How Tax Changes to Life Insurance Policies Might Affect Your Savings

Daniel Steinkey |

New legislation came into effect in 2017 regarding life insurance policies. The last major legislative change was in 1982, so the government wanted to update its rules. How might these changes affect you?

Changes to Permanent Policies

The biggest change is to permanent life insurance policies, particularly universal life (UL). With UL policies, there has been the ability to deposit extra premiums that go into a savings component of the policy. These savings can add to the death benefit paid to your beneficiary, or reduce the annual insurance charges. You also have the ability to make withdrawals from the savings portion of your policy while you are still alive. These withdrawals have largely been tax exempt, as long as you didn’t exceed prescribed limits within the old legislation.

The new legislation means you can tax shelter less money. In particular, the legislation aims to keep policy holders from making large deposits late in the life of the policy to avoid taxes. You can save more money tax free in the first decade of the policy, and less after year 10. Essentially, you will have to buy more coverage in new UL policies to get the same amount of tax sheltering that was available in old policies.

Generally, if your UL policy was in place prior to January 1, 2017, your policy is grandfathered under the older, more generous rules. However, if you make certain changes to an existing policy, it loses its grandfathering. In particular, if you increase the death benefit (meaning a larger payout) or make any changes that need new medical underwriting, your policy would move under the 2017 legislative rules.

Bottom Line

The rules about exactly how much you can save are a bit convoluted and long-winded. Just know that if you use a universal life policy to tax shelter some of your savings, the amount you can shelter is lower if you have a policy issued after December 21, 2016, or if you’ve made certain changes to old policies. If you would like to discuss how your own UL policy might be affected, I’d be happy to review your policy with you.