Did that get your attention? The END I am talking about is the end of the year when tax changes will come into effect January 1st, 2017. My September column on buying insurance began with a promise to get into the more exciting investing stuff next. But first I have to tell you about the impending tax changes that will impact the insured portion of your investments.
In the federal election last October (a whole year ago!) the limit on Tax Free Savings Accounts was an issue, with the Conservatives promising to increase it and the Liberals threatening to freeze them. Nobody messed with the RRSP contribution limits because that would have really been a contentious issue! Chapter 9 of my book gets into the tax planning issues of your investments and retirement planning, using Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts T(FSAs) and other legal tax avoidance to maximize your investment returns. The investment portion of a permanent insurance contract also has important tax benefits. These are the limits that are going to change January 1st. You need to act now if the tax benefits from the insured investments in your portfolio are to be fully preserved under the “grandfather” provisions. If your corporation has a need for this kind of product, the new rules are even less generous. Changes to the “investment income tax” (ITT) paid by insurance companies will increase the cost of insurance. The full impact and consequences of the rule changes can get complicated, which is why your poor professional advisors have been attending seminars ad nauseum about the changes.
We are talking about Universal Life contracts. These have a minimum premium that covers the insurance portion. However, you are allowed to deposit considerably more, two to three times the basic amount, in the investment portion, on a tax free basis, similar to a TFSA. You do not get a tax refund like with an RRSP investment but you do get tax free accumulation of returns just like with a TFSA. This means that the value of your insured investment will compound to much more than a similar investment without this tax shelter. Starting with any new permanent insurance contracts January 1st, 2017 the amount of additional tax sheltered investment allowed will be reduced. Expecting a rush, the insurance companies are imposing earlier deadlines from late October to early November on starting new contracts that will be grandfathered to the higher limits of tax shelter under the 2016 rules. If adding an insured investment is part of your financial plan, you should do it NOW to protect the better tax sheltered allowances.
In “THE END OF WORK: financial planning for people with better things to do” I suggest considering an insured investment as part of yourlife plan, most likely when in your forties. This is when your income has risen as you progress in your career, the kids are getting older, the mortgage is getting paid down, and you are finally out of the credit card and big new truck wealth killing traps. You have a company pension, healthy RRSPs and your emergency funds are sheltered in TFSAs – and your BMW is fifteen years old like mine. You now have some discretionary income to invest. Some might go to a great prospect gold mining company (Alamos Gold is my recommendation) or just to buy lottery tickets. At the other end of the risk spectrum, some should go to starting your own insurance company for your third trimester risks like critical illness, long term care, extra retirement income, making a legacy or just to pay off CRA’s final tax bill so the family cottage can stay in the family. A Universal Life investment will become over time like having your own insurance company.
But you are no longer insurable? No problem, if you have been following my advice you have a big whack of cheap term insurance you bought when your obligations were greatest (and discretionary funds the least). Convert some of it to an insured investment in a Universal Life contract.
So call your advisor right now. You have better things to do than figuring it all out yourself. Just tell her you want to convert some of your term coverage to tax sheltered investment before the end of year deadline. She will be happy to get it done for you.
Fredrick Petrie, author of “THE END OF WORK: financial planning for people with better things to do”, practices financial planning at Mortgage Logic, 1793 Portage Ave., Winnipeg, MB. (204) 298-2900