Creditor Life Insurance – 1 Creditor protection and life insurance Introduction As a general rule, all assets of an individual or organization are collateral for a creditor’s debts. This refers to whether a person or organization goes bankrupt or not. An interesting feature of life insurance policies is that they provide protection from the owner’s creditors if the appointment of a proper beneficiary is made well in advance of the owner’s death, bankruptcy of the creditor or collection of debts. . This tax topic will summarize the nature of creditor protection for life insurance policies (including registered and unregistered annuities). This is a must-read in relation to the subject of the tax “Creditors Protection and Limitation of Life Insurance” The Appendix includes the relevant definitions and shows tables of compliance with the relevant laws. Creditor protection under provincial insurance laws has been added to this tax subject. Traditionally, life insurance policies are protected under provincial insurance laws against creditor claims Physical protection insured for the entire life of a person can be achieved in two ways: by the owner specifying irrevocable beneficiaries in the life insurance policy or by specifying a number of beneficiaries. benefit. designated as a beneficiary in the provincial insurance law, the relationship must be between the life insured and the beneficiary. In Quebec, it is an owner and an intermediate beneficiary. The beneficiary is still alive, cannot change or withdraw the designation without the beneficiary’s consent. The insurance proceeds are not subject to the control of the owner or the owner’s creditors and are not part of the owner’s property, for example, see the Ontario Insurance Act. Excerpts of other provincial insurance provisions and related sections can be found in the relevant table in Appendix A. When certain family members are designated as beneficiaries, the law is a measure to prevent the owner’s creditor from losing or abandoning the policy during the life of the policy. life insurance. In most common law provinces, family members must be spouses, children, grandchildren or parents under a life insurance contract to provide creditor protection (Ontario Insurance Act, s. 196(2)). In Quebec, this category is broader and includes all heirs and descendants of the owner (Quebec Code, Art. 2457). The definition of spouse can include customary law spouses or same-sex partners, depending on provincial law. In Quebec, only couples who are married and in a civil union can benefit from creditor protection. Common law partners must be irrevocably appointed to receive equal benefits. First
2 If the beneficiary is a member of the designated group, the contract is exempt from foreclosure, although the designation of the beneficiary can be revoked. In the case of designation of a revocable beneficiary who is not included in the named group, the policy is not subject to creditor protection under the provincial insurance law during the existence of the beneficiary. In the case of owner or nominee property, there is no creditor protection for the term of the insured pursuant to the Insurance Act of Ontario, s. 171 The definition of a beneficiary does not include the owner or the owner’s personal representatives. By this logic, when the owner and the life insured are different persons, it is argued that the owner may inadvertently lose the creditor’s protection if he designates himself as the beneficiary. For example, this would occur in cases where the wife has a policy against her husband and calls herself beneficiary. This will be considered as a favorable appointment for the insured (owner) of the soul. If so, there will be no creditor protection for the death of the insured (owner) against the insured creditor, because there will be no heirs as defined or specified in s. 196(1) of the Ontario Insurance Act. The words of this section are important because they relate to the insured and the insured. Is the scenario above s. 196(2) of the Ontario Insurance Act, which provides creditor protection for the life of the insured, however, is controversial, and interpretation of the Act by insurance companies may differ from this viewpoint. Based on this section, if the wife makes a nomination on her behalf, it can be assumed that the spouse of the insured has been nominated. In Tennan v. In Tennant (2002) 34 R.F.L (5th) 167, the court considered subsections 196(1) and (2) of the Ontario Insurance Act. The ex-spouse enforces a spousal support order against the ex-spouse. The husband argued that the annuity contract was protected because the beneficiary under both contracts was his ex-wife. In this case, the creditor is the ex-wife. The court concluded that the ex-spouse was not named as part of a protected class, thus allowing the ex-spouse’s claim to income streams arising from the annuity agreement. However, the outcome of the case could have been different if the parties were not ex-spouses. While there is no direct case law on this issue, it is controversial. Creditor protection is not available if a life insurance policy or annuity policy is abandoned by the owner because of its cash value. The exception to this rule is annuities purchased with locked RRSP funds that are self-drawn from registered retirement plans. In addition, it used to be thought that there was no legal protection for payments received under a life insurance policy or an annuity contract: whereas the policy itself may not be subject to foreclosure. creditor. However, the Court of Appeal of Ontario, Whalley v. Harris Steel (1997) 46 C.C.L.I. (2d) 250, (1997) 17 C.C.P.B. 1 argues that such payments are premium payments and are therefore protected by the lender, even when paid for life insurance or annuities. The same argument holds true in Christianson, (1996) 39 Alta. L.R. (3D) 101 BC This trend seems to have overturned previous thinking on the subject. RRSP and RRIF Life Insurance The definition of life insurance in all provinces includes an annuity. Most of the RRSPs issued by insurance companies are in the form of liability annuities and are therefore defined as life insurance in provincial insurance laws. Noteworthy is the amendment to the Federal Bankruptcy and Insolvency Act published in the Amendment that provides creditor protection in bankruptcy for all RRSPS and RRIFS of any issuer, without specifying specific beneficiaries, subject to certain limitations (eg, 12 months billing). contribution). This is done without affecting the exclusion of provinces where RRSP and RRIF are life insurance products. That is, if the life insurance RRSP has a suitable beneficiary designation, it will receive creditor protection under the provincial insurance law and therefore the provincial exemption in the BIA also applies. If the registered insurance product is not covered by provincial insurance law exceptions (i.e., if no family category beneficiary is named) and the insurance RRSP is not held in a province that has passed a law providing provincial cover for all RRSP (currently Saskatchewan, PEI , Manitoba, B.C. Alberta, Newfoundland and Ontario with 2
Creditor Life Insurance
3 introduces Prop 70, which was not adopted at the time of the update) The fix can now be found at BIA. However, this protection is still subject to the limitations set out above (i.e. cancellation). Annuities in Quebec In Quebec, annuities can be issued by life insurance companies and trust companies. The legal case has provided creditor protection for the annuity product. Supreme Court of Canada v. Scotia Capital Inc. Bank of Nova Scotia and Guy Thibault, [2004] 1 S.C.R. 758, concludes that agreements retaining ownership and control over investor capital do not reflect the notion that creditor protection is extended to family members, which is the main reason for owner protection. Shortly after the Supreme Court of Canada’s decision in Thibault, the Quebec Parliament responded by amending the law governing annuity contracts sold in the province. Any contract that constitutes an annuity subject to section 2367 of the Quebec Civil Code will continue to be protected by the creditor. Starting December 6, 2005, capital from “proposed annuity contracts” (prior to March 1, 2006 and not fully compliant with section 2367) will remain exempt from confiscation. Until the end of the contract, under certain conditions. Meet Planning Points When lifetime creditor protection is important, it is a good idea to name alternative beneficiaries in the covered group, as there may be exceptions to foreclosures.