The headaches International Financial Reporting Standards have created for accountants will pale in comparison to the impact it will have on Canadian financial advisors and their clients. The proposed IFRS changes would require Canadian insurance companies to hold more in their reserves and mark their asset value to market value on long-term assets held to balance.
These long-term liabilities could cause them to stop writing new long-term permanent insurance policies: specifically, Term 100 and Level Cost of Insurance (LCOI) universal life policies. If you look at the European market, you can see the availability of these permanent plans on the decline since IFRS came into effect in 2005. As U.S. GAAP moves towards convergence, that trend will continue south of the border.
There are some efforts aimed at getting an exemption from these new rules for Canadian insurers. Yet even if these efforts are successful, Canadians are still going to feel the impact since reinsurance companies take on a lot of the risk.
Since Swiss Re and Munich Re are European, they still have to report to the IFRS standards, so they will not accept high insurance amounts from Canadian insurance companies as easily as before. There are few reinsurance companies left, and currently most insurance risk is transferred to Swiss Re and Munich Re.
The new IFRS rules and the ongoing LCOI permanent insurance rate increases by most major insurance carriers will make it difficult and expensive for Canadians to get the additional permanent insurance coverage they will need to complete their estate planning.
As for term insurance policies that have the conversion option to a permanent policy, insurance companies would still honour the conversion. However, if there are no new LCOI permanent insurance policies for sale, companies would likely create a special insurance class or product just for these cases, but price them so high it would make it unattractive to convert.
That said, you could consider a Yearly Renewal Term (YRT) universal life policy if your clients need normal life expectancy coverage. But if the insured lives longer, the policy will need additional deposits to avoid a lapse. A 58-year-old non-smoking male who purchased a $5-million policy just before the first round of rate increases had a LCOI premium of $88,951. If he purchased the same policy today from the same carrier, the premium would be $93,391.
If we switch from LCOI to YRT (age 85) with the original premium/deposit of $88,951, the policy would lapse at age 80. If we switch to YRT (age 100), the policy would lapse at age 86. His life expectancy is around age 83, but family history indicates his life expectancy is likely closer to 90. It’s a tough call to make and not something advisors can recommend.
Dr. Julia Sawicki, Associate Professor at Dalhousie University’s School of Business Administration, notes, “In principle, the adoption of IFRS and the move to fair-value accounting have many benefits in providing more relevant, current market information about the value of reported asset and liabilities.
“In practice, the real economic effects on financial markets and products are controversial and possibly detrimental. The effects on financial planners and their clients are a case in point. Insurance companies facing higher reserve requirements may stop writing long-term permanent policies, thus eliminating an effective tool for estate planning.”
Advisors should review their clients’ estate plans and put enough insurance in place while they still can. Dealing with an insolvent estate can be a costly experience both financially and emotionally. The last thing an advisor wants is for a client’s estate to have inadequate funds to pay capital gains taxes, loans, estate equalization between children, and even business partners/shareholders as part of a buy-sell agreement.