Regulation 1401

Effect of changes to the calculation of the accumulating fund for future policies (pp. 723-4)

There are significant changes to the calculation of the accumulating fund for the ETP for future policies. Instead of using the pricing basis of the actual policy, the insurance companies must use fixed assumptions for interest (3.5 percent) and mortality (using the Canadian Institute of Actuaries' [CIA] 1986-1992 mortality tables). As well, an 8-year payment period is to be used instead of the current 20-year payment period with the assumption that the policy endows at age 90 (instead of age 85 under the current rules). [f.n.70… “interpolation time” and “endowment date…regulation 310] The exemption test rules have also been clarified to ensure that the test continues to apply beyond age 90. [f.n. 71… “pay period”…regulation 310]

Similarly, the accumulating fund of the actual policy will no longer be based on product-pricing assumptions but will use fixed interest and mortality assumptions on the same basis as the accumulating fund of the ETP (3.5 percent interest and the CIA 1986-1992 mortality tables). In addition, the cash surrender value of the policy will be determined before surrender charges.73 The reserve basis of the policy will change from the 1.5 year preliminary term methodology to a "net premium reserve" (NPR) basis. [f.n. 74…“net premium reserve”…1401(3)]

By comparison with the current rules, the accumulating fund of the ETP will be higher in the first 10 to 12 years of the policy but trending lower thereafter until age 90. On the other hand, the accumulating fund of the actual policy will generally be higher at all policy durations by comparison with the current rules. The net effect (in relation to current policies) will generally be similar to higher accumulation room in the first 10 years and then a reduction in the maximum amount that may be accumulated. However, the impact of these changes will be significantly greater for UL LCOI policies, since surrender charges will now be ignored and the embedded reserve will be included in determining the accumulating fund of the actual policy.

Impact on universal life level cost of insurance (p. 724)

[T]he impact will be more pronounced for UL LCOI "life-pay" policies at younger ages and have less of an impact on policies with higher premiums paid over a shorter period of time. It should also be noted that only a small percentage of policyholders pay premiums to achieve the maximum permitted accumulation room over the lifetime of the policy. As a result, in the majority of situations, policyholders will not experience any practical impact from these changes to the exemption test.

Impact of changes in Part XII.3 (IIT) tax on UL LCOI policies (pp. 737-8)

• For policies issued after 2016, the embedded reserve for UL LCOI policies will be included in determining the IIT base, if it is not already included.
• The policy reserve will continue to use the 1.5-year preliminary term method based on cash surrender value or pricing assumptions, including lapses for lapse-supported products.

It is expected that the change in IIT on UL LCOI [universal life level cost of insurance] policies, if flowed through to policyholders, will have a significant impact on COI [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).