What the Government is Taking Away..NOT Another Tax Shelter?

By Nancy Lee RD

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The Minister of Finance has recently approved changes in the Income Tax Act effectively reducing the amount of money allowed to grow tax-preferred within a permanent life insurance policy, perhaps up to 40%.  Known as exempt test legislation, this change is much like the reduction of the Tax Free Savings Account (TFSA) from $10,000 back to $5,500. New permanent life insurance policies and conversions from term insurance that are successfully issued prior to January 1, 2017 will be grandfathered into the old rules, thereby preserving the shelter room for amount of money to grow tax-free inside an insurance contract.

Permanent life insurance policies provide protection at death by creating a lump sum of tax free money to beneficiaries quickly when they need it most. The lesser known benefit, for those in the know, is its consideration as another asset class alongside stocks, bonds, mutual funds and real estate investments.  The concept is simple: part of the yearly premium paid goes into the insurance while another portion goes towards an investment that grows tax free during the life of the insured and can be collateralized in later years for retirement or other income needs. Upon death, the loan is paid off and the remaining death benefit is paid within weeks to beneficiaries for estate taxes, charitable giving or a family legacy.

Policies issued before 2017 preserve the right to purchase “quick pay” insurance in a much shorter time frame than after 2017, thus cutting down the total cost of insurance in a policy and allowing more time for tax-free compounding of money that can be a potential source of income in the future years. Retirees and those approaching retirement years peace of mind as insurance is now paid up and inforce, eliminating the worry about forgotten payments and lapsed polices.

For business owners, the impact is even more significant.  A permanent corporate owned life insurance policy offers the ability to tax shelter growth of retained earnings that would otherwise be passive income and attract taxes at the highest marginal tax rate. Policies issued after 2017 are disadvantaged due to government imposed legislation – less money will be allowed to grow tax free thereby also reducing the death benefit payout. What will remain constant regardless of issue date is the collateralization feature to secure a potential retirement income for the business owner all the while funding a corporate buy-out option at death and creating liquidity for succession plans in future years.

Permanent life insurance is powerful planning tool for personal and business needs. It may just be one of the best well-kept secrets for 2016. To take advantage of the current taxation rules, new policies must be approved and issued by December 31, 2016. As insurance underwriting is more complicated and for those who have more years, consider applying with some urgency.  If you have a current term policies, this is the perfect time to review your policy needs. By exercising the conversion privilege, existing term coverage can be converted to permanent coverage without requiring health-related information.  To find out more about the exempt-test changes and how it affects your situation, please contact Nancy Lee at nancy.lee@flci.ca or 604-616-0533.

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Showing 1 to 2 of 2 comments.

Great article filled with all kinds of useful information for seniors and also not yet seniors. Nancy, thank you for clarifying a few things for me.

Posted by Wendy Dubois | September 1, 2016 Report Violation

What a timely article, Nancy I am glad you are getting the word out on what most Canadians are unaware of. Insurance is a topic not usually talked about and often misunderstood. Thank you for taking the time out of your busy schedule to help others!

Posted by Scott Grant | August 30, 2016 Report Violation

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