Should You Buy Life Insurance Before the Jan. 1, 2017 Tax Changes?

by Kerri-Lynn McAllister October 26, 2016 / No Comments

The life insurance sector is telling you to buy life insurance before 2017. If you have a proactive advisor, you may already have been contacted and told why.

The current Canadian tax rules for permanent life insurance took effect on December 2, 1982 when:

  • ET, the Extra-Terrestrial reclaimed the #1 spot at the box office in its 24th week of release (with a cumulative gross of $299M on a budget of $10.5M)
  • Universal life insurance didn’t exist
  • Level cost of insurance (LCOI) rates didn’t exist (whole life insurance still uses mortality rates which increase yearly and are not guaranteed)

Insurance companies interpreted the rules differently for new products. That lead to inconsistencies and perhaps unintended tax advantages.

New rules take effect on Jan. 1, 2017. For whole life insurance, the impact is small. For universal life insurance with a level cost of insurance, the changes are big.

The changes

Here are highlights:

  • Less overall tax-sheltering room in LCOI universal life insurance
  • More consistency among insurers
  • Minimum quick pay period of 8 years: limits deposits into permanent life insurance
  • Corporately-owned life insurance: the Capital Dividend Account allows business owners to extract funds from their private corporation tax-free. The death benefit from life insurance can use this mechanism but the tax-free extraction will be reduced.
  • More tax on prescribed life annuities: currently a portion of each payment is considered a blend of a return of your capital (tax-free) and interest (taxable). More income will be taxable.
  • Investment Income Tax (IIT) is paid by insurance companies on the tax-sheltered growth inside permanent life insurance. The tax rate is increasing, which may increase premiums for LCOI universal life.

You’ll find more information and details with search strings like “2017 life insurance tax changes Canada.” Most of the content is designed for advisors but can be read by you.

Grandfathering

If your life insurance policy doesn’t have changes which require underwriting after 2016, the pre-2017 rules likely apply.

If you are thinking about:

  • Converting your term life insurance to permanent
  • Adding a term rider to your life insurance
  • Buying new permanent life insurance

acting in 2016 gives you access to the current rules.

Fake deadline

Deadlines put an end to procrastination. We have deadlines for filing our taxes. We know when RRSP Season is ending. There’s no similar deadline for life insurance. Procrastination becomes easy. If you don’t mow the lawn or shovel the sidewalks, your neighbours will know. If you delay getting life insurance who will encourage you?

What happens in 2017?

Most people won’t be impacted by the changes much. That isn’t an excuse to do nothing. When was the last time you reviewed your life insurance? If your answer is “not recently” or “I don’t remember”, this is a great year for a review.

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Flickr: Sally Mahoney