No one
can foresee the future, and although you may not expect to encounter
financial difficulties, the possibility exists.
When considering your investment options, it's reassuring to know that Annuities and RRSP's issued by life insurance companies are considered life insurance contracts and may offer the creditor protection that these products afford ( so long as certain criteria are met ). For example, provincial insurance legislation restricts a policy owner's creditors and the creditors of the policy owner's estate from seizing the proceeds of the plan on the death of the life insured / annuitant, so long as a beneficiary is named.
If the beneficiary designation includes one or more of the spouse, same-sex partner (in Ontario) parent, child or grandchild of the person whose life is insured, then provincial insurance legislation restricts the policy owner's creditors from seizing the plan's proceeds while it is in force. However, for the creditor protection to apply, the beneficiary must not be the policy owner or the policy owner's personal representative ( executor / estate ). Note that creditor protection doesn't apply to the beneficiary ( the person who receives the proceeds of the life insurance product ).
In a bankruptcy situation, the federal Bankruptcy and Insolvency Act (BIA) incorporates the creditor protection provisions of provincial insurance legislation - - meaning that a trustee in bankruptcy may not take the property of a bankrupt individual that would otherwise be divisible among the bankrupt's creditors ( subject to the above criteria ). On the other hand, under certain bankruptcy circumstances, the creditor protection provisions of provincial insurance legislation won't apply. In these cases, the trustee in bankruptcy may take property settled by a policy-owner if the policy owner becomes bankrupt (settlement in a life insurance product context refers to a transfer of funds to a life insurance contract or a change of beneficiary on the life insurance contract).
For example, if a bankruptcy occurs within one year of settlement, the trustee may take the property settled by the bankrupt policy-owner. If a bankruptcy occurs within 5 years after the settlement date and the trustee can prove that either the insured was insolvent at the time of settlement, or the interest of the insured didn't pass when the settlement was reached, then the trustee in bankruptcy may seize the property settled by the bankrupt policy owner.
As always, we can't overlook the part the Canada Customs and Revenue Agency (CCRA) may play when creditor protection is in question. If a policy owner is is a tax debtor (owes money to the CCRA), a Requirement to Pay notice from the CCRA requires a life insurance company to provide money to the CCRA which would otherwise be payable by the life insurance company to the tax debtor (policy-owner). The courts have not enforced the Requirement to Pay in certain bankruptcy situations; however, enforcement in a non-bankruptcy scenario is uncertain. The law is still evolving where the CCRA is involved.
In addition, provincial fraudulent preference legislation can cancel out the creditor protection that may otherwise apply to life insurance contracts where the insured has acted for purposes of defeating his or her creditors, or has not acted in good faith. Courts are quick to strike down creditor protection in such circumstances.