Life insurance policies form part of your clients’ life insurance and financial plans that span many years. On January 1, 2017, new tax rules will apply to life insurance. Policies issued before this date will be grandfathered under the current rules.

When legislation changes, it’s important that existing life insurance policies continue to operate consistently with clients’ expectations. Grandfathering is intended to address this need, but it can be lost. Clients need to understand how to maintain this grandfathered status. Now’s the time to review your clients’ portfolios — it may be in their best interest to make any changes to their life insurance policies well before January 1, 2017.

WHAT POLICY CHANGES WILL CAUSE POLICIES TO LOSE GRANDFATHERING?

As a general rule, term conversions and any change that increases the amount of insurance coverage and requires medical underwriting on a pre-2017 policy will cause that policy to lose grandfathering and be subject to the post-2016 tax rules. For example, if a coverage is added to an in-force policy that requires medical underwriting, the entire policy is subject to the new tax rules, not just the additional coverage and grandfathering is lost.

Changes

Some life insurance products give clients the flexibility to make changes after the policy is issued. The following is a list of changes that, if made after 2016, will cause a policy to lose its current tax status or grandfathering:

  • Anything that requires medical underwriting to increase the amount of life insurance coverage under the policy such as:
    • adding an additional coverage or increasing the existing coverage on a universal life (UL) or term policy, or
    • adding a term benefit to a policy.
  • Term to term replacements on benefits that require medical underwriting will cause the entire policy to lose grandfathering, even if they maintain the same face amount.

Conversions

Life insurance conversions will also cause a policy to lose grandfathering. The legislation states the new rules apply to policies converted into “another type of life insurance” on or after the implementation date. The legislative wording of “another type of life insurance” may extend the definition beyond what is normally considered a term conversion.

Grandfathering will be lost to a pre-2017 term policy if it converts to a new policy after 2016, or if it’s converted to add additional coverage to another policy after 2016.

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WHAT POLICY CHANGES WON’T CAUSE POLICIES TO LOSE GRANDFATHERING?

There are some changes clients can make to policies issued before 2017 that won’t cause the policy to lose grandfathering. These changes include:

  • changing ownership, although this will continue to have tax consequences and will continue to impact pre-1982 policies,
  • exercising a guaranteed insurability option that was purchased and medically underwritten before 2017,
  • smoking status changes,
  • addition of non-life insurance waivers and benefits,
  • reinstating lapsed policies without changes to the coverage,
  • switching dividend options, and
  • reducing the death benefit.

Clients can generally make any contractual changes they would like to their pre-2017 policies in the post-2016 world without losing grandfathering, provided the changes don’t require medical underwriting or have specifically excluded, such as conversions. For more details about the grandfathering of pre-2017 life insurance policies, read Sun Life Financial’s advisor guide to grandfathering.

ACTIONS TO TAKE IN 2016

It’s in your clients’ best interest to maintain their policies’ pre-2017 tax status in the post-2016 world. Many contracts allow clients to make changes at any time. However, in 2016, it’s important to ensure any medically underwritten changes are completed before January 1, 2017 to avoid the loss of grandfathering.

Depending on clients’ needs, here are some points to discuss and implement in 2016:

Existing clients

  • Convert term policies to permanent coverage if it makes sense for the client.
  • Add or increase coverages or lives to UL policies.
  • Increase coverage by adding term benefits on themselves, spouses or another insured.
  • Revisit the option add plus premium benefit to their participating whole life policy.
  • Add a child term benefit for clients of young families.

New clients

  • Clients should purchase a UL policy today if they’re looking to take advantage of maximum funding.
  • Business clients who are looking to maximize the capital dividend account (CDA) credit on the insured person’s should have their policy issued before 2017.

THE BRIGHTER SIDE OF 2017

The brighter side of 2017 is that products will be enhanced to incorporate the new tax changes. While there may be some losses, there are a number of gains.

The tax changes have provided an opportunity to create a sense of urgency for those clients that were putting off the inevitable. They also present an opportunity for new and enhanced products to be offered in 2017 providing your clients with sound value for their investment. For more information, contact your Sun Life Financial Sales Director

SUMMARY OF POTENTIAL IMPLICATIONS FROM LOSS OF GRANDFATHERING ON PERMANENT INSURANCE PRODUCTS
Personal Corporate
  • Potential for the policy to become non-exempt
  • Potential for the policy to become non-exempt
  • Loss of tax-preferred funding room
  • Loss of tax-preferred funding room
  • Reduction in net cost of pure insurance (NCPI) factors, lowering amounts available for deductions for eligible collaterally assigned policies
  • Reduction in NCPI factors, lowering amounts available for deductions for eligible collaterally assigned policies
  • For multi-life policies, losing out on the ability to pay out the full fund value on each death without tax consequences
  • Increase to adjusted cost basis (ACB), resulting in a potentially lower capital dividend account (CDA) credit upon death of insured
  • For multi-life policies, losing out on the ability to pay out the full fund value on each death without tax consequences