18 June 2003 External T.I. 2003-0004265 - CRITICAL ILLNESS INSURANCE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: To provide an update on the CCRA's position on issues raised with respect to "critical illness insurance".

Position: Where an insurance policy provides for both critical illness and "return of premium" (ROP) benefits , the ROP benefits may constitute life insurance benefits. For civil law purposes, the primary coverage provided under the policy determines the character of the policy for tax purposes. It is, as yet, undetermined whether this is also true of policies governed by common law.

Reasons: N/A

CALU - Conference for Advanced Life Underwriting (2003)

Question 1

Critical illness insurance

In February 2002, we submitted a request for a technical interpretation on a variety of issues regarding critical illness insurance. Can the Agency provide an update or any guidance with respect to the issues raised in this request?

Agency's Response

Your request for a technical interpretation identified a number of issues respecting the application of the Act to holders of critical illness insurance. In response to your request, this Directorate has undertaken a comprehensive review of the issues raised. This review is not yet complete; however, we can provide you with an update.

You have advised that critical illness insurance may be issued as stand-alone insurance policies or as riders to life insurance policies. In both cases, where critical illness coverage is purchased, there may be available additional benefits, referred to as ROP or "return of premium" benefits for an additional premium. ROP benefits, we understand, may be payable in the event of the policyholder's death, the maturity of the policy, or periodically.

A key concern evidenced by your submission is how stand-alone critical illness policies will be characterized for purposes of the Act. In this respect, we think it may be relevant whether the policy includes ROP benefits and if so, the terms and conditions of the various benefits available under the policy.

Where a policy provides benefits only in the event of critical illness, we agree with your view that the policy should be viewed as a "sickness" policy, rather than a life insurance policy for purposes of the Act, notwithstanding that such policies are primarily issued by life insurers. In our view, the proceeds of disposition of such a policy would generally not be included in the policyholder's income under section 3 of the Act.

The appropriate treatment of policies providing benefits in addition to critical illness benefits is less clear. Some "ROP" benefits may well be life insurance. However, we have yet to satisfy ourselves that the primary coverage under such policies should dictate its treatment for purposes of section 148 of the Act in common law jurisdictions. We can confirm that this appears to be the case under civil law.

We understand that you have also raised these issues with the Department of Finance with a view to clarifying legislative intent with respect to critical illness policies. We expect to be working closely with the Department of Finance and with you in the coming months to clarify the remaining issues you have raised.