How tax changes of 2017 impacts life insurance?
Apart from being a mode of future protection, life insurance is an excellent way of reaping tax benefits and saving. Income tax act, however, gives guidelines that distinguishes between the life insurance policy for protection and policy for investment. The key decisive factor is Exempt Test Policy, that becomes the yardstick for valuing the savings and the tax implications used to assess them.
ZRPC, the leading personal tax consultants in Scarborough, tries to explain the new tax norms pertaining to life insurance in the most comprehensible manner possible.
The new tax rules are formulated quite thoughtfully, taking into consideration the unique traits of UL (Universal Life), which were neglected in earlier tax rule reviews. The key term to understand here is Exempt Test Policy.
Exempt Test Policy
Exempt Test Policy (ETP) is the benchmark policy with which every life insurance policy is compared to value the savings and to determine whether it’ll be exempted from tax or not.
It’s a fairly simple procedure. Your savings will be exempted from tax only if it falls under the savings limit of ETP. ETP has also changed from a 20-pay endowment policy maturing at 85 years of age, to an 8-pay endowment policy maturing at 90 years of age. This means a sharp inclination in additional funding in the earlier years that declines in the later years.
Accumulating Fund or AF measures the savings element of a policy. While earlier, AF for Exempt Test Policy was calculated by insurer’s own pricing or cash value assumptions. But the new tax rules outlines the guidelines to calculate AF for ETP which are laid out as:
• A fixed assumption of 3.5% to be used for interest rate estimation.
• Revised mortality based on Canadian Institute of Actuaries (CIA) 1986-1992 table.
This is applicable for calculating the reserve component for UL policies as well. In fact, Net Premium Reserve for AF of actual policy will be calculated on the basis of the above two postulates, with the above mentioned interest rate and mortality assumptions.
Surrender charges are done with. It will no longer be used to compare AF against the cash value.
This is not all. An 8% rule is in place that allows for death benefit to be increased by 8% annually. The mortality estimation is updated for calculating the Net Cost of Pure Insurance (NCPI). There are rules laid out for risk calculation for the same. Also, the rules for considering Substandard ratings have differed as well. To get the detailed info about the new tax rules and how it affects your current policy, consult the personal income tax experts at ZRPC, Scarborough.