10 April 2014

The Value of a Comprehensive Home Insurance Coverage

A funny thing happened to one of our clients the other day. She lives in a condo with two kids under 3 years old. One day, she started smelling something bad coming out of her second bathroom so she called her property manager to complain and the property manager told her to call a plumber.

The next day, a plumber came in and told her that since she doesn't use that shower that she should just run the shower for a while and the smell should go away.

She did as the plumber suggested but the smell didn't go away. In fact, it just got worst each day. She called the plumber again and the plumber said he couldn't figure out what was wrong. So he decided to remove the wall to find out if there was a broken sewer line which could be the source of the smell. Once the wall was taken out, the smell got even worst, in fact, 10 times as worst. She described it as like hitting a wall of stink and it was unbearable.

The plumber found nothing wrong and said the smell must be coming from the apartment below. So she called her property manager and told him that they have to go into that apartment below and find out the source of the smell.

The property manager called the owners, and it turns out that the owners don't live there but their brother did and promised to go there later in the day to check it out.

Well, the owners didn't actually check out the apartment until the next day and when they did, guess what they found? It turns out the brother died while in the tub, maybe from a heart attack. The brother has been dead for more than three weeks and nobody even bothered to check in on the brother the whole time.

So what is the point of this story other than sharing a morbid story.

Well, our client could't stay in her apartment because the smell was unbearable, especially with two kids under 3 years old. She was talking to her neighbor and who was wondering what to do. Our client told her that she will be checking with her insurance company if the company will pay for the cleanup and for her to move out. She asked her neighbor if she had home insurance said that she doesn't because she's just renting and didn't see the need for having insurance and asked if insurance would have paid for it.

Fortunately, our client has a comprehensive condominium insurance policy which is an All Risk policy. This means that all perils are covered unless specifically excluded in the policy. This policy also includes coverage for Additional Living Expense and this coverage will pay for her food and lodging until her place has been cleaned up.

Additionally, her insurance will pay to move her stuff out of her apartment to be cleaned and put in storage then return them once the apartment has been sanitized. The cost for the removal, cleanup and return of her personal property alone is $5,000.

You wouldn't normally think that something like a bad smell would be covered by your home insurance. But under a Comprehensive policy, it does, especially in this situation. That's why it pays to have a Comprehensive Insurance policy because it covers unusual situations like these.

29 October 2013

Losing the Creditor Protection Status of Your Life Insurance

Life insurance, especially Permanent Life insurance like Whole Life and Universal Life Insurance is one of the most underrated tool that one can use as a savings vehicle. Depending on the type of insurance used, you can get returns like you get from a GIC or like a mutual fund with he added benefit that the returns in a life insurance policy are tax deferred or can potentially be tax free. These are some of the benefits of a life insurance policy with cash values.

Did you also know that the cash value in a life insurance policy is also protected from creditors? All life insurance policies and life insurance products like segregated funds offer creditor protection if set up properly. This is because there is a designated beneficiary in the policy. However, for a life policy to be properly protected, the beneficiaries have to be set up properly.


I recently came upon a client who is undergoing bankruptcy. The bankruptcy happened because of a divorce and the ex-wife is now entitled to payment and the client had to file for bankruptcy. So the ex-wife is now the creditor of the husband.

Prior to the separation, the husband has a Universal Life policy where he is putting extra funds in the policy to build up his investments and cash values. The ex-wife was designated as a beneficiary of the policy with the kids set up a contingent or secondary beneficiaries.

After the divorce, the husband no longer wanted the wife to be the beneficiary. He wanted his kids to be the new beneficiaries but he didn't think his children (aged 19 and 21) should suddenly inherit a lot of money at a young age should he suddenly pass away. He is afraid that they may squander the money if they get it at a young age and thought that 30 would be an appropriate age for them to get the life insurance proceeds.

Instead of speaking to me about his situation, he directly called the insurance company to have his beneficiaries changed. He changed the primary beneficiary from his ex-wife to his sister and set up his children as contingent or secondary beneficiaries and had his brother be the trustee for the children until the children turn 30.

Then he filed for bankruptcy. Big mistake.

Life Insurance in Bankruptcy

As a general rule, all assets of an individual are security for unpaid debts owing to a creditor. This applies whether or not the individual is bankrupt.

When someone files for bankruptcy, his properties are turned over to his trustee. The life insurance policy of that individual is then put into a status called "Assignment in Bankruptcy". When a policy is under Assignment in Bankruptcy. The owner of the life insurance policy cannot make any changes to the policy until that person is discharged from bankruptcy.

Remember when I said that a life insurance offers creditor protection? It does but only if at least one of these two conditions are met:
  1. The beneficiary is designated as "Irrevocable"
  2. The beneficiary designated are certain family members specified in the provincial insurance legislation. In most common law provinces, the family member must be a spouse, child, grandchild or parent of the life insured in order for the policy to provide creditor protection.
Did you see the problem here? The client, not wanting the have the ex-wife as a beneficiary, but at the same time was wary of having his young adult children inheriting a big insurance proceed designated his sister to be the primary beneficiary. He instructed his sister to manage the money and give it to the children when they turn 30.

Unfortunately, under the provincial insurance legislation, when you designate a sibling as a beneficiary, they are NOT considered as family members. Hence, no creditor protection exists. And when your policy is under assignment in bankruptcy, you cannot do any changes to the policy like changing beneficiaries, etc.

Because the client has built up significant values in the life policy, the creditor now wants the cash in the life policy to pay off his debts. So now the client will either be forced to surrender the life insurance policy and leave nothing to the children and use the cash values to pay the creditor, or he has to borrow money from someone equal to the amount in the life insurance policy to pay the creditor. And you know you can't just borrow money from anyone when you're in bankruptcy.

Fortunately, the trustee was kind enough to tell him that they're not going to force him to cancel his policy. But did tell him to borrow money from his brother or sister and pay the equivalent of the cash value in the policy then they will release his policy from bankruptcy. Once released, the client can how do what he wants with his policy.

How could the client have saved himself from this headache? There are two thing he could have done.
  1. Assign the children to be the beneficiaries and assign his sister to be the trustee for the children until age 30 or whatever age he decides to give the children the full amount. That way, the sister controls the money until the children reaches age 30. At which point, they are entitled to get the full amount.
  2. Assign the sister or the children to be the irrevocable beneficiaries.
There are some important issues that needs to be understood when you assign someone as an irrevocable beneficiary. Basically, you cannot change this beneficiary without the consent of the beneficiary which could be a problem if you happen to not get along with that beneficiary later on.

There are also some rules that govern bankruptcy with regards to protecting your assets. The main thing is that if it was deemed you did something for the specific reason of hiding them from your creditors, you will not get protection. The general rule of thumb is, any assets you protected say in your life insurance or RRSP within one year from bankruptcy, they are not creditor protected.

If the client changed the beneficiary just prior to filing bankruptcy, he may only get partial protection from his creditors on his life insurance or he may not get any protection at all. That is up to the court to decide. But if he changed the beneficiaries two years ago, then he will be fully protected if it was deemed the change wasn't for the purpose of protecting the assets from creditors.

To summarize, life insurance is a great way to invest and also protect your assets from your creditors. They offer competitive rates of return and the death benefit bypasses probate and is tax free.

06 May 2013

Planning For Retirement? Cover Your Basic Needs

When you're planning for retirement, first, cover your basic needs. Basic needs are income you need to cover the basics like food, clothing, shelter, etc. Watch this short video on how to plan to cover your basic needs.

If you are interested in learning more, ask me how you can set one up for yourself.