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B.C. Regulator Raises Concerns about Donation of Life Insurance Policies

By Kevin Wark

Life insurance may be used to facilitate large charitable gifts to registered charities. One common method is for an individual donor to designate the charity as the beneficiary of a policy, resulting in the donor’s estate receiving a large charitable gift receipt on the life insured’s death. Another option is to gift a new or existing policy to a registered charity, with the donor receiving a charitable gift receipt equal to the fair market value of the policy and for any ongoing premium payments made by the donor.

Recently, however, the British Columbia Financial Services Authority (BCFSA) has raised concerns about the ability of registered charities to solicit the donation of life insurance policies where the donor resides in that province. In this regard, the BCFSA has sent enforcement notices to at least two registered charities indicating that their solicitation of life insurance policy donations from B.C. residents contravened the province’s Insurance Act. The registered charities were specifically advised that their solicitation of life insurance policies was in contravention of provincial “anti-trafficking” rules.

The B.C. anti-trafficking rules make it an offence for any person other than an “authorized agent of an insurer” to trade in life insurance policies for the purpose of procuring the “sale, surrender, or transfer” of a life insurance policy. This is the first known instance where a provincial insurance regulator has applied these provisions to a registered charity. This interpretation may have broader ramifications since a number of other provinces, including Alberta, Manitoba, and Ontario, have similar anti-trafficking rules.

A number of organizations have sought clarification of the BCFSA’s position, and the regulator has indicated it will conduct a further review based on the submissions and make an announcement when this review is completed. Fortunately, no other provincial insurance regulator has indicated that it will be taking a similar position to the B.C. regulators. However, due to the BCFSA enforcement notice, at least one life insurer has announced it will no longer permit the transfer of life insurance policies by B.C. residents to registered charities.

The British Columbia Insurance Council (BCIC) has also provided some additional guidance to B.C. insurance advisors who may wish to assist clients and/or registered charities with the donation of life insurance policies. Notice ICN-19-005 dated December 19, 2019 outlines the following key points:

  • The B.C. anti-trafficking rules do not prevent a B.C. resident from purchasing a life insurance policy and designating a registered charity as the beneficiary.
  • For a life insurance advisor to qualify under the “authorized agent” exemption from the anti-trafficking rules, the advisor must be specifically authorized by the insurer to represent that company in a transaction to purchase an existing policy.
  • B.C. life insurance registrants should refrain from the following activities: Advertising or representing a willingness to facilitate the purchase of an insurance policy from an insured person; dealing or trading in policies for the purpose of obtaining the assignment or transfer of the policy; or dealing or trading in existing policies for the purpose of securing life insurance policies as collateral for loans.

The notice also makes it clear that the anti-trafficking rules do not prevent an insurance advisor from assisting a client who specifically seeks that advisor’s help in donating their policy to a registered charity. However, the advisor should only act on behalf of their client and not receive any fee or other benefit from the registered charity.

Given the position of the B.C. regulators, and the fact that similar legislation exists in other provinces, insurance advisors need to proceed with caution when assisting with the donation of a life insurance policy to a registered charity. Provincial penalties for contravening their insurance anti-trafficking rules include fines and the possible suspension or revocation of an agent’s license. So it’s recommended that advisors working in this area consider implementing the following practices:

  • Do not accept referral fees or other compensation to assist a registered charity in obtaining the donation of a life insurance policy.
  • Provide the client with written confirmation indicating that the advisor is working solely for the client (and at their request) in facilitating the transfer of an insurance policy to a registered charity.
  • Contact the affected life insurance company to ensure it will permit the transfer of the insurance policy and confirm that the registered charity will accept the donation of the insurance policy.

Kevin Wark, LLB, CLU, TEP, is the author of The Essential Canadian Guide to Estate Planning (2nd Ed.) and The Essential Canadian Guide to Income Splitting. Download a complete estate planning fact-finder at www.integratedestate.ca

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