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We are being affected and we don't even know how...

on Sun, 10/21/2012 - 19:26

On March 29, 2012, the Federal Minister of Finance, Jim Flaherty, presented the government’s budget. The budget proposes technical changes to a life insurance policy on its tax exempt functionality. That rule particularly impact the life insurance policies issue on or after 2013. I had been trying to "wait and see", to understand whether any insurance company would release any memo or article in regards to this. However, after all these months, no insurance companies had release any memo on this and even, when I enquired about this, no company could give me any solid answers to how this change will affect the tax exempt room.

I emailed the Canadian Life and Health Insurance Association, hoping that I can get some insight from them. However, the answer I got was "Details of the proposed changes to the exempt test are still in development and the precise impact is still unknown. It is expected that overall savings capacity will be reduced slightly, but larger premiums may be allowed in the earlier policy years..." I also found a Tax Memo from tax expert PricewaterhouseCoopers Canada illustrates a little graph on the change.
 
Yes, it looks like we can put in more money in the early years but if you look closer, the room gets reduced along the way (which we have to remember that a saving strategy within a life insurance policy is always long term), so, to me, from what I gathered, we are still better off to get our policies in place before that change actually kicks in (which is 2013, 2 months away from now).
 
I have done a calculation on an Excel spreadsheet to illustrate how it might be affecting the savings in the policy (this is just an illustration based on what I have gathered and what I understood based on all the info I have on hand, cannot be taken as an actual projection in any way at all).
 
This table has (but not limited to) the following assumptions:
- the policy holder has $500 budget for a saving plan every month, for 20 years
- the objective of the plan is to save money under a tax deferral environment, having a flexibility to withdraw the money approaching retirement
- assumed rate of return is 4% a year
- marginal tax rate of policy holder is 46%
 

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