Changes to the life insurance policy taxation rules are impacting UL LCOI policies

The accumulating fund of a life insurance policy, which is intended to represent its savings element, is compared to that of a notional exemption test policy so as to determine whether the policy holder is exempt from taxation on accruing income. A number of changes to the rules for calculating the accumulating fund will, in a majority of situations, not have much impact – but could have a significant impact for universal life level cost of insurance (UL LCOI) policies, especially for younger ages. Furthermore, respecting changes to the calculation of the 15% Part XII.3 (IIT) tax payable by life insurance companies on the investment income accumulating within life insurance policies:

It is expected that the change in IIT on UL LCOI policies, if flowed through to policyholders, will have a significant impact on [cost of insurance] rates at younger ages (in the range of 6 to 9 percent), gradually decreasing at older ages (for example, 3 percent or less for insured individuals over the age of 60). There will also be an impact on level limited-pay universal life policies (whether on a level cost or yearly renewable term cost).

Neal Armstrong. Summaries of Kevin Wark and Michael O'Connor, “The Next Phase of Life Insurance Policyholder Taxation is Nigh,” Canadian Tax Journal (2016) 64:4, 705 - 50 including under Reg. 1401(1)(c).