2017 Tax Changes For Life Insurance
New tax rules took effect on January 1, 2017
The previous tax rules were in effect from December 2, 1982 to December 31, 2016. They were generally more generous than then new rules. The impact varies. Policies purchased before 2017 and used carefully are often "grandparented". Overall, life insurance remains worthwhile, provided updated strategies are used.
Products purchased before 2017 are generally "grandfathered" under the 1982 rules .
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 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.
- you own a corporation: the Capital Dividend Account (CDA) Credit in the early policy years is now lower (which you can offset by adding an inexpensive term life rider)
- 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 now lower.
- 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?
What Can You Do?
We can't go back to the 1982 tax rules but you can:
- 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.
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