As we are well into the second half of 2016, now may be a great time to consider reviewing your life insurance requirements before changes take place starting at the beginning of next year.
Life insurance not only provides protection, but certain policies also allow the holder to accumulate savings on a tax-preferred basis. Most Canadian life insurance policies are structured to be tax-exempt policies, meaning that any investment earnings associated with the cash value accumulation in the policy are not subject to annual taxation. Under the Income Tax Act, certain rules, collectively “the exempt test”, determine if income within a life insurance policy is considered to be tax exempt. These rules were put into place in 1982. Over time, these rules have not been updated to account for such factors as increased life expectancies, as well as the introduction of new types of insurance products, such as Universal Life.
However, as of January 1, 2017, changes will be made to these rules which will impact the amount of funds that can accumulate within an exempt life insurance policy on a tax-preferred basis. In general, the maximum tax-exempt savings room for the same policy offered today will be lower, beginning in 2017.
How Does This Affect Me?
Policies issued prior to January 1, 2017 will be grandfathered under the existing exempt test rules. However, if certain changes are made to these policies after January 1, 2017, this may result in a loss of grandfathering privileges. Therefore, if you currently hold life insurance and need to make any changes to these existing policies, you may wish to consider reviewing whether it makes sense to do so before the end of 2016.
If you are in need of additional insurance and want to maximize the potential to accumulate tax-exempt income within an insurance policy, there may be tax-sheltering opportunities available to you through the funding of a tax-exempt insurance policy purchased prior to 2017.
A regular review of your insurance coverage is always important when considering your overall financial plan. Now may be an ideal time to review your current and future life insurance needs before the changes take place next year.