In this article, Dean Chambers discusses changes to tax rules in 2017, how they’ll affect clients’ life insurance and why it’s a good time for you to connect with clients now.

Physical by Olivia Newton-John tops the Billboard 100. E.T.: The Extra-Terrestrial packs movie theatres. Family Ties airs for the first time on TV, with Canadian Michael J. Fox in the lead role. Like enters our language as an all-purpose expression. The New York Islanders, St. Louis Cardinals, San Francisco 49ers, and Los Angeles Lakers are the champions.1

It’s 1982. That wonderfully innocent — or scarily mundane — year, depending on your tastes, is also the year the current tax exempt rules for life insurance policies took effect.

35 years later, tax rule changes are coming. They’ll affect life insurance policies and the people who buy them. Advisors will need help understanding the changes, but they can be confident this won’t change. Canadians want life insurance, and Canadians need the basic benefits life insurance policies provide:

  • Over 6 million Canadian households believe they need more life insurance.
  • 2 in 3 Canadian households would have difficulty meeting everyday living expenses within a few months if the primary wage earner were to die.2

With so many Canadians expressing the need for more life insurance, the opportunity exists for you to explain to clients and prospects how they can purchase coverage to protect themselves and their families. The tax-free death benefit and preferred tax strategies are good topics to discuss today, and they’ll continue to be good topics to discuss as we get closer to 2017.

The rules, they are a changin’

Most life insurance products haven’t evolved greatly, except for universal life (UL), which wasn’t even considered in 1982. In an effort to modernize legislation, and to take into account UL, the Department of Finance has revised the life insurance exempt test and some of the related rules.

These changes come into effect on January 1, 2017 – not that far away, when you consider the first quarter of 2016 is already in the books. The good news for you and your clients is that grandfathering rules cover policies issued before that date.

Assumptions updated — is a policy tax exempt?

Every life insurance policy is compared to a hypothetical benchmark policy called the exempt test policy (ETP), with the comparison against the actual policy occurring at each policy anniversary. As long as the savings component of the actual policy stays within the savings element of the ETP, the policy will remain exempt. The savings component of both the ETP and the actual policy is measured by the Accumulating Fund (AF) in each policy. For UL policies, the AF of the actual policy is the cash value of the policy, including surrender charges.

With the new rules, surrender charges will no longer be taken into account when comparing against the AF. This significantly affects the fund accumulation available with UL policies, particularly for policies with Level Cost of Insurance (LCOI) and a Face plus Fund death benefit.

The changes to the AF of the actual policy, when compared to the ETP, change the pattern of the funding room, with the potential for a reduction over the lifetime of the policy. This situation is particularly significant with LCOI UL, because of the change in the calculations for the Net Premium Reserve (NPR). The chart below shows the difference between the new funding room and the current funding room:

The impact to traditional types of insurance, such as participating insurance, will be much less severe.

As well, the new 8% rule creates a new ETP when death benefit coverage increases by more than 8% annually. This change could result in less funding room for some product types. While the tax rule changes are relevant to individual policyholders, the following revisions may have more of an impact on corporate insurance.

Calculation of Net Cost of Pure Insurance (NCPI)

Changes could result in a lower NCPI, but also potentially lower tax deductions.

Adjusted Cost Basis (ACB) calculations updated

Substandard premiums will now be included in the ACB calculations of a life insurance policy. In most cases, the lower NCPI will affect the ACB, resulting in a higher ACB for most product types, and an extended period before the ACB reaches zero.

Term policies will be affected the least; universal life policies will see the most change to exempt room, NCPI, and ACB. In the chart below, you can see that the ACB for this UL policy will be higher and drops to zero later in the life of the policy with the 2017 rules compared to the current rules:

You can see in the chart below that under the new rules, the ACB for this Par policy will be higher and drops to zero later than under the current rules, but the effect of the new rules on the Par policy isn’t as great:

ACB/$1,000 death benefit - Male, age 40, non-smoker, $1 million - Sun Par Protector

Don’t lose the grandfathered status

The new rules won’t affect policies already in force, unless your clients:

  • convert from one type of life insurance to another; for example, a term policy that converts to a permanent policy after December 31, 2016, loses grandfathering.
  • add coverage requiring medical underwriting; for example, increasing the coverage amount, adding a term life insurance benefit to a policy, or substituting a life insured person under a policy.

Have no fear though; many actions won’t cause the loss of grandfathering, even if they involve underwriting, including changing from smoker to non-smoker status, reducing a rating, and transfering of ownership.

Conduct a thorough review of clients’ insurance policies and lifestyle to see if they need to make any changes before the end of this year, and before the new rules take effect.

Understanding the tax changes and what they mean to clients

Regardless of the rule changes, the need for life insurance protection remains the main reason for you to talk with your clients about increasing their coverage or acting before the rules take effect. These new rules give you an opportunity to create a sense of urgency with your clients. More importantly, it’s a great opportunity to connect with your clients, review their plans, and discuss their insurance needs and the potential benefits they can get by buying now.

We’re getting ready for the new tax exempt rules, and looking forward to providing solutions to help you deliver lifetime financial security to your clients. In the meantime, you can learn more from the following resources on

If you have questions, please select your region and contact your Director of Advanced Planning or Regional Sales Director.

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1 Pop Culture Trivia,

2 Statistics in both bullets from Canadian Billion Dollar Baby Revisited: Sales potential of the underinsured life insurance market, LIMRA report, 2014.

Dean Chambers, Vice-President, Individual Insurance, Sun Life Financial Canada, has over 23 years of experience in the insurance and wealth industry where he’s held various roles in financial management, group national accounts and individual life marketing. His experience includes senior-level positions in individual life pricing and individual wealth product development.

Dean joined Sun Life Financial in 2011 as Vice-President, Individual Insurance. He is responsible for product development and pricing for the individual life and health business. Most recently, he led the re-launch of Sun Life’s Term insurance portfolio and is in the process of updating Individual life products for 2017.

For more than 10 years, Dean has been a member of the Society of Actuary’s Education Committee, participating in and chairing several committees. He is a frequent speaker at forums across Canada, including meetings of the Canadian Life and Health Insurance Association (CLHIA), the Canadian Institute of Actuaries and the Canadian Institute of Underwriters.

A native of London, Ontario, Dean earned a Bachelor of Science in Actuarial Science from the University of Western Ontario in 1992. In 1998, he qualified as a Fellow in the Canadian Institute of Actuaries (F.C.I.A.) and Society of Actuaries (F.S.A.).