The Canadian government has for many years been examining the life insurance industry, looking to reduce the tax favourable treatment of life insurance products. For many years Canadians have had access to the only three remaining tax-sheltered financial vehicles (our personal residences, TFSA’s and life insurance) used to create, protect, and preserve wealth. Now the government is looking to reduce the tax effectiveness of one of these cornerstones – life insurance.
On Jan. 1, 2017 new tax rules become effective, adversely impacting life insurance policies acquired after Dec. 31, 2016. The effect of the pending changes will serve to increase annual out-of-pocket expenses for life insurance while reducing long term cash values and death benefit growth, when compared to policies issued in 2016 or earlier.
There is still an opportunity to protect yourself from the upcoming changes. Life insurance policies issued in 2016 and providing permanent lifetime death benefits will be grandfathered and will remain unaffected by the upcoming changes taking place Jan. 1, 2017.
As such, you should review your life insurance. If you have been thinking that perhaps you need additional insurance or that you should be converting your existing term insurance into insurance that provides lifetime benefits to your family, then you should consider taking action NOW to avoid the impact of the upcoming changes. And you need to act urgently. The insurance companies are forewarning that to guarantee a 2016 issue policy, the application and all underwriting requirements need to be received by the insurance company by September 1, 2016. This is the minimum required lead time the insurers need to process and issue new contracts that will retain their beneficial grandfathering status.
Acting prior to September 1, 2016 will allow you to retain significant benefits that will not be available to consumers who acquire life insurance dated after the Jan. 1, 2017 implementation date. These include:
- Avoiding anticipated premium increases of approximately 5-10% per year, payable for life with possible cash value reductions. The amount of this increase will vary based on age, plan and insurer.
- Taking advantage of younger insuring age. Life insurance pricing is based on one’s insuring age. Deferring a decision to purchase life insurance by six months may result in an older insuring age and an increased premium of approximately 4-5% annually payable for life. Again the amount of the premium increase will vary based on age, plan and insurer.
- Total combined additional premium of 9-15%: That’s the combined impact of the added premiums payable for life arising from higher insuring ages & the upcoming change to the rules governing life insurance.
- Avoiding reductions in the Capital Dividend Account: for corporate owned life insurance policies, the amount of the TAX-FREE benefit available through the Capital Dividend Account will be reduced for policies issued AFTER Dec. 31, 2016.
Change is coming in 2017. However, it’s not too late to take advantage of these benefits before time runs out; call The Hull Group before September 1, 2016.