Speaking to our clients on a regular basis provides me with great insight as to what trends are going on in the marketplace and more importantly, some of the challenges the industry is currently facing. One common denominator that is prevalent among many of our underwriting clients is the anticipated increase of life insurance sales, which can place a strain on back office resources and affect the desired time service levels an insurer provides to their clients.
There are a number of factors that can result in production underwriting overflow:
- the launch of a competitive new product,
- a reprice of an existing line,
- seasonal factors that cause a shift in client focus to their financial planning,
- or new industry regulations or legislation that affect insurance to name a few.
In these instances, many direct writers look for solutions to accommodate their increased sales with minimal disruption to their business operations or compromising their desired time service levels.
For many of our clients, LOGiQ3 has been able to provide scalable Underwriting Solutions to ensure our client’s risk is being properly managed and that their existing service standards are consistently met when faced with the above scenarios.
Why the recent increase in insurance sales in Canada?
In Canada, there has been a recent increase in insurance sales across the industry, due in part to the upcoming enactment of new legislation that comes into effect on January 1st, 2017. The legislation, which received Royal Assent on December 16, 2014 will have serious implications on how policyholders are able to utilize Life Insurance products in their comprehensive financial plans going forward; as it changes the current exempt test regulations for how insurance products such as Universal Life (UL) are able to act as a vehicle for tax sheltered growth.
Under the current Income Tax Act, income that has been earned within a policy that is deemed exempt would not be taxed on an accrual basis to the policyholder. These rules were introduced and have remained relatively unchanged since the 1980s.
How will exempt statuses be determined?
Once enacted, insurance policies in Canada will fall into one of 3 tax generations which will determine a policy’s exempt status and how it will be subject to this new legislation. These 3 tax generations are:
- G1 pertains to policies issued and last acquired before December 2, 1982.
- G2 pertains to policies issued before 2017 and last acquired after December 1, 1982.
- G3 pertains to policies issued before 2016, or policies that have lost their G1 or G2 status due to lack of grandfathering.
“Grandfathering”, as it pertains to the new legislation refers to policies that will remain unaffected by the new legislation based on the policyholder taxation rules that were in place at the time of issue or last acquisition. There are instances, however, in which a policy can lose its grandfathered status – thereby making it subject to the new legislation.
It is important that both advisors and clients are educated on this as it can have a major financial impact on how they can utilize their existing insurance policies for future planning.
Two of the most common instances that would cause a policy to lose their grandfathered status are:
- Any changes are made to the policy that involve medical underwriting
These changes most commonly include items such as increase in face amount or the reinstatement of a lapsed policy.
- Term Conversions
A convertible term policy can be converted into a permanent, whole life product after being in-force for a specified period of time.
Perhaps unsurprisingly, the aforementioned spike in life insurance sales followed the announcement of the new legislation in the last quarter of 2014.
The year 2015 saw an overall year over year increase of 14% in new annualized premiums.
This was the highest YOY growth since 2010 - 9% of which was attributed to Universal Life (UL) policies, according to LIMRA. This jump in sales can likely be attributed in part to clients who may have been in the process of weighing their options when it comes to wealth preservation and estate planning and wanted to purchase a Universal Life policy in order to have the current exempt test legislation grandfathered in.
One of the most attractive features of a Universal Life product has always been its ability to act as a vehicle for tax sheltered growth for the investment products that it can house. UL policyholders have the ability to choose from a wide range of investment funds to invest in within the policy vehicle; any growth experienced by these investments within the UL policy will be exempt from any accrual taxation that investment income would usually be subject to.
As someone who has worked as an advisor – I understand the complexity of UL products and the time it takes to place these cases and to ensure your clients have a full understanding of how best to utilize the product features in their plans for wealth preservation.
What does this mean for underwriters?
From an application processing perspective, they can also be time consuming to underwriters for a number of reasons:
- As these products are frequently purchased by high net worth clients – they often have a higher face amount which results in an increase in the age/amount underwriting requirements for applicants
- There are also other components when dealing with high face amount cases such as satisfying Anti-Money Laundering compliance regulations during the underwriting process.
Our Team of Underwriting Experts have a great deal of expertise in complex scenarios and have helped many of our clients effectively manage the above along with other scenarios resulting in significant volume increases.
What types of events have contributed to high application volumes for you? How has your organization dealt with increases in volume in the past?
We’d love to hear your insights in the comments below or better yet, contact us to discuss the customized Underwriting solutions LOGiQ3 can provide for your business.
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