2009 Annual Meeting ● Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse) 2009 Annual Meeting ● Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse) Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

Selling Insurance in Today’s Market Jeff Shaddick Ron Atkinson Jean Roy

Today’s Market  Unsettled Times  Unstable Economy  Some Clients are having a tough time But  Many are not  Unsettled Times  Unstable Economy  Some Clients are having a tough time But  Many are not

Challenge or Opportunity?  In good times clients become blasé  In these illiquid times, insurance becomes more real and obvious as a viable financial planning solution  In good times clients become blasé  In these illiquid times, insurance becomes more real and obvious as a viable financial planning solution

Opportunities  The Dreams still remain – Protection of Family – Protection of Business – Protection of Legacy  The Dreams still remain – Protection of Family – Protection of Business – Protection of Legacy

Opportunities  Clients facing reality of reduced value but also reduced liquidity  Problems still remain – Capital Gains Tax – Funding Shareholders Agreements – Succession Planning – Charitable Commitments  Efficient and Effective Tax Planning  Clients facing reality of reduced value but also reduced liquidity  Problems still remain – Capital Gains Tax – Funding Shareholders Agreements – Succession Planning – Charitable Commitments  Efficient and Effective Tax Planning

Corporate Owned Insurance  Male 50 non smoker  $5,000,000  T100 or minimum funded UL/LCOI  Male 50 non smoker  $5,000,000  T100 or minimum funded UL/LCOI

Internal Rate of Return at Death Age at DeathAfter-tax IRRPre-tax Equiv %21.1% 758.8%14.1% 806.4%9.9% 854.8%7.2% 903.6%5.4%

Enhanced IRR with Capital Dividend Account Credit Age at DeathAfter-tax IRRPre-tax Equiv %25.3% %17.3% 807.8%12.6% 856.0%9.5% 904.7%7.3%

Charitable Gifting  Value of T100/LCOI  2007 legislative change  Can be gifted for FMV not just CSV  Value of T100/LCOI  2007 legislative change  Can be gifted for FMV not just CSV

Charitable Gifting Client FMV Actuary

Charitable Gifting  3 Potential Structures – FMV + Commitment to pay future Premiums – FMV + Life Annuity to pay future Premiums – FMV + 3 rd Party Contributor  3 Potential Structures – FMV + Commitment to pay future Premiums – FMV + Life Annuity to pay future Premiums – FMV + 3 rd Party Contributor

Charitable Gifting  Process – Independent Actuarial Valuation  Cost $1,200 (tax deductible) – Purchase SPIA – Donate T100/LCOI policy and SPIA – Charitable receipt  Process – Independent Actuarial Valuation  Cost $1,200 (tax deductible) – Purchase SPIA – Donate T100/LCOI policy and SPIA – Charitable receipt

Charitable Gifting  Male 70 owns T100 purchased at age 50 – Death Benefit $2 million – Premium $22,061  Male 70 owns T100 purchased at age 50 – Death Benefit $2 million – Premium $22,061 Fair Market Value Life Annuity Cost Total Contribution $635,000 $257,000 $892,000 Total Tax Credit (45%) Life Annuity Cost Net Positive Cash Flow $401,400 (257,000) $144,400

Charitable Gifting  Replacement Donor – Commits to fund future premiums: or – Buys life annuity to fund future premiums  Policy Donor – Receipt for policy’s FMV and designates proportion of death benefit  Replacement Donor – Receipt for SPIA and designates balance of death benefit  Replacement Donor – Commits to fund future premiums: or – Buys life annuity to fund future premiums  Policy Donor – Receipt for policy’s FMV and designates proportion of death benefit  Replacement Donor – Receipt for SPIA and designates balance of death benefit

Alternative to buying Term  Male 50 non Smoker $2,000,000  45% Tax Rate; 2% PV rate  Male 50 non Smoker $2,000,000  45% Tax Rate; 2% PV rate Term 10 R&C $272,100 $210,212 LCOI UL Min Prem $441,225 $367,947 UL with Charitable Gift $175,645 After 20 years Total Outlay Net PV

Alternative to buying Term  Options left open to insure future needs at today’s rates  Flexibility to accumulate cash on a Tax Exempt basis  If true short term need; – Charitable legacy – Lower PV cost  Higher Compensation  Options left open to insure future needs at today’s rates  Flexibility to accumulate cash on a Tax Exempt basis  If true short term need; – Charitable legacy – Lower PV cost  Higher Compensation

Underwriting

The Underwriting Experience  Client’s view: – Long and complicated – Credibility is affected sometimes  E.g. some information is asked twice – Some just give up in the process  Business left on the table  Client’s view: – Long and complicated – Credibility is affected sometimes  E.g. some information is asked twice – Some just give up in the process  Business left on the table

