Changes to cash reserve tax rules will increase permanent life insurance premiums.
There are multiple changes to the income tax legislation resulting in an increase in Term 100 or Level Cost of Insurance Policy (LCOI) premiums. This change impacts those who want permanent life insurance at a minimum lifetime premium. While the legislation changes are complicated, we have broken down the changes for you.
New rules limit investment inside Term 100 policies
To understand the changes, it is important to first understand the product design. Mortality has an increasing curve-the older we get the more likely we are to die. But Term 100 or LCOI policies levelize the curve and overcharge mortality in the early years while undercharging in the later years. This overpayment creates a cash value reserve that is imbedded inside the policy. This reserve currently does not form part of the policy cash value.
The new 2017 rules will require the reserve to be a part of the policy cash value. While the final product designs for 2017 are not yet known, we can anticipate a few consequences of this change:
- The inclusion of the reserve will limit the amount of additional funds that can be invested inside the policy
- The reserve will be subject to investment income tax and the additional investment income tax will be passed onto policy holders
- Insurance companies may take the approach of making the imbedded reserve available to the policyholder. As this reserve is factored into the product’s pricing, it would be logical to assume that this would lead to a further increase in premium
By reviewing current life insurance needs and in-force policies, our business insurance specialists can help establish the best protection for wealth and cash flow against the impact of these new tax rules.