Advisors need to be aware of exempt rule provisos: Manulife

New tax exemption rule for life insurance products comes in on January 1, but are advisors aware of exactly what this means for clients?

Advisors need to be aware of exempt rule provisos: Manulife
With new rules for tax exemption on life insurance policies to be enacted on January 1, many providers made the first week of November their cut-off point for taking in new applications under the old legislation. Manulife was no different, although its AVP Advanced Sales Actuarial and Underwriting Consulting, Steve Krupicz, identifies some changes that advisors may be unaware of.

“The original legislation categorically said that to be covered under the current tax rule, the policy had to be issued in 2016 (or before) – we have been given some leeway on this,” he says.

Leeway in this case concerns temporary insurance. Those of good health seeking life insurance are often granted temporary coverage in many cases, usually for a period of 90 days when the underwriting process is still ongoing. When it comes to the new exempt rules, individuals that have not yet received their full policy by January 1, but have taken out temporary insurance, may be eligible under the old law. Not surprisingly for this industry, there are certain requirements that must be met, as Krupicz explains.

“People that get their applications in the door using temporary insurance will have until the end of March 2017 to get the new policy issued and still be grandfathered under the 2016 rules,” he says. “The key issue here is the amount of the temporary insurance has to match the amount of insurance the person has applied for.”

The implications of the change in legislation for the life insurance industry are pretty substantial, particularly when it comes to universal and whole-life products. The main change, however, is going to affect the wallets of customers – something they will soon discover.

“There is a price hike happening on rates in universal-life products as the industry is passing on its increased tax burden to clients,” says Krupicz. “Virtually every universal-life policy in the country will see a price hike, if not late this year than early next year. The majority of companies have already announced price increases in the range of 5-10%.”

An even bigger impact will be felt on the whole-life side, where many providers are now adapting their products to fit within the new rules, lest their clients be in for a shock further down the road when they receive a hefty tax bill. 

“Some of the options available within the whole-life suite of products in Canada today will actually fail the exempt test,” he says. “The failure is slight, it’s only a few years, but it is something companies have to react to.”

Manulife’s cut-off for policies under the old exemption rules was October 31. This gives the firm time to carry out the underwriting process, although clients applying after that date are not automatically disqualified if their cases can be easily processed.

“We had that cut-off so clients could get a guarantee they would have that business issued before the end of the year,” says Krupicz. “It allows us two months to do the underwriting for the more complex cases. It doesn’t mean if someone submits an application on December 5 and it’s a nice clean case we won’t underwrite and turn it around – we just can’t guarantee.”

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