A few years ago our neighbour was grocery shopping on a Saturday afternoon with her four young children, eight months along with child number five.
With a large family of our own, we knew very well the sorts of glances she tended to get while in public. She was wearing a T-shirt with a family picture printed on the front along with the caption: "Yes, these are all mine!"
After loading the kids and the groceries in to their van, she headed back toward home, but just five minutes later, her water broke. She pulled over to the side of the road.
It was a cold day in January, and the eldest of her children was not yet eight years old. It was too cold to stay still and wait for help. The hospital was a short five-minute drive, so she looked up toward the heavens, nodded and turned the van around.
A short time later she screeched her brakes in front of the ER, and ran awkwardly through the automatic doors screaming: "My baby, my baby!"
The nurses, thinking something had happened to one of her children in the vehicle, ran right past her and out toward the van, leaving her standing in the doorway, briefly confused:
"No! Here!" She pointed below her beltline. There was no beltline of course. At eight months pregnant, it's all about stretchy pants. And these stretchy pants were being occupied at that moment by two viable, breathing human beings. Talk about multitasking! She had given birth while driving.
That beautiful little one is now a thriving young adult.
My good friend was fortunate to have survived, along with her lovely son, who they were tempted to name Miracle.
But not every dramatic story has a happy ending, and hence
we have insurance. On the bright side, insurance has some tax advantages which we are wise to consider.
Given that the savings component of an insurance contract has some very attractive non-taxable features, and that these advantages are going to shrink in 2017 and beyond, you will want to be covered by the old rules.
The changing landscape of insurance
Legislation in the House of Commons will change the landscape for life insurance in Canada and these changes may affect policies you hold or intend to purchase in the near future. Tax-exempt life insurance continues to offer Canadians the opportunity to mitigate financial risk while providing "exempt" investment choices - where annual investment growth is not taxed, within policy limits and while the investment remains in the exempt policy.
Exempt versus non-exempt insurance
Virtually all life insurance policies available in Canada are exempt policies, but not all. To qualify as exempt, the main purpose of the policy must be "protection-oriented" versus being savings-oriented
What Does this Mean?
Essentially, the new legislation will:
No. 1 - Reduce the maximum amounts you can pay in to an exempt life insurance policy.
No. 2 - Lower the amounts you can accumulate and shelter in the policy.
No. 3 - Increase the taxable portion of income from prescribed annuity contracts.
The legislation will impact one of the few tax-exempt savings options Canadians have beyond traditional registered accounts and Tax-Free Savings Accounts. In short, the maximum tax-exempt savings room for the same policy (age, amount and other basic factors) will be somewhere in the range of 30% lower after December 31, 2016.
Consider acting before 2017
Those who can take advantage of additional room in a tax-exempt policy, with capital available that is exposed to tax, may benefit from funding a tax-exempt insurance policy purchased prior to 2017, to maximize their tax-sheltering potential.
The legislative changes are set to govern policies sold after January 1, 2017. Under most circumstances, and within the policy limits, the new rules will not affect grandfathering of existing policies. However, policy owners should be aware that certain changes to their policy may cause a loss of grandfathering privileges, regardless of when the policy was issued.
What to consider
It's important to consider all of your existing policies, their riders and any contractual guarantees in those policies over the next few years and after 2016. Term insurance policies (stand-alone) issued before 2017 and converted after 2016 will not be grandfathered - policy conversion will be administered under the new rules.
What should you do?
If you want to maximize the tax-exempt deposit room current policies offer, or need additional insurance, you should consider beginning the application process for new coverage as soon as possible to ensure your policy is issued before the January 1, 2017 deadline.
Also, determine whether or not you want to exercise policy rights before 2017. Pre- 1982 policies (not subject to exempt testing unless the policy had a prescribed premium) may also be affected.
As always, this article is not intended as individualized tax or legal advice. Readers should consult their own professionals before proceeding with a strategy.
Mark Ryan is an advisor in Prince George with RBC Wealth Management Financial Services Inc, and can be reached at [email protected] or by calling 250-960-4927.
