BMO Insurance is offering an advance on the death benefit in case of financial hardship to permanent life insurance policyholders whose life expectancy is less than five years.

By providing this advance, which corresponds to 50% of the benefit foreseen in its life insurance contract, BMO Insurance says it is providing an alternative to insureds who lack financial resources to pay for long-term care. The annual instalments of the advance are paid over five years, to a maximum of $250,000.   

 The Conference for Advanced Life Underwriting’s (CALU) issued a press release on the same day as that of BMO’s announcement, applauding the initiative.

Countering life settlements

What neither press release spelled out is that BMO is actually proposing an alternative to life settlements, whereby policies in force are purchased by third parties. In this secondary market, investment firms offer insured a lump sum in exchange for their life insurance policy. This practice is frowned on in the industry and banned in certain provinces, including Ontario.

Inspiring imitators

CALU has good reasons to rejoice at BMO’s initiative. “The launch by BMO meshes with our program and is a better solution than life settlement,” CALU CEO Guy Legault told Insurance Journal. The launch is in fact the outcome of a process that CALU set in motion after publishing its 2015 report inviting the industry to find an alternative to life settlements.

Kevin Wark, tax consultant for CALU and managing director for Integrated Estate Solutions, says he hopes the solution will extend to other insurers. “We’ve promoted it, looking at the life settlements market. We didn’t take a position on whether this market is good or bad. Many provinces are banning it, others allow it. We thought it would be better for the companies to come up with a solution,” he explains.

BMO confirms its intention

Asked by Insurance Journal about his intentions regarding life settlements, BMO Insurance Vice-President of Business Development Daniel Walsh replied: “Although some provinces may allow such transactions, we think our approach is more advantageous for customers who are facing financial hardship because it provides them with the liquid assets they want and it preserves part of the insured capital for their heirs. In life settlements, a life insurance contract is sold to a third party. As a result, the contract beneficiaries do not receive any death benefit.” 

Walsh points out that the amount customers receive under life settlements is net of several factors: actuarial fees, amounts that may be paid to advisors who act as intermediaries, and the return for the contract buyer.

Kevin Wark emphasizes that the CALU is not asking insurers to replace the life settlement market. “The solution we are promoting is not intended for the full replacement of the insurance policy. It’s more focus to insurance needs. The idea is to pursue the policy, and that the beneficiaries can get the residual death benefit. It preserves the death benefit as much as possible,” he explains.

Advisors deterred

Most insurers ban advisors from engaging in this practice, which is widely viewed as speculative. “The third party has no insurable interest in the life or well-being of the insured. They are essentially betting on the insured’s life expectancy by acquiring a financial interest in the transaction. Buying a life insurance contract in order to make a profit is not part of the basic principles of life insurance,” Daniel Walsh, of BMO Insurance, explains.

Advisors who deal with BMO must follow this principle. “BMO Insurance neither promotes nor supports life settlements. We think our position is in line with that of other insurers. In fact, BMO Insurance will cancel the contract of any advisor involved in promoting such transactions involving our customers,” he adds.

A very selective advance

BMO Insurance does a complete analysis of the state of health of insured policyholders who request an advance, Walsh points out. A competent authorized physician and the insurer’s medical team determine the customer’s eligibility. 

There are two criteria for financial hardship: medical expenses and household expenses must exceed earnings after taxes; and the policyholder’s net value including the principal residence must be $250,000 or less. Household expenses considered include rent, mortgage, utilities, food and real estate taxes, Walsh explains.

BMO Insurance specifies that the advance is non-contractual. Walsh explains that the advance is not a rider but rather a benefit included automatically in all insurance contracts at no additional cost.

Broadening the industry standard

The new advance expands BMO Insurance’s current compassion benefits program. This program foresees an advance on life insurance in case of terminal illness for insured whose life expectancy does not exceed 12 months. The amount also corresponds to 50% of the insurance benefits, to a maximum of $250,000. However, this amount is paid in one instalment.  

Although several insurers offer a compassionate advance, the extension by BMO is the first of its kind in the market, the insurer says. The benefit paid by insurers is usually limited to insured whose life expectancy is between 1 and 2 years, BMO says. The percentage and the limit of the benefits may also vary between insurers.   

Long-term care

Both BMO and CALU say they are also planning to develop long-term care solutions in the industry. “We have been actively advocating for solutions that support individuals with serious long-term health issues and who are in financial need. This new program is an innovative solution to the bigger problem of people outliving their savings,” says CALU Chair Roger Sinclair.

BMO is positioning the advance as a means for insured to cover their unforeseen expenses and medical costs. "Canadians are sometimes faced with unexpected medical-related expenses at a very difficult time in their lives. We want to do more to help our policyholders cope with health-related hardships,” explains Steven Cooney, Senior Vice-President, Head of Individual Life and Annuities, BMO Insurance.

Guy Legault says that many Canadians mistakenly believe that public programs will meet their long-term health care needs. Although these programs exist, they vary by province and are often linked to the person’s income, he explains. “Based on future funding requirements for long-term care, it is anticipated that Canadians will become responsible for an increasing portion of the overall costs, either directly or through increased taxes,” he says.

“We will actively engage with others in the insurance industry and with the federal government to ensure that Canadians, particularly seniors, are properly prepared for the potentially significant costs associated with living with chronic disease and long-term care,” Roger Sinclair says.