Legislative changes that affect Canadian life insurance policies take effect January 1, 2017. If you are considering making changes to an existing policy or the purchase of permanent insurance, it’s important for you to take action now in order to take advantage of potential benefits that will no longer be available after 2016.
Level Cost of Insurance (LCOI) life insurance policies issued before 2017 can provide significantly better financial benefits than policies issued when the new rules become effective. Here are three key areas for you to consider:
- As a policyholder, you can deposit funds into a policy over and above the premium needed to pay for the basic death benefit. Provided that the policy is an exempt policy for tax purposes, the additional deposited funds can grow without tax within the limits prescribed in Canada’s Income Tax Act. The new rules propose to limit the amount that can be deposited into the policy, which means that the amount not subject to tax will be reduced in comparison to policies issued before 2017. LCOI policies issued now (as opposed to after 2016) will be able to accumulate larger fund values than those issued beyond 2016, which means that there will be more funds available to you in the future for planning needs, such as estate planning, retirement planning and leveraging.
- Another area that will be affected after 2016 is the Capital Dividend Account (CDA) credit. For life insurance owned by corporations, the policy proceeds paid on death to the corporation can be paid out to shareholders and/or your estates tax-free, to the extent of the CDA credit arising from the policy proceeds. Additionally, these capital dividends can be used to reduce or eliminate capital gains on death related to shares owned by the deceased person. After 2016, the capital dividend account credit for LCOI policies will be reduced in comparison to the capital dividend account credit associated with pre-2017 policies.
- Lastly, if you use your policy as collateral security for investment loans, you may be able to deduct a portion of the premium for the policy. After 2016, the amount of the deduction will be significantly reduced.
Contact your advisor today to discuss what you can do to take advantage of the benefits that are still available in 2016.