Now is the time to invest in permanent insurance. Since 1982, permanent insurance policies have been an incredibly effective tax-sheltering vehicle for investment growth in the form of cash values. Effective January 1, 2017 however, the CRA is implementing new changes that will limit the effectiveness of using permanent insurance in this way.
Current Canadian Rules
John McKay, Executive Vice-President and Actuary at PPI Solutions breaks down what the current CRA rules are here. He agrees permanent insurance policies are effective due to the cash values built inside that grow tax-free. This, in turn, makes insurance premiums cheaper and more affordable. If, at any point, the values inside grow to exceed the tax sheltered limits, insurance companies will automatically modify the policy to retain the tax-exempt status by either returning cash values to you, or by increasing the death benefit; whichever option was selected at application.
These current rules will generally be carried forward (or ‘grandfathered’) if the policy is applied for, and issued, before January 1, 2017.
New Canadian Rules
Canada’s Department of Finance and CRA are updating these rules on January 1, 2017 to reflect current mortality rates, to limit the use of permanent insurance products as investments, and to standardize tax rules across all insurance carriers. John McKay goes on to explain that the CRA changes will increase the tax-sheltering limit within the first 10 years, but will decrease it in the long-term. SunLife Insurance adds, in this article, that Universal Life Level Cost of Insurance (LCOI) premiums will be most negatively affected with premium increases. As the Net Cost of Pure Insurance (NCPI) decreases along with mortality rates after the changes, the Adjusted Cost Basis (ACB) will increase and drive up premiums. Policy premium prepayments will also be extended from a minimum of 1 year to 8 years to prevent policyholders from dumping money in the policy at the beginning for a short period of time to take advantage of the tax-free growth.
The coming tax changes effective January 1, 2017 will, for the most part, negatively impact the use of permanent insurance products as tax-free investment vehicles.
The following are three reasons to buy today before these changes take place.
More Tax-Free Growth – If bought today, permanent insurance products will have more room for tax-free growth for optimal estate planning.
Lower Premiums – Minimum premiums will increase with the new rules; especially for Universal Life LCOI policies.
Deposit Freedom – There will be less freedom to deposit lump sums of money to pay for premiums as a new 8-year minimums are enforced with the new changes.
If bought today, nearly every policy will be ‘grandfathered’ with current CRA guidelines. Contact an advisor today to discuss your specific estate planning needs and determine if incorporating a permanent insurance product could help you save for your future.