The Underwriting Experience  Agent or broker’s view: – Physician medical reports take a long time  Apparently often incomplete the first time  Information contained may lead to new requests to other physicians or specialists  Hospital records, doctors no longer in health system make it even more difficult  Agent or broker’s view: – Physician medical reports take a long time  Apparently often incomplete the first time  Information contained may lead to new requests to other physicians or specialists  Hospital records, doctors no longer in health system make it even more difficult

The Underwriting Experience  Agent or broker’s view: – Wealthy people go to private sector – Private sector competes for the wealthy  Offer/suggest variety of tests/procedures  Wealthy is key to the family/business  They happily go for all sorts of tests/procedures  Underwriter wonders what she/he is missing  Agent or broker’s view: – Wealthy people go to private sector – Private sector competes for the wealthy  Offer/suggest variety of tests/procedures  Wealthy is key to the family/business  They happily go for all sorts of tests/procedures  Underwriter wonders what she/he is missing

The Underwriting Experience  Agent or broker’s view: – Travelling pattern of clients is problematic – More challenges on the financial side since the financial crisis  More information requested  Agent or broker’s view: – Travelling pattern of clients is problematic – More challenges on the financial side since the financial crisis  More information requested

Underwriting  Underwriters are more and more busy – Very little time left to think the situation through – More reactive  Increased workload & costs on sales force  Art (judgement) versus science  Few young underwriters  Underwriters are more and more busy – Very little time left to think the situation through – More reactive  Increased workload & costs on sales force  Art (judgement) versus science  Few young underwriters

Underwriting  How can process be simplified? – Slow process and reactive mode is invitation for multiple applications which is perverse  For a sale to materialize: – Qualification – Need, relationship and momentum – Delays, and or unpleasant experience can kill momentum and also relationship  How can process be simplified? – Slow process and reactive mode is invitation for multiple applications which is perverse  For a sale to materialize: – Qualification – Need, relationship and momentum – Delays, and or unpleasant experience can kill momentum and also relationship

Illustrations

 Volatility in stock markets affected investment portions of UL policies  Is it realistic to illustrate equity returns in UL using flat rates? – Making 7% net over a 10 year period is not the same as making 7% every year for 10 years – Use of variable rates should be emphasized  Volatility in stock markets affected investment portions of UL policies  Is it realistic to illustrate equity returns in UL using flat rates? – Making 7% net over a 10 year period is not the same as making 7% every year for 10 years – Use of variable rates should be emphasized

Illustrations  Volatility can be amplified if COI is taken from equity accounts – Reverse dollar cost averaging – The higher the COI in proportion of the fund value, the more you get hurt – Potential for high disappointment by clients – Shift towards GIC types for existing clients  Volatility can be amplified if COI is taken from equity accounts – Reverse dollar cost averaging – The higher the COI in proportion of the fund value, the more you get hurt – Potential for high disappointment by clients – Shift towards GIC types for existing clients

Exempt Test Update

 Brief Review  2008 Meetings  Next Steps  Brief Review  2008 Meetings  Next Steps

Review  How did we let things get so far? – 1982 rules addressed traditional insurance products – By 1990’s, various interpretations to deal with UL  CHHIA submission in August 1998 (Green Monster)  CLHIA/CALU submission on CI and LTC in March 2004  How did we let things get so far? – 1982 rules addressed traditional insurance products – By 1990’s, various interpretations to deal with UL  CHHIA submission in August 1998 (Green Monster)  CLHIA/CALU submission on CI and LTC in March 2004

Review  Current concerns: – Single premium UL – Green Monster is 10 years old – Need to address CI and LTC  Refund of premium options  Current concerns: – Single premium UL – Green Monster is 10 years old – Need to address CI and LTC  Refund of premium options

2008 Meetings  April 22th – Are previous submissions still valid? – CI/LTC  Need to deal with ROP  CI is more popular now than LTC  Finance – wants to ensure rules are reasonable  April 22th – Are previous submissions still valid? – CI/LTC  Need to deal with ROP  CI is more popular now than LTC  Finance – wants to ensure rules are reasonable

2008 Meetings  June 26th – Finance review updated proposals to Green Monster – Finance wants to understand what an AF consists of – Finance is looking at IIT income  How to measure “value” inside a policy  Is there “value” building inside T-100 or LCOI-UL?  June 26th – Finance review updated proposals to Green Monster – Finance wants to understand what an AF consists of – Finance is looking at IIT income  How to measure “value” inside a policy  Is there “value” building inside T-100 or LCOI-UL?

2008 Meetings  Conclusion: – There should be pressure to do something soon due to SP UL sales opportunities  Conclusion: – There should be pressure to do something soon due to SP UL sales opportunities

Next Steps  There was immediacy after last meetings  Now – nothing since last year  Stay tuned!  There was immediacy after last meetings  Now – nothing since last year  Stay tuned!

Thank you