Can a Synergy solution be collaterally assigned to a financial institution?
Synergy is a life insurance policy, a critical illness insurance policy and a disability insurance policy in one solution. Clients buy between $100,000 and $500,000 of Synergy. This amount creates a “pool of money” from which benefits are paid. Whenever a benefit is paid from the life insurance policy, the critical illness insurance policy or the disability insurance policy, the available pool of money reduces by that amount.
Because Synergy consists of three policies, the question is, can the life insurance policy under the Synergy solution be collaterally assigned or must the entire Synergy solution be collaterally assigned?
The “pool of money” concept means that the amount of the life insurance policy death benefit under the Synergy solution can be impacted if a claim is made on the solution’s critical illness insurance policy or the disability insurance policy.. Therefore, a lender will require the collateral assignment of the entire Synergy solution. What this means is that any benefits paid would first be used to repay any outstanding loan balance with the financial institution.
This may be a significant issue for your client from a planning perspective. If your client is looking to replace income during a disability or use the critical illness insurance benefit for medical treatment, they must be aware that the funds paid under the disability insurance policy or critical illness insurance policy may not meet that purpose and rather will be paid to the financial institution in satisfaction of the loan under the collateral assignment.
Even though the policyholder sends in one premium for the Synergy solution, each policy will indicate what percentage of the Synergy solution premium is for each policy. The adjusted cost basis (ACB) of the life insurance policy is calculated using the premium for the life insurance policy only. The net cost of pure insurance (NCPI) is also calculated for purposes of calculating the life insurance policy’s ACB. The NCPI is calculated by multiplying the “net amount at risk” under the life insurance policy by the probability of death for the year.
The 1969-1975 Canadian Institute of Actuaries Select and Ultimate Mortality Tables are used to determine the probability of death in respect of the insured under the policy. The death benefit is used to determine the net amount at risk under the policy. Because the death benefit of the life insurance policy under the Synergy solution can decrease due to a claim under the disability insurance or critical illness insurance policies, the NCPI calculated for the life insurance policy takes this into account.
You can get the NCPI for the life insurance policy under the Synergy solution by contacting LIFETAX@manulife.com. NCPI calculations are done on a calendar year basis.
For purposes of the collateral insurance deduction, the lesser of the life insurance policy premium and the NCPI may be deductible. There would be no collateral insurance deduction for the premiums under the critical illness insurance or disability insurance policies.