Permanent life insurance, such as Whole Life or Universal Life, has long been accepted as a tax efficient way of accumulating cash for future needs. Soon the amount of funds that can be tax sheltered within a life insurance policy will be reduced by new tax rules which take effect January 1, 2017. These changes may make 2016 the best year to buy cash value life insurance.
The changes to the tax rules regarding life insurance have resulted in an update to the “exempt test” which measures how much cash value can accumulate in a policy before it becomes subject to income tax.
Highlights of the new rules and their effect
For Cash Value Life Insurance:
The bottom line – Permanent cash value life insurance policies purchased after 2016 will be less effective in accumulating tax-deferred wealth.
The opportunity – Policies purchased before 2017 will be grandfathered from these changes.
For Life Insurance used as collateral for business or investment loans:
The bottom line – *Business owners or investors who borrow for investment or business purposes will experience a reduction in their collateral insurance tax deductions.
The opportunity – Purchase before 2017 and you will be grandfathered. If you have a rated policy that was issued before 2017 and is being used as collateral term insurance, consider re-writing it after January 1, 2017 to receive a higher collateral insurance deduction.
For Prescribed Life Annuities:
The bottom line – For prescribed Life Annuities issued after 2016 the after- tax annuity income will be less with this change.
The opportunity – Purchase your Prescribed Life Annuity before 2017.
It’s important to remember that the death benefit of life insurance policies are unaffected by these changes and are still paid out tax-free.
Consider reviewing your life insurance now to ensure that you have the proper amount and type of coverage. Call me to discuss how you can take advantage of the grandfathering status for new purchases prior to the end of 2016.
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Alex Chan, RHU, CHS, CFSB, CPCA, EPC, CFP, CLU | Certified Financial Planner & Chartered Life Underwriter
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