Shared Ownership refers to a concept where more than one party owns an interest in an insurance policy. The most common of these arrangements is with cash value life insurance where one party (usually a corporation), owns and is beneficiary of the life insurance and an individual (shareholder or employee) owns the cash value of the policy.
Recently there has been growing interest in applying this strategy to a Critical Illness policy. Although the CI policy does not have cash value, there is usually an option to have a Return of premium (ROP) in the following situation
- Upon death – If the insured dies without having submitted a claim for critical illness the premiums paid are refunded;
- Upon Termination – If the policy reaches its termination age without a claim being made, the premiums paid are refunded;
- Upon Surrender –If the policy is surrendered without a claim, premiums paid are refunded.
Who should consider this arrangement?
Anyone who owns shares in a corporation and wishes to protect that corporation against loss if one of the shareholders or other key employee is diagnosed with a critical illness.
How does it work?
A Shared Ownership Agreement is drafted documenting:
- That the corporation will own, pay for and be the beneficiary of the CI coverage on the key shareholder or employee;
- That the shareholder will own and pay for the Return of Premium option upon the surrender of the policy.
The company is protected against loss but should no critical illness occur the shareholder/employee will receive a financial benefit as the premiums paid will be refunded.
Barry applies for $500,000 of lifetime critical illness coverage with a return of premium benefit upon surrender. His company lawyer drafts a Shared Ownership Agreement which stipulates that the corporation owns and is beneficiary of the $500,000 CI benefit while Barry owns and pays for the ROP benefit.
- The total annual premium for the policy is $ 9,131.
- The Corporation pays the cost of insurance $7,003
- Barry personally pays the ROP benefit of $2,128
How does Barry Benefit?
Twenty years later, when Barry turns 60, he determines that the CI coverage is no longer required. His company cancels the policy and Barry exercises his return of premium option. Barry receives a cheque from the insurance company for $182,628.
Is this really an important planning strategy?
- One in three Canadians will develop life threatening cancer;
- Half of all heart attack victims are under the age of 65;
- Each year 50,000 Canadians suffer a stroke with 75% of all victims being left with a disability.
The CI Shared Ownership Strategy can result in significant financial benefits for the individual shareholder while the Corporation enjoys the protection of its key employees against loss from a critical illness.
Call me if you would like to explore whether this will benefit you and your company. Or feel free to use the sharing icons below to forward this to someone who might find this of interest.
For Barry’s case study, Industrial Alliance’s Transition Critical Illness product to age 100 with Flexible Return of Premium was illustrated. Of course, results will depend on age and amount plus product features will be vary by company.
* Source: RBC Insurance