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Maximise Your Life Insurance Tax Benefits Before Time Runs Out

By Acton Accounting | Aug 07, 2016 | Posted in " Accountants, accounting services, August 2016, bookkeepers, bookkeeping services, corporate tax, personal tax, Tax & Benefits, Tax accountants, tax filing, tax return preparation, tax services "

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Whole life insurance policies have been a really effective tax-sheltering vehicle for investment growth in the form of cash values. For over a decade, the people of Canada have stuffed millions and millions of dollars into the life insurance tax-shelter programs due to the tax-deferred or tax-free treatment of their investment dollars.

New Tax Rules for Life Insurance Policies

The government has reviewed the tax benefits of insurance policies due to longer life expectancy combined with interest rates and inflation conditions. And, the Canada Revenue Agency (CRA) is implementing new tax rules for life insurance that will take effect on January 1, 2017.

The tax changes will limit the effectiveness of using permanent insurance in a way that it has long been used. The amount of money that can flow out of a corporation in a tax-preferred manner can now be restricted.

Severe Impact on the Use of Universal Insurance Products as Tax-Free Investment Vehicles

With the current Canadian income tax rules on life insurance, a person would enable his holding company to distribute up to 100% of his death benefit tax-free to the new shareholders of the holding company, should he die any time after he reaches the age of 73.

With the new income tax rules for life insurance, if a person passes away at the age of 73, his holding company would be able to distribute only 75% of the death benefit on a tax-free basis. The full 100% money would only be accessible to his heirs if he were to die after age 90.

New Insurance Policy effective January 1st 2017

Reasons to Purchase a Permanent Insurance before the New Rules Take Effect

More room for tax-free growth: If people buy a life insurance policy before September 2016 (as it can take up to three months or more to progress for having a policy issued), they will obtain a policy under the current rules and have more tax-free growth for the best estate planning.

The cost of insurance rates:With the current insurance rules, people have to pay the least amount of premium for life insurance products.

Prepay an insurance policy in lesser time: With the new tax rules, 8 years will be the fastest payment term to pay up a policy. If people buy a life insurance policy now, they will have more freedom to deposit a lump sum of money to pay for a premium.

A Brighter Side

Insurance policies that are completed before the New Year starts will be exempted from this tax change if they do not intend to change it in any material way. This means that your insurance policy will continue to receive the same tax treatment applied under the current CRA rules.

Get Experts Help with Estate Planning

Are you considering changing your existing insurance policies or buying permanent insurance? Do you want to assess your overall estate planning and insurance requirements before the new regulations are in place? Get in touch with Acton Accounting And Bookkeeping.

Our advisors will help you with your specific estate planning needs. Moreover, we can help you decide if including a corporate insurance product could help you save for your future.