When an insurance audit is done as part of a mandate given by a policy owner, we find that in 99% of the cases that the policy has been mismanaged. In this particular case, such mismanagement cost the client more than $90,000. Why is this? The reason is simple and it is because financial advisors do not know how to deal or manage the Fair Market Value of a life insurance policy. Why is this? Again the reason is simple. Insurers have blocked any attempts to educate financial advisors on this issue. We always stated that a Universal Life policy badly mismanaged by an advisor is very profitable to the insurer. Why would they change this? We are however disappointed with Advocis for not actively be providing education on this subject since it is their responsibility. To financial advisors: keep doing a bad job and we will keep writing reports like this.
Following is the executive summary of this insurance audit and the full report is available at this link:
3.0 Executive Summary
You currently are the sole shareholder of corporation ABC. Corporation ABC does not own any assets aside from the liquidities created from the employment income paid by employer XXX to this corporation and representing half of your yearly income. The other half of your yearly income is provided by your business which is not incorporated and where business assets worth more than $1 million are personally owned. When you were questioned on your corporate structure, you could not provide any information to us as to your goals and objectives in adopting such a corporate structure.
While we do not need this information to conduct the audit of your insurance policies, we strongly suggest that you sit with your tax advisor to clearly understand your corporate structure and taxes that would result from this structure. While your business assets would probably qualify as a “Qualified Property” for the purpose of the capital gain exemption, you should discuss this with your tax advisor in order to gain a better understanding of any estate planning issues.
Our insurance audits of the past management and past performance of the two policies have revealed serious issues. For your policy #xxxxxx, your financial advisor has shown an extremely poor knowledge of the investments offered in the Universal Life he sold. Your premiums paid were invested into a bond fund for 15 years. You have achieved an annualized return of -2.28% which resulted in a loss of $15,000. In addition, as shown in the section of our report discussing this issue, you have lost an additional $25,000 considering that the money should have been invested into the guaranteed account with a minimum rate of return of 3%.
For policy #yyyyyyy, on the life of your son, your financial advisor recommended that you used the dividends to reduce the premium payable. This was poor advice when it is clear that you had the income available to pay for this premium. Instead it should have been shown to you how the dividends could have been used to purchase additional insurance. These dividends would have purchased a minimum of $150,000 of additional insurance (this number is an estimate as we do not have past dividends history and insurance cost, but we believe the number of $150,000 to be conservative). With a total death benefit of $250,000, the Fair Market Value of this policy would have been 2.5 times higher which would have allowed you to withdraw an additional $45,000 tax free from your corporation upon the transfer of this policy.
As indicated in the report, we believe that the policy #yyyyyy with a Fair Market Value of $30,000 could be transferred to your corporation allowing you to withdraw $30,000 from your corporation on a tax free basis. The main advantage of doing this transfer, now versus later, is that the Adjusted Cost Base of this policy is above its cash value which means there would be no taxable consequence on the disposition of this policy. However this Adjusted Cost Base will soon be quickly decreasing.
For your policy #xxxxxx, the Adjusted Cost Base is almost zero and a significant amount of taxes would be due on the disposition of the policy and transfer to your corporation. While your policy has a Fair Market Value of $65,000, the $25,000 cash value would be fully taxable. You could consider waiting to transfer the policy to your corporation until there is a significant change in your insurability. We have included a Fair Market Value estimate at year 10 and 20 based on 100% and 200% change in insurability.
To conclude, it is clear that the lack of knowledge and training of your advisor has cost you an amount around $90,000. It would be easy to condemn this advisor which is your right while seeking to recover this loss.
We however feel that we have a duty to inform you that there is a reason why such advisors are not knowledgeable in managing existing policies. The reason is because companies such as Sun Life are actively denying the tools, training or education to such advisors. It is clear that it is Sun Life and not the advisor who has gained the most from the mismanagement of your policy.
We have approached Sun Life and other companies offering to train their advisors for free but they are not interested. We have created a tool to enable advisors to manage the Fair Market Value of the policy but no insurance companies want to promote this tool.
We have approached Advocis, the association representing financial advisors in Canada, and they also have shown little interest in improving the knowledge of their members. We feel this information is extremely important to consider in choosing the appropriate legal avenue to deal with this. We are available to provide sworn testimony in regards to this and any other facts or observations contained in this report.