducement activities are permitted in the provinces where they do business. In addition, the codes of conduct of the relevant insurance companies should be consulted to determine their stance on rebating and any required policyholder disclosure. As noted, contravention of provincial or insurer rules and guidelines could result in the imposition of fines or the suspension/termination of the advisor’s insurance licence or contract.
Kevin Wark , LLB, CLU, TEP, is managing partner, Integrated Estate Solutions, and tax consultant, Conference for Advanced Life Underwriting. He’s also the author of The Essential Canadian Guide to Estate Planning.