September 30, 2016 Deadline
Have you prepared for the 2017 changes?
On January 1, 2017, life insurance is losing valuable tax advantages which have been available since December 2, 1982. The impact varies. Overall, life insurance will remain worthwhile. You may be able lock-in the 1982 rules if you act promptly.
What's Really Changing?
The changes may not affect you today but could in the future. If you have life insurance which is "grandfathered", you're able to keep the advantages of the 1982 rules for later use.
The Exempt Test Policy (ETP)
Life insurance policies with a cash value component — whole life and universal life — allow tax-sheltered investment growth which is exempt from annual taxation. The maximum fund value allowed is based on a comparison with a reference called an Exempt Test Policy (ETP). As long as your policy has a smaller fund value now and in future projections, you generally have an exempt policy. Insurers take steps each year to make sure that your policy is exempt: once lost, exempt status can never be restored.
The 2017 rules generally allow less tax-sheltered growth — especially for universal life insurance with level cost of insurance rates.
The Mortality Tables
People are living longer now than in 1982. The new mortality tables reflect the increased longevity. The is update has consequences:
- dampening the Capital Dividend Account (CDA) Credit used to remove a death benefit from a private corporation tax-free
- reducing the tax deductions when using life insurance as collateral for investment loans
The Three Key Changes
1. Less Tax-Sheltering Room
2. Dampened CDA Credit
3. Smaller Tax-Deductible Premiums
Who's Impacted Most?
You're most affected if
- you have term life insurance: you might be able to lock-in the 1982 rules by converting from term to permanent coverage regardless of your health. Your insurance contract will have the details.
- you have changes requiring underwriting: perhaps you're paying smoker rates but now qualify for nonsmoker rates, or you're planning to add a term life insurance rider. Consider making those changes now.
- you own a corporation: the Capital Dividend Account (CDA) Credit is being reduced in the early policy years on policies put into place after 2016
- you borrow to invest: a portion of your premiums may be tax deductible if the lender requires assignment of life insurance as collateral for the loan. The amount of the deduction is being reduced for policies put into place after 2016.
- you haven't reviewed your insurance recently: unless you monitor and update your insurance regularly, how can you know if you have suitable coverage now?
Here's an overview of the impacts for male nonsmokers age 40, 50, 60 and 70 (tap to open a 4-page PDF):
If you're a female, a smoker or a different age, pick the nearest age to get a general idea of the impact.
What Can You Do?
You have two proactive options:
- Fix what you have: You may be able to make changes to your current life insurance.
- Add what you're missing: If you need more life insurance, we'll help you examine different ways to fill the gap. Options may include temporary insurance, permanent insurance or a combination.
A Real Deadline
You can't procrastinate. You can't apply for insurance on December 31st and get grandfathered. That's not because our office will be closed! There are deadlines from the insurance companies.
Taxevity's deadline is September 30, 2016. This does not guarantee that the insurance companies will be able to make the changes before the new rules take effect.
More Taxevity Articles
- How to prepare for the changes to life insurance
- The Reduced Capital Dividend Account (CDA) Credit for corporately-owned life insurance
- Smaller tax deductions for life insurance premiums
You'll find more details in these sources and resources:
- Explanatory Notes - Life Insurance Policy Exemption Test (PDF, Department of Finance)
- New law will impact insurance tax benefits (advisor.ca, May 2015)
- Changes to exempt test rules coming (Investment Executive, Feb 2016)
- Change is coming (PDF, Forum, Apr 2016)
- Tax changes impacting life insurance planning (BDO)
- New rules for life insurance (PDF, Grant Thornton)
- Getting ahead of tax changes that will impact your life insurance (The Link Within blog; includes a video)
- Upcoming changes to insurance taxation rules in Canada (PDF, BMO Insurance)
- Impact of 2017 tax changes on life insurance (PDF, Sun Life Financial)
- Manulife microsite
You have two proactive options:
If you have the time and desire to make changes on your own, you can contact your insurance companies directly. Since part of your premium pays for service from your advisor, you might want to get your advisor involved.
We're here to help you with a free review of your life insurance. This offer is available as our schedules allows. Because of the real deadlines, sooner is better. We can meet in person at our office or by a video meeting. To get started: Arrange A Chat