Permanent life insurance, such as Whole Life or Universal Life, has long been accepted as a tax efficient way of accumulating cash for future needs.

Soon the amount of funds that can be tax sheltered within a life insurance policy will be reduced by new tax rules which take effect January 1, 2017. These changes may make 2016 the best year to buy cash value life insurance.

The changes to the tax rules regarding life insurance have resulted in an update to the “exempt test” which measures how much cash value can accumulate in a policy to keep it exempted from income tax.

Highlights of the new rules and their effect

For Cash Value Life Insurance:
• Effective with policies issued in 2017 the new rules will reduce the amount of cash value that can be tax sheltered from accrual taxation. Some types of policies will be affected more than others.
• The bottom line – Permanent cash value life insurance policies issued after 2016 will be less effective in accumulating tax-deferred wealth.

The opportunity – Policies Issued before 2017 will be grandfathered from these changes.

For Life Insurance used as collateral for business or investment loans:
• For policies of standard risk purchased after 2016 changes in the Net Cost of Pure Insurance (NCPI) will result in a lower deduction for income tax purposes.
• Policies Issued before 2016 will be grandfathered as to the current rules.

The bottom line – Business owners or investors who borrow for investment or business purposes will on new policies issued after 2016 not be able to deduct in their collateral insurance tax deductions as much as those who bought their policies before 2017.

The opportunity – Purchase before 2017 and you will be grandfathered.

For Prescribed Life Annuities:
• After 2016 The mortality table used for calculating annuity income has been updated.
• This table projects a longer life expectancy resulting in an increase in the taxable portion of the annuity income.

The bottom line – For prescribed Life Annuities issued after 2016 the after- tax annuity income will be less.

The opportunity – Purchase your Prescribed Life Annuity before 2017.

It’s important to remember that the death benefit of life insurance policies are unaffected by these changes and are still paid out tax-free.

Consider reviewing your life insurance now to ensure that you have the proper amount and type of coverage. Call me to discuss how you can take advantage of the grandfathering status for new purchases prior to the end of 2016.

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