THE IMPORTANCE OF INVESTING DURING THE FIRST 7 YEARS OF A UNIVERSAL LIFE CONTRACT

The Income Tax Act (Canada) Regulation 306(4)b Goal: –Control the savings that accumulate tax-free within a universal life contract

Encourage additional premium deposits during the initial policy years rather than single lump-sum deposits several years after issue. What Should I Do? Why?

The Act states that on the 10th policy anniversary and all subsequent anniversaries, the total amount accumulated in the policy cannot exceed the value of the funds accumulated three years earlier by more than 250%. 10 th anniversary 250 % x value of the Fund 7 th anniversary

If you only deposit the minimum premium If you invest more than the minimum premium Additional tax room Fund after 7 years Maximum fund after 10 years Fund after 7 years Tax room 250% The 250% Rule

Fund Limited by the 250% Rule Is there a way around it? Since issuing a new policy because the 250% rule failed is not the best alternative, tax authorities propose a solution: –Act as though the policy had been issued 3 years earlier, hence the term “redating” rule.

Starting in the 10th Year... When the deposits are bigger than the allowable amount, it’s possible to “redate” tax-related factors* to increase tax room. *Important: It isn’t the issue date but the date used to calculate the maximum fund (maximum allowable amount for the policy to remain exonerated for taxation purposes) that is modified.

Redating This solution is applied automatically by our administrative systems and software. For all UL policies, the tax room is calculated according to the redating rule and the 250% rule starting in the 10 th year. The client in turn benefits from the most advantageous value (the 250% rule or the redating).

Example of Redating Male, age 40, NS Face amount: $100,000 Deposit: Min. premium With the redating rule, the maximum fund increases considerably in the 8th year.

Conclusion Important: The maximum fund will always be higher if deposits are made at the beginning of the contract, regardless of the redating rule.

 Capitalize as soon as possible, i.e., during the first 7 years. The higher the accumulation fund, the bigger the tax room.  But if not, all is not lost! The Solution