How the Changes to Bill C-43 Will Impact the Way Everyone Invests Their Money

July 28, 2014 10:31 am Published by

“Bill C-43 restricts the amount a person can invest into permanent insurance policies and maintain their tax exempt status.”

That’s the man himself, Marco Faccone. Since the 1960’s, the Income tax Act has regulated how much growth can occur within permanent insurance policies. Bill C-43’s exempt test modifications will reduce a policy’s ability to grow tax free and be exempt from taxation when it pays out.

People have taken advantage of tax exempt growth in permanent life insurance policies for the last half century. But, like we said, these tax rules were established in the 1960’s, and a lot has changed since then.

So Bill C-43 is changing the exempt test, too.

Permanent Insurance vs Temporary Insurance

Before we dig deeper into Bill C-43, it’s important to understand the difference between the insurance industry’s two main products: permanent and temporary insurance.

Temporary Insurance

Also referred to as term insurance, this product is used to cover short-term risk. Term insurance is used to cover mortgage balances or periods where the insured has dependents, such as a spouse or young children. With term insurance, if something happens to one of the key insured income earners, then the mortgage is repaid or the dependents receive life insurance proceeds. Term carries the least expensive premium, because in essence you’re renting insurance; you hope you don’t need it, but it’s there in the event you do.

Permanent Insurance

Permanent insurance focuses on the tax exempt accumulation of funds that will be paid out during one’s lifetime. With permanent insurance, you’re putting money into an insurance policy that guarantees a death benefit will be paid to a designated beneficiary no matter what. Permanent insurance is used to pay large tax bills or cover other long-term cash flow needs, such as leaving a legacy for children. So, permanent insurance can grow and maintain tax exempt status. It’s possible to estimate the inherent return of a permanent policy by assuming a life expectancy and calculating the rate of return needed on policy premiums to afford the death benefit. In our current low interest rate environment, permanent insurance can offer fantastic returns on investments.

How Will Bill C-43 Affect Me?

Got all that? Good. Essentially, Bill C-43 says that when you buy permanent insurance, you’re only allowed to put so much into the policy in order to qualify it for tax exempt growth. So, if you’re someone who wants permanent insurance coverage, now is the time to take action. Any policy issued prior to January 1st, 2017, will be grandfathered under existing tax rules.

After January 1st? You guessed it, new rules. So if you want to take advantage of tax exempt growth, then the time to start the discussion is now.

Next week we’re going to take a closer look at the two types of permanent life insurance, whole and universal life, and client examples of their use. In the meantime, if you’re looking for a more detailed explanation, please don’t hesitate to give us a call.

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This post was written by Marco Faccone